Why USD is doomed.... to rise?

for the past several years the media and influential business authors have been pressing on the idea that the US dollar is dead and unreliable. reasons such as big national debt, constant money printing and appreciation of gold have been given as proof to their points. excessive national debt was claimed to be the reason why international lenders would eventually turn away from the USD because of a default risk. periodically implemented FED's QEs were seen as USD-value-depreciating source. and gold was speculated to be the all time value storage instrument that continuously appreciated relatively to the dollar...
    
however, fundamentally there is a number of reasons as to why the US dollar should actually rise in value relatively to other currencies and equities...

first of all, the currency market, theoretically, should be reflecting the economic conditions of a given country that is represented by its currency. of course that is by far not always the case. secondly, it is considered almost a financial law that a cheaper currency relative to its alternatives serves to the local market's advantage and boosts the economy via increased exports. i use the term "alternative" because all currencies with the exception of the USD are basically the same base fiat currency. the USD is different because it is also the world's reserve currency and it constitutes over 80% of world transactions. people who speculate that the USD is going to be spontaneously replaced by some other mystical currency probably neglect this fact. which is a minor reason for USD being the safest currency and a safe haven...

1) Reason number one - the EURO. or rather - the project-euro... fundamentally the European currency is self-destructive. once adopted by a given country that country looses almost all control over its monetary policies - one of the key instruments in national stability. remember Keynes? he said something like "take over a country's finances and you need no war to take control over it" - or something of this sort.

the money flow resembles the red cells in your blood system - no red cells, no oxygen. the reason Spain, Greece, Cyprus, and so on are in deep recession is because they cannot create money - they can only borrow it from the ECB, the ESM, and the IMF. but simply put - from the banks. Spanish unemployment rate rose to 27,2% last month. almost every third person is unemployed! it's a catastrophe, yet nobody pays any attention to it...

why? because if we were to investigate this matter and bring it to the public's opinion it would likely cause this nation to exit the EU (remember the famous quote from H. Ford? the guy who found the Ford Motor Co?.. - "...people of the nation do not understand our banking and monetary system, for if they did, there would be a revolution before tomorrow morning"). in short - all EU members are being forced to the ECB credit needle just like drug addicts. the Cyprus situation demonstrated it best - the ECB did not want any other nation to loan any money to Cyprus when Cyprus requested aid from Russia. i would say - who cares where they get the money? but the real objective here is to tie Cyprus to one controlling agent which is the ECB (the ECB in case somebody doesn't know is the European Central Bank currently headed by the FED's puppet - M. Draghi). the policy right now is to gather all the member countries under one hand with the use of financial force and economic threat...

but the main and pretty much the only reason the EU is not stable is the fact that the EU is not united under the common law! it is impossible to have one financial instrument and different laws! particularly - monetary laws (that are in the hands of the ECB primarily). conflicts always take place. that's why we have the WTO, UN, etc - to solve conflicts. currently the conflict in the EU lies in the financial system and complete absence of free chose with the austerity measures! when Germany tells Greece to cut expenses Greece obeys. (the Bundesbank and the ECB are closely linked, but it's a different story, but pretty much all decisions come from either the FED or the Bundesbank). when ECB tells Cyprus not to borrow anywhere but from the ECB itself - Cyprus obeys (and digs its own grave where it is yet to fall and bury itself)...

but oddly, nobody wishes to exit the euro zone because, oddly again, they believe that the current system has some advantages. and they see those advantages as being more important than every third person being unemployed and their own power to control their finances! but what are those advantages? the main one is the fact that there is no longer an exchange rate between the European countries. and, arguably, the fact that the financial problems are no longer the head ache of a given state, but ache of the central bank... easy it is to give your problems to somebody else to solve them isn't it?... but does the ECB do a good job solving them? with unemployment in almost all the countries going up every month?... you tell me... what is measurement of a good job?.. balance sheets or humanitarian issues?... you live in those countries - you decide what's more important for you and your children - bankers' multi-million bonuses, or you being on your state's food-supply list...

this rising unemployment should concern the politicians and the economists very much due to one fundamental reason - high unemployment means lower consumption, lower demand and consequently - more layoffs and even higher unemployment...

the Euro area has the greatest potential of becoming the spark of the future economic collapse. and what's worse - it is very likely that it will be a domino type collapse that will include in its chain-reaction countries such as China, Australia, Russia, the whole Mid Eastern region and eventually - the US itself.

the euro is getting weaker and weaker. the ECB finally decided to lower the interest rates down to 0,50% - but it's not enough. however, it will be one of the reasons for the euro depreciation. and when euro goes down - it pushes up the dollar. thus we have one reason for USD to rise - the weakening euro (and not only euro but a lot of other currencies as well - JPY, AUD, CAD, GBP, etc - almost every currency is now falling relative to the USD)

2) Reason number two is the unfolding crisis. as Europe crumbles and the demand in Europe contracts, the next country to suffer will be China as EU constitutes 1/3 of its export markets. loosing even a small portion of it will result in great consequences for Chinese manufacturing and consequently - Chinese labor. why is Chinese labor market so important? because the relation of the number of people employed and the unemployment rate is tricky in the sense that even such insignificant number as 1% increase in unemployment in real figures would mean millions of workers... it may end up with potential social instability. the one good thing is the fact that the Chinese consumers grow in number and boost internal demand.

it's not an argument that China has a lot of room for stimulating its economy during bad times. but what will be good for the Chinese economy will further damage the economies of other countries, including the USA. what could be the means of economic support for China? well, the first principal states that you lower the value of your currency in order to pick up inflation. unlike the European countries the Chinese are able and are very likely to do it. so, lowering the yuan will ultimately bring the USD up in value. China has a lot of room lowering the interest rates that currently stand at 6%. the US and the EU stand at 0,25% and 0,50% - practically limited with this particular means of stimulus. and there is a number of other things China can do to stimulate its economy - decrease banking reserves, start another QE program, but the one measure i'm mostly concerned with is a potential price war known as dumping that is doomed to force other nations into protectionism...

what is protectionism? it is when a nation or nations restrict to some extent its foreign trade with other nations in order to help its local producers escape from foreign competition in a given industry(ies). personally i believe that globalization is not a healthy thing. it mixes the world into one big pot and makes nations loose their personal traits and uniqueness. it makes the western way of life and ideologies dominant. but who said they should be?.. who said the world must function the way the USA thinks it should?.. nations should maintain their unique characteristics and cultures and live in a mutually beneficial relationship. and nations should protect their people from the financial disasters the same way they protect themselves during wars, environmental disasters, etc. a certain level of autonomy and independence must always be maintained. otherwise a nation looses its sovereignty and lets others to control it...

the world became so interconnected that an overdone protection will inevitably damage a partnering country's manufacturing. and i believe China will, through its dumping strategy, force other nations to limit the product flow into those nations. primarily Europe. if the Europeans choose not to do so they will end up like Egypt where farmers were crushed by foreign imports and revolution begun...

but closing European markets will cause prices to fall even further as there will be an oversupply of the embargoed goods. or those goods will stop being manufactured which will cause layoffs and higher unemployment in China... you see - no matter what we do, it all comes down to being worse...

3) The 3d reason for USD to go up in value is the pledge made by the FED to fold the QE program when unemployment falls below 7,2% or inflation gets higher than 2,5% i believe. well, the unemployment rate is already at 7,5% and clearly demonstrates a positive tendency. whether it is positive or not is not important right now because what is important is that the FED will be making the decision based on that number. and they don't care about whether there are more part time jobs created than permanent. they look at the number and keep it simple...

in fact the FED is interested in the future crisis and is actually the one orchestrating it. remember Thomas Jefferson - "first by inflation then by deflation bank will deprive the people of all property...". that's what they are doing - inflating bubbles. right now it's the bond market bubble. well, actually it's both bond and stock markets and when the bubble bursts the investors will sell their shares and go into the dollar thus creating a huge demand for it.

as far as inflation goes i tend to see that there is much more inflation out on the streets than that seen in the statistics. but statistics show even slower increases in wages. the increase is practically absent! people do not get payed the amounts sufficient enough for them to spend freely, borrow more and take mortgages. that's one of the reason why mortgage rates keep on falling to record lows and the housing market is practically nowhere since the 2008 crash. so if you combine the two factors - growing inflation and standing still wages you'll see that there is a conflict which makes the demand for the USD even stronger.

and the fact that the FED is about to fold the QE program will mean that less dollars will be printed and loaning policies will change towards increasing the interest rates and thus making borrowing harder. to say the truth i do not think that the FED will have the time to fold the QE program. i think the events in the EU will start happening very soon and the consequences of those events will stop the recovery of the US economy (taken that there ever was a recovery...) and force the FED to continue with the QE, or fold it temporarily and then start it again some time later...

4) Reason number four might be a little bit confusing as it is all about the debt... the current monetary system is based on debt. in fact debt is the money! if there was to be no debt - there wouldn't be any money in the system. so paying it off is simply not possible! thus the whole concept of debt is not really worth any debates. i always laugh when Obama makes a serious face talking about raising the debt ceiling))) well, there is no point in having the debt ceiling at all! debt will go up infinitely. more money will be borrowed in order to plug holes in past obligations. it's a classic pyramid scheme and it is one of the reason (if not the main reason) why we have crisis. the financial pyramids periodically fall apart and then get rebuilt again through more borrowing and more debt and more devaluation of the paper money...

but debts do not always get accumulated - they also get payed back. and not without an interest... and not only not without an interest, but the interest is the prime part of the loan that gets payed back. and the best part of it all is the fact that money for interest are never created in the system! so there is ultimately always a shortage of money in the system. right now the interest that is owed by the US government amounts to almost 3 trillion(!) dollars out of the nearly 17 trillion national debt! think about it - 18% of the national debt is interest. and if you make an effort to see which one is currently increasing and which one is decreasing you'll find that the interest is currently being payed off while the national debt continues to rise... actually this system that does not create money for paying off interest but demands it forces people to, basically, battle with each other for money. that's why the concept that in order to have money you have to take it from somebody else stands...

how can the government be paying off interest and continue to borrow at the same time? well, remember the fiscal cliff, the sequestration, and how the taxed were raised recently? together with spending cuts the US government is freeing up money to pay off its past debts. and the major beneficiary is the FED... but who's paying?! - YOU are! well, the American tax payers in this case... yeah - people. people pay - bankers chill...

so, the US needs the dollar and creates demand for it which we do not feel yet (well, not all of us). right now we are in the euphoria state and people continue to drop the dollar and buy stocks and bonds without even considering that they are at the all time highs. it's not even dangerous - it is suicidal. they might as well take their money and flush them down the toilet... (this was written before today's Nikkei 6% drop)

5) Finally the reason number five (which is by no means the last one) - gold and other commodities being sold on a big scale. or better said - being exchanged. actually the term exchange makes terms like buy and sell meaningless. when you go to a store you don't often think of yourself as selling dollars and buying bread. the thing is you don't do either - you exchange your money for bread...

gold is still perceived as a value maintaining investment, but it's not. the truth is that gold is probably the last equity that can actually be measured in terms of paper money! and it is the most manipulated commodity in the world. for instance demand for oil can be measured by the quantity consumed, in reserves and drilled. but gold is absolutely speculative. nobody uses it! oil at least can be turned in gas and used to power your car, not to mention hundreds of other uses for it. but gold?... we know it is scarce but who cares? there is practically no demand for it other than in jewelry industry and narrow and closed industries such as space technology. most of the gold is just sitting in vaults and never exits them. most of those vaults and the gold in them are owned by banks making them in total control of not only the paper money but the gold as well... and what they do is speculate with the price of gold! they've successfully done so for the past several years turning gold into yet another bubble which actually is currently bursting and already lost 1/4th of its value compared to the record highs... (but did the investors change their tune?..... nooo, they are like parrots "buy gold, buy gold!"...)

somebody is selling gold but we don't know who exactly because the media won't tell us. but we know that gold is mostly owned by banks and by governments in reserve funds (of central banks). the overwhelming majority of people does not owe any gold thus making the gold market very thin and with very small number of players whom we already know - the banks, the gold miners (who are usually also owned by banks...) and governments; with the major chunk of the total gold out there owned by banks - 1/3 of it!..

gold is an ultimate financial weapon. it practically has no value, it is not considered by law a means of exchange, so you can't buy anything with it without breaking the law. it's price is highly speculative and the only reason why gold is still special is because people believe it is. but the truth is - it is not special and the gold standard that some economists are preaching will never come back. if it were to come back the world would instantly become extremely poor. i don't have the words to describe what would happen if GS was brought back - extreme misery and poverty and wars and total chaos...

and because it is not special it has the potential of stripping the world countries off of huge sums of money because it makes the gold reserves not so special... if people start seeing gold in the light of its true value the price for gold will crash thereby crashing the countries' reserves down to the ground. the only thing that is need to be done is for some big media to announce the fact that gold is priceless in the sense that it cannot be measured in terms of real value. and once this idea sinks in the minds of the people and governments - gold will depreciate greatly causing the run for the legal means of trade which is the paper money...

it's already happening. the further the gold prices fall the more conscious of this fact the governments will become and the more suspicious they'll become. and more people who share my opinion will speak out saying - sell gold and never buy it again until its price is determined by the real demand for it.

but the questing remains - who's selling gold? i think the major contribution to the latest gold plunge was caused by the US government. they are exchanging gold for dollars. it is for some reason not evident yet but the demand for USD constantly grows. and the only reason USD is not rising so much is because people still believe that QE program make the dollar unattractive.

well first of all it's not because most of the money rotates in the banks. it actually never ends up being printed! only about 3% of the total money supply is actually paper money. the rest of it is digital!
secondly the QE money does not go to the direct use that is was designed to go for - most of it is never loaned out. it just goes to the stock market and the bond market and rotates there earning billions for banks and millions for the managers! the real economy never sees that money.
more than that - a bank DOES NOT even need to have any money to lend it in the first place! a borrower (be it a corporation or a bus driver) creates his own loan by himself. what a borrower does is writes an IOU in the form of the loan contract where he promises to return the money he borrows with interest. then the bank literally CREATES this money out of nothing, gives it to the borrower and then demands it back with interest. it creates the money from your promise!..

think about it - can you trace the money that was loaned to you to any specific depositor who previously deposited his money with the bank? no you cannot. this is bringing us back to the debt = money issue. you create debt by PROMISING the bank to return the money it gives you and the bank CREATES that loan for you. thus all the money in the system is based on debt. now think about that banks also loan to each other creating enormous sums of money... (this is actually called the fractional reserve system which is a different topic)

the problem with the system begins when borrowers default on their debts in big quantities. that's when the banks have troubles and go to the FED (which they actually own, so you can say they go to themselves...) and ask it to bail them out. and the FED bails them out by printing money (or rather by creating numbers on the balance sheets in the computer) and then passes the burden of this newly created debt to the taxpayers in at least one form - which is inflation...

to summarize the picture you have to place all the puzzle pieces together.
Europe is in a deep, deep recession which by now should be called a depression. for 6 (SIX) QUARTERS in the row the European GDP was below 00. that's one year and a half...

the unemployment rate in Europe constantly rises but people are too afraid to admit that the common currency (the euro) is a failed experiment that ties the hands of sovereign nations and takes away their power to control their local finances. that has led to the so called peripheral economies such as Spain to experience a severe deflation whilst the central economy, namely Germany, felt itself quite comfortable with moderate inflation...

China's manufacturing is falling down (here is my previous topic on this matter - http://doncutlass.blogspot.ru/2013/03/and-later-theyll-say-oh-we-didnt-notice.html )

the FED created another bubble and at the same time arguably improved the economy justified by decreasing tendency in the unemployment rates. however it is going to play a bad trick with the FED once it folds its QE program...

and gold is falling down as somebody foresees the future demand for the US dollar...

thank you for reading. you can follow me on twitter - https://twitter.com/DonCutlass - i use it to post links to my new articles.

i do not reprint random and pre-ordered news - i interpret fundamental factors and draw my own conclusions...