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« Agnico-Eagle Mines Call Options: Bought! | Main | A Comic Banker Explains How The Markets work! »
Sunday
Oct052008

The Federal Reserve Slays the US Dollar!

Bernake, Bush and Paulson
Since coming off the gold standard back in the 1970s the US Dollar has lost around 97% of its purchasing power. This latest bail out, which is a magical trick of creating money out of thin air adds nothing to the economy and only serves to reduce the wealth of those holding dollars. Our sympathy goes out to the American citizens who will carry this load for years to come and to the many foreign suppliers of goods and services that have received a hollow unsustainable paper promise for their efforts.

It is interesting to note the stock markets reaction on Friday 3rd October 2008 as the news of the bail out filtered through. The DOW was standing at 10782 at 1.00pm and by the close it had dropped 457 points or 4.2% to close at 10325, not the most enthusiastic reception for this historical piece of legislation.

DOW 03oct08

The dollar was already on its knees due to the printing presses working 24/7 to produce dollars by the billion when the Federal Reserve hit the accelerator with their brain wave idea of a near trillion-dollar bail out. The pendulum for real estate prices had swung way past fair value and a correction was imminent, attempting to stall such market corrections is akin to trying to stop the tide from coming in. King Canute could not stop the tide from coming in and so got his feet wet. King Bernanke cannot prevent a recession and so the dollar will be decimated.

King Canute

We are just four weeks out from a presidential election so the powers that be will do their utmost to make the picture look as rosy as possible for the electorate, therefore we can expect some support for the dollar in the near term. After the election the successful presidential candidate will be handed the poison chalice of a contracting economy, mega debts, a falling dollar and an angry nation looking for answers.

If we take a look at the rest of the world we can see that the picture there is not dissimilar to that of the United States. Japan, for instance has been pumping liquidity into the their financial system with much gusto. Over the pond in the United States of Europe they have just held a meeting in Paris to discuss the possibility of a unified approach to the current predicament. Well as the British, French, Germans, Italians, Spanish et al, have not managed to agree on much over the last two thousand years it comes as no surprise that they agreed to disagree. In other words each country will take whatever remedial action it thinks is necessary. This sounds fine in principle but in practice the Irish have already stated that they will guarantee deposits in their banks. This action has annoyed the British Prime Minister, Gordon Brown, as money is now moving out of English banks into Irish Banks. The Italians have also stated that they will guarantee the deposits in their banks, which in turn will attract more capital putting a strain on those who do not offer the very same assurances. This is like being on a raft that has entered choppy waters in that some people have moved to the Irish part of the raft causing the raft to wobble slightly. When a perceived better offer appears so a larger crowd moves to the other side of the raft causing a bigger wobble. It won’t take much for the heard to head for the same space seeking shelter from the financial uncertainty that abounds, for the wobble to gain momentum and tip the raft over completely.

The US Dollar is as good as dead and the other so called top flight currencies are walking corpses looking for a grave.

We can only conclude that gold, which is unprintable, is the only safe haven left and we expect to see it trade above $1000/oz shortly.

What all people, not just investors, need to understand is that paper money is worthless. Gold and precious metals are the real money, the real wealth that cannot be created or diluted by our political masters.

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Reader Comments (5)

I read the article"The Federal Reserve Slays The US Dollar,"and this occurred to me: Why do the American people allow this fiat money system to exist? A system that steals from their labor through inflation and burdens them and their descendants with massive debt that,it appears,cannot possibly be paid.I have one answer that may be part of the overall answer to this complex problem;namely,ignorance.I mean the public's ignorance of economics.The question may arise then:Why are many Americans so ignorant of economics to such an extent that we are in this economic mess?Americans are not taught economics properly in their schools.When I went to college,I was taught Keynesian economics.I was taught absolutley nothing of gold as a governor to the amount of paper money that could be printed,and I was not taught that,historically, all fiat currencies will eventually fail(become worthless).I only became aware of these when I became a coin collector and did some extra study independent of what I was taught in college.The U.S is on a fiat currency called the dollar,and it should be apparent as to what the outcome would be to anyone who has proper training.A couple of solutions might be that no one may graduate from the university or college without taking a required Austrian School of Economics course and,also,a required course in the U.S.Constitution along with the Federalist Papers,so that students would know what our founding fathers intended especially with regard to our money.

October 6, 2008 | Unregistered CommenterADW

I think it's strange in the face of a rising dollar, that will surpass every gold bug's expectations, you see a dying dollar. In march it was near 70. Now it's 81.6. I think it's important that our wishes for a weak dollar and strong gold don't delude us into thinking that by our wishes it will somehow be. The dollar is manipulated like everything else that matters to the powers that be. It can be lowered and raised. It will be raised and gold will tank in the short term, wiping out a lot of people's gold stock valuations.

October 6, 2008 | Unregistered CommenterMark

Mark,

Yes we see this move by the dollar as something that will be short lived - time will tell!

October 6, 2008 | Unregistered CommenterGold Prices

I notice that in the past few recessions, gold prices were somehow subdued. With the current gloomy global economic outlook, a worldwide recession seems inevitable, especially when you think of the repercussions of the impending demise of the US economy.
Do you still think that gold prices will remain buoyant? Please comment.

October 7, 2008 | Unregistered CommenterLF Phang

Gold seems to be in growing in demand by the general public(serfs of all nations) now, so I think that alone will keep prices up. The government corporation has a lot of money in collusion with the central banks to suppress gold indefinitely though. Continued suppression, however, will enable the serfs to keep what little wealth we have left by our buying gold at a great price before it goes ballistic during possible hyperinflation(housing implosion makes hyperinflation unlikely) or at least maintains value in deflation. But, in the end, the government can always confiscate gold; then we're screwed.

October 7, 2008 | Unregistered CommenterMark

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