September 11, 2013
Whether you are an Obama fan or not, what has transpired over the last week has been a travesty and the U.S. by extension looks foolish, incompetent and sadly weak. I was only a teenager back in 1973-74 when Richard Nixon went through the gauntlet of Watergate but I do remember it fairly well as it was of interest to me. One thing I remember for sure was that inflation was a problem and a chorus began to grow regarding the value of the dollar versus foreign currencies.
What is happening now from a financial standpoint is far worse in so many ways than what we experienced back then. What is also worse is that now we have a President who has lost more credibility than even Richard Nixon did. The current scandals are one thing (even though the public seems to have slept through them) but President Obama acting wishy-washy while Vladimir Putin teaches him the art of chess is very dangerous at "this stage of the game."
I say "this stage of the game" because we are financially incredibly vulnerable whereas back in 1974 we still had options left which no longer exist today. The president of any company is the same as the "CEO of the corporation." Whether it be president, prime minister or dictator, the person at the top is the "CEO" and thus "face and spokesman" of/for the country. The currency and bond market of any nation are the "common stock" of the country and will be generally bought with a credible leader in charge and sold if the leader (country) should lose credibility.
This is where we are now, foreigners had already gone on strike when it comes to our Treasury auctions, this past week can only serve to give foreigners more reason to outright sell our Treasuries. I know that I've spent an inordinate amount of time on this subject and you may be tired of hearing it but there is nothing more important in finance AND foreign relations than "credibility." There is also nothing more important to a fiat currency than confidence. The actions of our president over the last week have served to undercut credibility and faith. I would go so far as to say that we have even lost "face" because WE are supposed to be the voice of reason.
If there truly is a growing consensus (which I believe there is) within the G-20 to dethrone and supplant the dollar as the world's reserve currency, the last week has surely served to embolden the mutineers and hasten the dollar's demise. As you know, China has been circling the globe "spending" dollars on projects everywhere and trading dollars for "hard assets". Another example of foreigners "spending" (getting out of) their dollars was posted yesterday on Zero Hedge. Foreigners have been buying our real estate with cash transactions in a frenzy. The article points out that this is a way to "launder" dollars but you can rest assured that if these foreigners believed in the "strength" of the dollar they would not be dumping them.
This has been occurring in the "luxury" real estate market and has caused prices to rise. I have been asked several times "why" inflation would rise if foreigners en masse dumped their dollars. This is a prime example. If the dollars floating around the globe were to suddenly (and in volume) start to "come home" then the "inflation" that had previously been "exported" will come back here. In other words, a glut of "returned" dollars will be within OUR borders rather than all over the world and will compete to purchase the goods (limited supply) available for sale. Inflation will rise ...very rapidly.
The point I am trying to put together here is that weakened confidence in the U.S. as a country will ultimately spill over and be reflected in the value of the dollar. You can argue all that you'd like that "deflation" will be the problem, but I won't buy it. Not when we have a central bank willing (desiring) to print madly and foreigners being pushed and prodded toward selling their dollars.
Obviously another example of these foreigners wanting out of dollars has been the demand for gold and silver as a replacement. Demand has overwhelmed supply and the Western central banks have made up the difference for years. How much gold is left in Western vaults is unknown and attempting to purchase gold AFTER we find out the answer will not work. Will the West sell every last ounce available or will they give up the game while they still at least have "some" left? I don't know the answer to this but I can tell you that if the U.S. continues to lose face and credibility at the same pace of the last 7 days, we will find out very soon just how much gold is left. Just as Nixon took us off of the "Gold standard" back in the early 70s, our current president will be presented with a "cash call." No, I don't mean that foreigners will try to redeem their dollars for U.S. gold. They will increase their rate of dollar sales and gold purchases on the open market. The Fed may be able to soak up much of the dollar sales temporarily but gold cannot "magically" be created for delivery. This is a "call" that cannot be met.