Wednesday, October 27, 2010

King Dollar?

The global currency crisis centered around the U.S. dollar is unfolding as expected, with over-indebtedness in the Western world leading to a global race to devalue. The mainstream financial media still carries hope that global economic leaders will work together to prevent a major currency crisis from occurring. I believe such hopes are short-sighted. Everyone knows the U.S. will continue to abuse its status as owner of the global reserve currency. Game theory suggests every nation will look after themselves.

I fail to see what the G-20 meetings this past weekend accomplished. Tim Geithner made his obligatory statements regarding the “strong dollar policy” of the U.S. Meanwhile, the dollar opened the week hitting 15-year lows against the Yen. At the end of the day, markets will go where they want to go. The Bank of Japan has failed to devalue the Yen against the dollar, which is a strong indictment on the dollar. Remember, Japan has a 200% debt to GDP ratio and a demographic time bomb on their hands. The foundations of their economy aren’t terribly strong. Given the tremendous headwinds facing Japan in the years ahead, they need a weaker Yen in the worst way. Trust me, Japan is trying to devalue- it’s just that Helicopter Ben has a more technologically advanced printing press.

If global leaders really had the ability to overpower markets, they would have done so long before gold breached $1,000. The truth is, capital always finds its way to value, regardless of government intervention. Coming out of the G-20 meeting, I expected at least a temporary rally in the dollar and a correction in gold. That neither trend developed today is troubling. I would keep a close eye on the dollar- it’s long overdue for a substantial rally. A failure to muster a rally from such oversold conditions suggests the smart money is really starting to head for the exits. If this happens, look out. Don’t be surprised if you see weakness in the dollar attended by a sell-off in U.S. bonds.

The truly critical trends of the future are playing out as we speak. I don’t see why Western nations up to their eyeballs in debt will raise the real value of their burden by allowing their currencies to appreciate. It just isn’t going to happen. As social unrest intensifies in countries that enact austerity measures, politicians will realize cutting spending isn’t a politically popular solution. You see, a lot of people say they believe in fiscal restraint. But tell these very people how fiscal responsibility will affect their entitlements, and watch how quickly they change their tune. As Frederic Bastiat said, “Everyone wants to live at the expense of the state. They forget that the state lives at the expense of everyone.” This entire debt model is going to collapse under its own weight. It always does.