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Yesterday, Zerohedge published an article describing how Steve Mnuchin admitted that he isn't concerned with the strength of the dollar, only the stability of the bond market. I think anyone who still has faith in the idea that the Fed is looking out for our best interests is either deluding themselves or not paying attention. While the survivability of the bond market may be the only thing keeping this "market-on-life support" alive, it comes at the cost of the dollar...not the cost of A dollar, but the cost of THE dollar.
It's well-known the Fed has been targeting an inflation rate of 2-3% for a number of years, but they've had a hard time reaching that rate by official measurements. One must wonder how they are currently measuring the CPI, considering how many goods and services used by everyday citizens seem to continue increasing each year. Taxes may have a little to do with it, but generally, it has to do with the loss of purchasing power that we have been experiencing over the last hundred years.
But what if the worst happens? Once the inflation rate reaches the target 2-3%, it's pretty easy to pass it as hyperinflation takes hold. I want to go through a quick thought exercise to see what some of the effects might be from devaluing the dollar.
- Trump's tax break for companies repatriating their offshore dollars causes not just cash, but bonds to come back home.
- Influx of bonds being sold on the market (by corporations) drops bond values and drives yields up
- Fed is still trying to deleverage their balance sheet, so bond values get hit harder
- Fed is forced to turn on the printing presses and start buying bonds again, despite the desire to deleverage their balance sheet
- QE4 (or whatever iteration by this point) is forced to push cheap dollars into the market and stabilize bond market
- Dollars continue to get devalued, causing a "race to the bottom" versus other currencies
- Imports from foreign countries rise in price because the value of the dollar is decreasing
- Exports increase because US goods are cheaper (too bad we don't have hardly any manufacturing left in the US)
- Economy does improve slightly, but wages don't rise enough to combat the huge cost of living increases
- Basic commodities start to rise, like price of oil and fruits/vegetables
- Price rises dramatically as Fed continues to print dollars to fight the domino effect dropping bond values
- Dollar loses reserve currency status
- Foreign dollar reserves flood back to the US in favor of Yuan or Rubles (or Euros)
- Hyperinflation
- All American families take a 20-30% reduction in quality of life (minimum) for the foreseeable future
A thought did occur to me while reading another article with Trump enacting a 30% tariff on solar panels and other appliances...people were bitching about how Trump is trying to discourage people from going off grid by increasing the price of solar panels. I suggest that MAYBE, just MAYBE, Trump is trying to kick start AMERICAN solar companies by making them more competitive against the cheaper Chinese-made panels. It could kick off a bit of a trade skirmish, but I think he is trying to encourage more manufacturing locally.
But I digress. Look, the dollar is in trouble and it has been in trouble for a number of years. Mathematically, there are way too many dollars out there and demand is decreasing with every arrogant move by the Fed. We swing our big economic stick around way too often so we can get our way and the rest of the world is sick of being forced to play by our rules...they are looking for another way. And China and Russia are giving it to them.
China and Russia have both essentially tripled their gold holdings over the last 10 years. They know what sound money is....and it isn't the dollar.
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