USD Clamor; The USD Won't Go Quietly
Christopher Laird, September 9th, 2009
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As gold tries to break and hold $1000 it brings up the larger question of how long the USD has to last. At the very least, after the markets digest the debate over deflation which is USD bullish, the question becomes: how long can the USD hold together before it falls in value drastically.
Big drumbeat out there
I am sure that you know about China vigorously complaining about the abuse of the USD, most loudly complaining about the Fed's quantitative easing (buying any and all bad assets from banks and putting them on their balance sheet - called monetization, which is printing the money to replace the losses). The Fed had to back off this Summer from that plan and significantly reduce those policies, said in large part due to China's vigorous complaints.
No, we cannot
Or, in other words, the Fed is finding it cannot just print its way out of its problems, it cannot just ‘drop money from helicopters', Bernanke does not have the latitude he thought he would have when he made that infamous statement, the bond markets won't tolerate that without crashing the USD and skyrocketing interest rates. Skyrocketing interest rates would totally stop any remaining credit growth, which will strangle the remaining life out of the economy.
If you agree with that, then the prognosis for the US and Western economies will be a second round of credit deflation, and must result in much lower stock markets. Without going into a whole paper on how that will work, basically, if credit growth falls further, the Western economy will contract faster than its -3% rate at this point. That will cause stocks to have a second big down leg crash, akin to the second down leg of the stock crashes following the first 1929 stock crashes. The second stock down leg took stocks down eventually to 10% of their 1929 highs by the early 1930's.
But a recent development just out, that the UN stated that a new world currency not dependent on the USD must be created:
"In a radical report, the UN Conference on Trade and Development (UNCTAD) has said the system of currencies and capital rules which binds the world economy is not working properly, and was largely responsible for the financial and economic crises.
It added that the present system, under which the dollar acts as the world's reserve currency , should be subject to a wholesale reconsideration. Although a number of countries, including China and Russia, have suggested replacing the dollar as the world's reserve currency, the UNCTAD report is the first time a major multinational institution has posited such a suggestion..." Telegraph.co.uk
And of course we heard that the IMF is using SDRs (special drawing right - a quasi reserve currency that central banks share, a sort of basket currency made up mostly of USD consisting of the Euro, Yen, USD, British Pound). China for instance just bought $50 billion worth of SDR denominated bonds from the IMF. Not a whole lot of money in the scheme of things, but this shows what is beginning to happen. The IMF has now about $500 billion of SDR out (rough guess). It is growing. As a true quasi currency, the SDR is an alternative to the USD if the world wanted to push it. Still it's a drop in the bucket now though.
