So Long, Dollar

Recently by Jeff Fisher: Quantitative Looting, QL

Every day the US Dollar moves closer to collapse.

International 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.

Therefore, a central bank must sell dollars for anything but their respective currency.

For example, we recently witnessed China buying Japanese JGBs.

This creates a potentially very chaotic condition for markets.

US dollars 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.

The dollar’s velocity would be very likely to spin ever higher as buyers and sellers toss it back and forth like a hot potato.

The effect of the Dollar repudiation US Treasury bond prices will be extremely negative.

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 Greece.

The factors pushing up yields in those countries exist in the US, UK, Spain, and Japan.

However, any attempt to cap yields will just tend to push rates higher.

The Theory of Money & ... Ludwig von Mises Best Price: $17.00 Buy New $15.95 (as of 07:55 EST - Details)

Ludwig von Mises explains this very well in his book, The Theory of Money and Credit:

At first 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, too.

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.

What about 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.

What about Gold and Silver? On a net basis, central banks can not increase their gold or silver reserves.

Quite simply, 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?

The Indians 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.

What about 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.

Trade must be settled and mutually beneficial or it will not happen.

Without trade 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 will create.

The Dollar stole Gold’s historic role as money at Bretton Woods, and only Gold can replace the dollar in international trade.

The unique conditions created by World War II facilitated the rise of the Dollar.

Those initial conditions will never be replicated for the US or any other Nation.