by Jeff Fisher: Quantitative
Every day the
US Dollar moves closer to collapse.
investors, unlike most Americans, are aware of the risk, and are
nervously watching Gold and Silver march higher.
As the primary
reserve asset on central bank balance sheets, the US Dollar is a
major risk for central banks and their solvency.
How will central
banks deal with this balance sheet risk?
First, it is
clear that no central bank can sell Dollars and buy their own fiat
money which is a balance sheet liability.
If they did,
it would be a direct deflation of their banking reserves and highly
disruptive to their own domestic credit system.
a central bank must sell dollars for anything but their respective
we recently witnessed China buying Japanese JGBs.
a potentially very chaotic condition for markets.
may at any moment move very quickly from storage on central bank
balance sheets into the global economy chasing anything and everything
capable of being a reserve asset.
velocity would be very likely to spin ever higher as buyers and
sellers toss it back and forth like a hot potato.
of the Dollar repudiation US Treasury bond prices will be extremely
QE II is an
attempt by the Fed to get ahead of any Dollar selling to stabilize
long-term interest rates.
We are already
seeing sovereign debt prices collapse in Ireland, Portugal, and
pushing up yields in those countries exist in the US, UK, Spain,
attempt to cap yields will just tend to push rates higher.
Mises explains this very well in his book, The
Theory of Money and Credit:
the banks may try to oppose these two tendencies that counteract
their interest policy by continually reducing the rate of interest
charged for loans and forcing fresh quantities of fiduciary media
into circulation. But the more they thus increase the stock of
money in the broader sense, the more quickly does the value of
money fall, and the stronger is its countereffect on the rate
of interest. However much the banks may endeavor to extend their
credit circulation, they cannot stop the rise in the rate of interest.
Even if they were prepared to go on increasing the quantity of
fiduciary media until further increase was no longer possible
(whether because the money in use was metallic money and the limit
had been reached below which the purchasing power of the money-and-credit
unit could not sink without the banks being forced to suspend
cash redemption, or whether because the reduction of the interest
charged on loans had reached the limit set by the running costs
of the banks), they would still be unable to secure the intended
result. For such an avalanche of fiduciary media, when its cessation
cannot be foreseen, must lead to a fall in the objective exchange
value of the money-and-credit unit to the paniclike course of
which there can be no bounds. Then the rate of interest on loans
must also rise in a similar degree and fashion.
As the dollar
falls, the asset side of central banks will be falling in value,
This will pressure
a dollar heavy central bank’s solvency.
How will Japan
respond? Will they panic and begin adding Yen assets?
If so, that
will inject base money into the Japanese fractional reserve banking
system and be wildly inflationary.
the other Asian central banks? They all have balance sheets loaded
with dollar assets.
If they begin
purchasing assets in their respective currencies, massive inflation
will break out in their economies, too.
Gold and Silver? On a net basis, central banks can not increase
their gold or silver reserves.
there is not any way of increasing supply in a meaningful way.
The next big
risk is how will international trade be settled?
If India and
China no longer want dollars, how will they settle trade?
will surely not want to grant the Chinese the luxury of settling
in Yuan, nor will the Chinese want to grant India the luxury of
settling in Rupee.
Russia/China trade? Or Japan/Saudi trade?
The IMF, controlled
by the US, will likely suggest SDRs.
SDRs are too
dollar centric and esoteric to be accepted internationally.
be settled and mutually beneficial or it will not happen.
global economies will collapse.
This is the
biggest risk of all, and it must be addressed immediately.
Gold is the
only commodity that can fill the void that the collapse of the dollar
stole Gold’s historic role as money at Bretton Woods, and only Gold
can replace the dollar in international trade.
conditions created by World War II facilitated the rise of the Dollar.
conditions will never be replicated for the US or any other Nation.
Fisher [send him mail] is
an independent investor and professional trader living in Austin,
TX. Formerly, he co-managed a successful hedge fund.