Daily Dirt A little blog of clips and quotes about the Falling Dollar.

Apr 14:  FTSE drops as US recession fears hit banks (Reuters)

Now, at $925, is your last chance to buy gold at under $1000 as it gears up for its next rally.  Where will the next level be?  $1034 was just the beginning.  I'm betting on over $2500 before the Fed gets a spine and takes its medicine....

http://uk.reuters.com/article/businessNews/idUKL1476795920080414?feedType=RSS&feedName=businessNews  marks the beginning of the next gold rally.

Mar 26: Fed in trouble, and where's the next bubble? Bill Bonner:

Stepping back…we try to bring the world economy into focus.

Yes, the economies of the West have overdone it. They are burdened by high costs…an aging workforce…and enormous debt. After a big run up in debt (the US government has added $20 trillion to its ‘financial gap’ in the two terms of George W. Bush alone)…it is normal that you would have a period of debt liquidation. That is what is happening. And that’s what is so troubling Wall Street. No one knows exactly which debt will be liquidated most abruptly…nor who, exactly, holds it.

Of course, the feds are trying to stop this process. They fear a Japan-like slump – long, slow and impossible to reverse – or even a Great Depression-like crash… with even greater suffering for even more people.

What can they do about it? They can make money and credit more available to the banks. That is what they have done – with mixed results for far. While the Fed has pushed down on short rates, for example, most borrowers’ cost of money has actually gone up.

The feds can also try other tricks – such as tax rebates. Or, they could actually step in and buy mortgages. These measures do not really prevent losses. The losses are already there. All they do is take them away from the people who deserve them and distribute them among the public, often in ways that are hard for the voters to understand.

None of these things are likely to set off another boom on Wall Street or in the economy. Any way you look at it, consumers are squeezed…and the financial industry (which was to blame for the bubble of the last few years) is now in decline. It is very rare for a bubble to re-inflate. Usually (in fact, in every case we can think of) when a bubble deflates in one sector…the next bubble will occur somewhere else, normally in a rising market. The bubble in Japan of the ‘80s was followed by the bubble in the US of the ‘90s. Japan still has not recovered. And the bubble in the US of the ‘90s was centred in the tech area…on the Nasdaq. That sector crashed and has never recovered. The next bubbles were in residential property and the financial sector, notably in private equity, hedge funds, and derivatives. Those bubbles have popped too…and are losing air fast. They will probably not reflate in our lifetimes.

So, a logical question: where’s the next bubble?

“It’s in emerging markets,” says colleague Manraaj Singh.

“Haven’t they already had a bubble?” we ask in response.

"No," was his answer. "They’ve only had the beginnings of a bubble. They are rising markets…but not crazy markets. What we’re seeing now is a correction in many emerging markets, but not a change of the underlying trend."

Manraaj argues that the same mechanics that puffed up a bubble in residential housing and financial services is now at work in emerging markets. The financial authorities of the West are making more money and credit available to aid their aging, debt-burdened economies. Many foreign nations – China and the major Gulf oil exporters, for example – tie their own currencies to the dollar and their economies to that of their biggest customer – the USA. When the Fed cuts rates, as it did to try to save the tech sector and cure the recession of 2001-2002, the credit goes somewhere…but not necessarily where it was intended to go. In 2002-2007, it went into housing and finance, not into the deflating bubbles. Now that the Fed is cutting again, the emerging markets will be the ones to reap the benefits of the easier credit…so you can look for new bubbles there.

Latin America was the best performing region over the last three years – with annual returns of 47%. And the best single market over the last three years was Brazil – with annual returns of 56%.

Are these spectacular returns the peak of a trend…or just the prelude to the next bubble? Perhaps Manraaj is right: the next bubble will be in these hot emerging markets.

Another possible focus for the next bubble: gold. More to come…

Mar 10:  Surely the Feds can fix this, right?

Bill Bonner illustrates why not, and why only gold will survive...

"The Fed is desperately pulling on levers. Each day brings more evidence of a system-wide credit breakdown. The Fed intends to stop the meltdown in the only way it can – by pulling on the lever of inflation; that is, by introducing more ‘liquidity’ into the marketplace.

This might work, if the problem really were merely a lack of available cash and credit. But consider the problem in housing. A man’s house goes down in price. He has a mortgage to pay. He notices that the mortgage is greater than the value of the house. In the past, he may have been too embarrassed or too proud to do it, but now he is likely to resort to what is being called ‘jingle mail.’ That is, he’s likely to put the keys in the mailbox….and walk away.

What can the feds do about this? The problem is not liquidity. You could offer to lend the man more money on his house, but that doesn’t really help his situation. And who would lend more money, with the value of the collateral falling? As the value of the collateral falls, so do the value of the derivative assets and the institutions that hold them. All up and down the credit capital structure, losses whack into one another like balls on a billiard table. Hedge funds… banks… lenders…borrowers – as one takes a loss, the next one in line takes a hit…which causes the third to lose money too.

It is not a liquidity problem, in other words, but a solvency problem. Too much debt has led to too much lending to too many people who can’t pay it back. And this lending was secured by too many assets that aren’t worth what investors hoped they’d be worth. The losses are there. They are real. They won’t go away – even if you offer more credit....

(from The Daily Reckoning)

Mar 7:  Inflation and contraction as deleveraging picks up speed.  Here's Bill Bonner:

Until now, investors have been mostly positive on the situation. They saw trouble coming…but assumed it would be easy to deal with. They applauded the Fed’s quick response and believed it would soon put the economy back in the pink of health. Practically every prediction included a “recovery in the second half,” provision. Now, the commentators aren’t so sure....

...

*** What happens to a paper currency when its custodians decide to destroy it? We have the answer to that question illustrated for us in the headlines from Zimbabwe. Last we heard inflation was running at 100,000% per year. The average employee made millions per day…but could barely buy a can of beans with the money. Worse still, the beans - and everything else - had disappeared from the shops…hyperinflation has destroyed the economy.

http://www.dailyreckoning.co.uk/Economic-Forecasts/Deleveraging-Picks-Up-Speed.html

My advice remains: Hold on to your savings if you have any, put them in gold. Let your debts remain in worthless devaluing currency.

Mar 6: Gold's going mainstream and about to hit $1000

Mar 3: I'm back from holiday.

...and everything has gone just as I predicted, hasn't it?   Gold's at $988 today and will be over $1000 this week, over $1200 by June. (Mark my words.)

Why am I so confident?  Because I'm confident that the commentators I'm reading have more depth to their perspective than the commentators who blather in the daily news.  And when I see those blatherers reluctantly coming round to the same conclusions, though with less depth to their reasoning, my confidence is just confirmed.  And my advice remains:  Buy Gold now.Today's article is from John Lee, Rice University, from GoldMau.com:

EVERYONE HAS THEIR OWN THEORY as to why the US Dollar is sagging, writes John Lee of GoldMau.com – huge deficits, slowing economy, high inflation, artificially low interest rates, subprime issues etc.

   I am not sure if those factors are the cause or the effect, however. Like beauty, the value of any fiat currency is entirely subjective and often arbitrary and irrational..

The $600 Billion Dollar Trade Deficit
It is a drop in the sea in magnitude when compared to the world's investable dollars, pegged at over $100 trillion. It is a fallacy to analyze the Dollar based on trade deficits alone, much like analyzing the Gold Price based on physical mining supply vs. jewelry demand.

The Slowing US Economy
The US economy grew 2% in 2002 when the Dollar index reached all time high of 120. In 2007 GDP also grew 2% yet the Dollar has just reached all time low of 74. The correlation between GDP and the dollar index is far from distinctive.

Rising Inflation
Inflation as properly defined means an increase in money supply, which has been consistently growing by 10-15% per year for the last two decades. While gold is reaching new record highs by the day, the money supply growth has actually slowed compared to past years as fewer people take out mortgages and loans.

   Talk about a floating concept. The Euro is no less abstract than the Dollar, yet it now trades at a 50% premium to the Dollar when it once traded at a 12% discount!

   The Dollar has remained a fiat currency – backed by nothing but confidence and faith – for more than thirty years, ever since Richard Nixon closed the gold window at the Federal Reserve and stopped redeeming the United States' paper debts with gold.

   If all dollars are fiat monies, and intrinsically a dollar is worth nothing today – but it was worth nothing ten years ago – then why the Dollar crisis now?

   The current collapse, in my view, has more to do with psychology and confidence. Let me expand.

   If a colleague of yours asked you for a $100 handout, you would probably say no. If he asked you for a $100 loan, on the other hand – a loan which you gave but a year later he still couldn't pay back – the result would be a $100 loss. That's no different from the handout you had first refused. You were tricked.

   Banks create dollars out of thin air and loan them to people. Even though money is created out of thin air, once the borrower pays back the loan, the transaction is complete and those borrowed dollars perish in the bank's books. In this scenario, the dollar's purchasing power is preserved through non-dilution.

   However, as we have witnessed through the recent sub-prime fiasco, many parties are getting away without fulfilling their obligation to repay a loan. Institutions were bailed out as the Fed bought their mortgage positions at face value with new money. Consumers were bailed out as lenders were elbowed by the US Treasury to freeze foreclosures, freeze rate resets, forgive loans, and make lower payments.

   Such compromises erode confidence in the system. If one person can get dollars through borrowing without paying them back, and yet another had to work to obtain and save dollars, it is surely not an incentive to earn and keep dollars. Rather, it is a no brainer to borrow dollars and spend unabashedly.

   Savers are the most risk averse bunch of people, and when the monetary rules are muddied, they will opt out. This is how a run on the Dollar starts.

Deflation & the Fed are Mutually Exclusive

   The deflation camp has been on the wrong side throughout EVERY fiat money experiment thus far. The bear camp contends that the debt burden will eventually become so large that eventually the debt bubble will blow and the prices of everything stocks to real estate to copper and zinc will collapse.

   Fiat money systems have always resorted to hyperinflation and destruction of the currency without fail. If hyperinflation could be avoided in a fiat system by the creation of the Fed, the Argentines in 2002 surely would have figured it out and avoided their hyperinflationary disaster.

   The idea that the Fed and the government will allow a laissez faire debt cleansing is patently absurd in my opinion. Central bank action has spoken louder than words in the past six months as a record $1 trillion has being printed to rescue banks. For instance, one of the UK's top five mortgage lenders, Northern Rock, has been nationalized. And as for the consumers, loan amounts are reduced without penalty or conditions, mortgage rate resets are postponed, federal guarantee limits are set to increase.

   Here we go back to psychology. It is not so much about the amount of bail out money being printed, but rather that the smart money took issue with the way the handouts were given unconditionally across the spectrum. Confidence in the Dollar, as the apex of the world's fiat money system, was further eroded.

   Hence the Fed is not the problem or the solution at this point. The Fed's official stance is to ensure price stability. But many people begin to question what the Fed is doing by lowering rates amid record oil prices.

   The United States today is the world's largest debtor nation. Regardless of how high oil is, there is no room to raise rates with tens of trillions of dollars in debts to be serviced. Don't blame Bernanke for our problems; even if Paul Volcker were to be the chairman today, he would have acted in exact same way as Bernanke did.

   The ideal dream for debtors is inflation, which is precisely what the Fed is advocating – expanding money supply through lowering interest rates and direct handouts. The Fed's action is entirely logical acting on behalf of the average American, which is heavily in debt.

What's Next? Gold & Prosperity

   At this point, all the cards have been dealt and exposed. Gold is money and a refuge of capital when a defective fiat money system shows its ugly head. Gold is universally recognized, portable, divisible, liquid, and limited in supply which makes it the only real viable option as store of wealth.

   Today's Gold Price has not fully priced in the Dollar's deep and terminal issues and there is nothing that can be done to stop the further rise in gold.

   The Fed can talk tame on the consumer price index to try stabilizing commodity prices, but the effect will be limited. Mind you, gold's rising popularity should be seen as positive; the fall of the dollar system levels the playing fields for global consumers and producers.

   The Gold Market can easily handle $3,000 to $5,000 per ounce in the near term horizon with minimal disturbance. It is when gold rises too much over $5,000 too fast that we might start to worry about global inflation panic.

   My take is that over the next few years gold will establish a new equilibrium to fiat currencies, albeit at much higher level than today's $980 per oz.