US Dollar Devaluation Prediction for 2014
A debt crisis has taken the western world by storm, but few seem to be sounding the alarm. The U.S dollar, the go-to currency for global economic stability and growth, is imploding at an unprecedented rate.
Profit Confidential editors have been critics of the U.S.’s inability to reign-in government spending. Based on the White House’s own figures, the national debt will reach $20.0 trillion by the end of this decade—about 140% of our current gross domestic product (GDP).
Historically, countries that have incurred considerable debt and consistent national debt-to-GDP multiples of 120% or more have experienced currency devaluation. The U.S. dollar has been in a free-fall against other major world currencies since 2009.
You have to print money to make money. No one knows this better than the Federal Reserve. Since November 2008, Federal Reserve Chairman Ben Bernanke has initiated three rounds of quantitative easing (QE) in an effort to create more economic activity and increase home prices.
Since 2008, the Federal Reserve has printed roughly $3.0 trillion. And, it’s climbing each month by an additional $85.0 billion.
What have three rounds of QE accomplished? It was supposed to increase lending, create more jobs, and lower the unemployment rate. Instead, banks are sitting on a pile of cash and remain tight-fisted, fewer jobs have been created, and the unemployment rate remains high.
What QE has done is flood the global markets with trillions of U.S dollars. It’s not as if this new-found money is backed by gold. It’s simply created out of thin air.
In essence, the U.S. Federal Reserve, in an attempt to save the U.S., has ravaged and devalued the U.S. dollar. In the process, it has also eroded international confidence in the U.S. economy and the green-back.
What’s keeping the U.S. economy afloat? The Federal Reserve is artificially propping up the entire U.S. economy by buying a majority of the government debt issued by the Treasury department. As a result, the U.S. government has become dependent on borrowing (creating money) to finance itself. (Source: ”WSJ: Fed Buying 61 Percent of US Debt, Moneynews, March 28, 2012.)
Where does the U.S. government get the money to buy the bonds? It gets the Federal Reserve to create money out of thin air. This is a dangerous, unsustainable trend that cannot continue. The U.S. cannot continue to issue government debt and then print the money to pay for said debt.
At Profit Confidential, we expect the devaluation of the U.S. dollar to continue as the U.S. continues to pile on the debt. You can find regular commentary on the U.S. dollar in Profit Confidential.
There’s a big problem brewing…one that I started warning about two years ago: food and basic commodities prices are skyrocketing.
In April, the Producer Price Index (PPI), an index that tracks prices paid by producers for commodities, increased by the most in 19 months. The month-over-month change was 0.6%—yes, that is an annualized inflation rate of 7.2%. (Source: Bureau of Labor Statistics web site, last accessed May 20, 2014.)
Generally speaking, the producers (the companies that grow/import the food we eat and make the goods we buy) are “hedged” in the short-term so consumers won’t see a jump in prices right away; consumers will see prices rise in the months ahead.
While some economists are saying food prices are rising because we had a terrible winter and the weather played havoc with harvests around the world, I simply think too much money has been created out of thin air over the past five years, too many dollars are in circulation, the U.S. dollar is falling in value against other world currencies and that is pushing up domestic prices for goods, causing inflation.
This chart illustrates the situation very well. It shows how much currency there is in circulation in the U.S. economy. You can easily see that after 2008, our monetary base exploded.
As the chart shows, there is no denying we are experiencing hyper-monetary inflation in the U.S. There’s simply too much money in circulation. (You can thank the Federal Reserve for that.)
Understand this: when inflation increases, your buying power goes down. Today, your dollar is worth less than it was last year, last month, or even last … Read More
Central banks are still adding gold bullion to their reserves and the smaller countries are getting into the act big-time.
According to the International Monetary Fund (IMF), in the month of March, Iraq’s central bank added 36 tonnes of gold bullion to its reserves—worth about $1.5 billion. This is the first purchase by the central bank since August of 2012, when it bought 23.9 tonnes of gold. (Source: Reuters, March 25, 2014.)
Sure, you could say, “Michael, 36 tonnes of gold bullion is nothing for a central bank.”
I agree. But looking at the bigger picture, it is very significant for a small country like Iraq—a country whose annual gross domestic product (GDP) is smaller than Amazon.com’s sales for 2013—to be getting into gold bullion in a big way. The official announcement from the central bank of Iraq sent the message that it bought the gold bullion to stabilize the country’s currency and add insurance to their reserves.
Since 2009, central banks around the global economy have become net buyers of gold bullion, and I don’t think they will stop anytime soon. The main reason for this is that the central banks see a significant amount of volatility coming to the world of paper currencies—something they hold in their reserves.
Too many major world currencies are in a downtrend. The U.S. dollar has been on a decline since the beginning of 2014. The Canadian dollar is hitting multiyear lows. The Japanese yen has been plummeting.
Where do we go next with gold bullion?
At present, the amount of negativity towards gold bullion is immense. But the fundamentals paint a different … Read More
When news first broke from the Federal Reserve that it would slow down the pace of its quantitative easing program, the consensus was that the U.S. dollar would start to rise in value as the Fed would be printing fewer new dollars and actually eliminating all new paper money printing by the end of 2014.
But the opposite has happened.
Below, I present the chart of the U.S. Dollar Index, an index that compares the value of the dollar to other major world currencies.
As the chart clearly shows, the dollar started on a strong downtrend in July of 2013. When I look at the dollar compared to individual currencies like the euro and British pound, the picture looks even worse.
The common belief since the Credit Crisis of 2008: when there’s uncertainty, investors run towards the safety of the U.S. dollar. But something started to happen in mid-2013. Despite China’s economic slowdown, despite the situation with Russia and Ukraine, and with the Federal Reserve cutting back substantially on its money printing program, one would think the U.S. dollar would rally in value—but the opposite is happening.
Two reasons why the greenback is falling in value so fast:
First, world central banks have been slowly selling the U.S. dollars they keep in their reserves, as the percentage of world central banks that use the dollar as their reserve currency has fallen from more than 70% in the year 2000 to just over 60% today.
Secondly, with the Japanese and Chinese reducing the amount of U.S. Treasuries they buy and with the Federal Reserve reducing the paper … Read More
Understanding the economic slowdown in the Chinese economy is very important because not only does it impact American companies doing business there, but what happens in the Chinese economy—now the second-largest economy in the world—affects the global economy.
While media outlets tell us the Chinese economy will grow by about seven percent this year (30% below the 10% the economy has been growing annually over the past few years), the statistics I see point to much slower growth.
In February, manufacturing activity in the Chinese economy contracted and hit an eight-month low. The final readings on the HSBC Purchasing Managers’ Index (PMI) for February showed manufacturing output and new orders declined for the first time since July of 2013. (Source: Markit, March 3, 2014.)
And there are other troubles. The shadow banking sector in the Chinese economy shows signs of deep stress, but we don’t know how much money is really on the line here. China keeps much of its real economic news to itself, but we do hear how firms that are involved in the sector are defaulting on their payments.
And the Chinese currency, the yuan, keeps declining in value compared to other major world currencies. The Wisdom Tree Chinese Yuan Strategy (NYSEArca/CYB) is an exchange-traded fund (ETF) that tracks the performance of Chinese money market instruments and the yuan compared to the U.S. dollar. Look at the chart below:
Since the beginning of February, the Chinese yuan and Chinese money market instruments have been showing signs of severe stress, largely unnoticed by mainstream media and economists.
There is no doubt in my mind … Read More
Whenever I got stuck solving a problem in elementary school, my teacher would say, “go back and see where you went wrong.” This lesson—“learn from your mistakes”—was taught again in high school, and then throughout my life. It’s very simple: you can’t do the same thing over and over again and expect different results. Albert Einstein called it “insanity.”
When I look at the Japanese economy, I see the most basic lesson you learn in business school being ignored. The Bank of Japan, and the government, in an effort to improve the Japanese economy has resorted to money printing (quantitative easing) over and over, failing each time to spur growth. One might call it an act of insanity.
Through quantitative easing, the central bank of Japan wanted to boost the Japanese economy. It hoped that pushing more exports to the global economy from its manufacturers would change the fate of the country. It wanted inflation as well.
The result: after years of quantitative easing, the government and the central bank have outright failed to revive the Japanese economy. In fact, the opposite of their original plan is happening.
In January, the trade deficit in the Japanese economy grew—the country’s imports were more than its exports. Imports amounted to 7.70 trillion yen and exports were only 5.88 trillion yen. The trade deficit was 3.5% greater compared to the previous month. (Source: Japanese Customers web site, last accessed February 20, 2014.) Mind you, January wasn’t the only month when imports were more than exports in the Japanese economy. This is something that has been happening for some time.
Inflation in the … Read More
This is an entirely free service. No credit card required.
We hate spam as much as you do.