The much anticipated decline of the US dollar appears to have started with yesterday’s announcement that the Federal Reserve will start buying up to $300 billion of Treasuries and mortgage bonds. The action is expected to expand the central bank’s balance sheet by $1.15 trillion. The excess supply of dollars is threatening investors with fears of an inflationary spiral. The Dollar Index reflected this as it fell 2.7%, the largest one day drop since 1971.
The dollar started on a declining trend in 2005 amid concerns for the United States’ expanding current account deficit. However, this trend was largely reversed last year as investors flocked to risk free U.S. Treasury Bills amid panic in global financial markets, raising demand. Analysts also agree much of the demand for the dollar was made up of investors unwinding their positions, and was not actual sustainable demand.
My Opinion: These actions emphasize the severity of the economic crisis in the U.S. While the recession has taken its toll on most economies, central banks have largely avoided printing money at the pace the Fed has. Eventual devaluation isn’t a hypothesis but rather a proven fact — printing money leads to inflation, which erodes the value of the currency in question. One needn’t look further than Zimbabwe to see this in action.
As more money is printed, there is more currency chasing the same amount of goods. Production isn’t increasing in the United States and all this excess capital will be representative of the same volume of production. If for example there was $100 in an economy which produced 10 equal products, each product would be valued at $10. If the central bank printed an extra $50 and let it circulate without any matching increase in production, $150 would be representative of the same 10 products, thus pricing them at $15 each, resulting in 50% inflation.
As inflationary pressure mounts, I expect more investors to dump dollars in favor of assets that offer a better inflationary hedge, like gold.
Related Posts
- Bernanke Knows the Dollar is Doomed (06/04/08)
- Inflation, the dollar, gold and more … (06/17/08)
- UN and PBOC Call For Dollar To Be Replaced By Single World Currency (03/26/09)
- Dollar’s fall last week is exactly what I’ve been warning about! (12/14/08)
- More evidence of what I’ve been saying about what’s going to happen to the dollar … (10/26/09)
{ 9 comments… read them below or add one }
I have been a follower for years. Your letters are just common semse and not loaded with :Oh,God.,!!Do this right away!!!! It is a pleasure to read your letters and know the ’sky is not falling’ Keep up those wo nderful comments/they are appreciated. I have been a “gold bug” since the ’70s.
Larry Edelson Reply:
March 25th, 2009 at 12:22 pm
Thank you for your ongoing support and compliments!
Dear Larry,
Regarding the imminent devaluation of the US$, that brought to my mind when Peru had the hyperinflation in the late 80´s. Printing funny money is terrible and yet people in charge of taking those decisions are either foolish or very clever to make profits out of it.
Please take a look at statistics of the Peruvian Hyperinflation of 1988 through1990.
Also I would reccomend the Peruvian “Sol” currency to invest. Peru will remain solid among the world economies…what do you think about investing in the Peruvian Sol S/.?
Larry Edelson Reply:
March 26th, 2009 at 5:08 pm
Agreed. On the sol though right now, or for any currency for that matter, I prefer gold
Do you think its possible we could go into a hyper-inflationary crisis (as per Peter Schiff) with the USD holding onto sole world reserve currency status?? I agree with your views that the USD will probably fall from such status soon, but nonetheless, is hyperinflation even possible if the USD holds its current position as the worlds only reserve currency?
thanks
matt
biloxi
Larry Edelson Reply:
March 26th, 2009 at 5:12 pm
Yes, it will happen before the dollar loses its status as a reserve currency. Ultimately, the wipeout of the dollar will be a major catalyst behind it being replaced. It’s already starting, and I expect it to happen in the next couple of years.
Hello Larry
I’m glad you have your own site now. Congratulations.
Two quick questions.
I read in Liberty Coin monthly not to hold gold in your IRA accounts because of the risk that in 2009 or beyond the government may nationalize private retirement accounts, so they do not consider them a safe place for your precious metals. Yikes. What does this mean? Do you agree? This was in their November 2008 issue of Liberty’s Outlook.
Secondly, they also say that because there are many legal loopholes in the legal paperwork of ETF’s that they do not recommend holding any of your gold positions through them, because you may never see any of the gold increases in these “paper gold positions”, and that it could happen that you never see any of the benefits if prices soar. What do you say? (This is in their December 2008 Liberty’s Outlook issue. You can obtain a copy at 1-800-527-2375.
Thank you kindly for your response.
Tom
Larry Edelson Reply:
March 26th, 2009 at 5:13 pm
In answer to your first question: No, I do not agree. The risks of nationalizing retirement accounts, and confiscating gold exist, but they are very, very remote.
As for your second question: That, too, is possible, that a gold ETF could default. But I consider it a relatively small risk compared to the convenience of owning gold through an ETF. However, everyone should have some physical gold safely tucked away as well.
Hi Larry
I know Zambabwe was the best performing stockmarket thanks to inflation.
Is USA really close to Zambabwe inflation rate?
Will we see dow 10000?
There’s one difference debt levels are extremely high and amount of wealth destruction is very powerful and no big money is getting to the masses.
This asset boom was cause by leverage and reckless borrowing turn off the tap and you get deflation.
That would mean house prices would increase as well ,no upward trend all down hill in house prices.
If we do reach dow 10000 believe just a bunch of speculators follow the leader.
Another bear rally trap?
No inflation in house prices yet?
Larry Edelson Reply:
April 2nd, 2009 at 2:13 pm
I don’t expect Zimbabwe-style hyperinflation here. But 20% or more, yes. And as the Zimbabwe example points out, under hyperinflation, even stocks (though certainly not all) can become an inflation hedge.
In your “Uncommon Wisdom” of 4/2/09, you speak of devaluing currencies and in doing so, it will reflate assets and reduce debts. How does that work exactly? My house goes up in value but the dollars in my pocket buy much less so I will need many more dollars to maintain my standard of living. I’m sure my assets will not increase by as much as the dollars they are valued in, decline. How is debt relieved? Give it to me in layman terms. and who’s debt is relieved? And lastly, will this not cause anarchy in the streets around the world?
Thanks
Roger Walters
Larry Edelson Reply:
April 6th, 2009 at 8:44 pm
You are correct. Your money will buy less, unless you have planned your finances accordingly to hedge against the inflation, or loss of purchasing power of your money.
Hi Larry,
I read your Win Win piece in Money and Markets today and have been thinking the same for some time. But . . . Bill Bonner at the Daily Reckoning is saying that because the economy is so bad people losing jobs etc., there will be deflation - prices will not inflate just because the government is pumping money into the economy and this will be bad for gold. I guess he is saying that people will see no reason to go to gold if there dollars still have the same purchasing power. He says, yes, eventually, after some time, there will be inflation but by then gold and gold stocks will have taken a beating.
What do you think of that?
Larry Edelson Reply:
April 20th, 2009 at 9:01 pm
We’ve already had massive deflation that has wiped out real estate, major banks and insurers, the auto industry, the airlines, and more. Plus, severe deflation is very bullish for gold, as the financial system collapses. Further down the road, when loss of confidence in government’s ability to solve the problem and currency devaluations occur, that’s also extremely bullish for gold. Other than short-term pullbacks, gold is a win-win!
Hi Larry,
If gold is such a sure bet would it be wise to invest in some of the double long gold ETFs in addition to GLD?
Thanks,
Steve
Larry Edelson Reply:
May 21st, 2009 at 3:23 pm
Using leverage is only for speculation, not for core holdings. As such, I would consider it trading rather than investing.
“If Obama is really interested in helping honest people, then just restore ‘integrity money’ to the economy. ‘Agenda money’ - legal tender, fiat money, debt money, blip money, is killing America. Let the Federal Government get back to the business of stopping robbers, rather than being one!
That’s not too much to ask is it?”
James Jay Ferris - author: Are You Worried Yet? Where Is Money Taking Us?