Why U.S. Dollar’s Continued Fall Is Written in Stone

Written in StoneWhen the U.S. economy was on the verge of collapse after the financial crisis of 2008, the Federal Reserve came to the rescue. The central bank provided the financial system with quantitative easing—it printed money and bought bad debt from the big banks.

Today, the Federal Reserve will meet and discuss the further purchase of bad debt from the big banks or some other form of monetary stimulus. To me, it won’t be a surprise to see it “add” to its balance sheet with more money creation. The Federal Reserve already announced three rounds of quantitative easing; I highly doubt it will be shy to announce more.

What is troublesome to me is the speed at which the Federal Reserve is building its balance sheet. In January of 2008, the Federal Reserve had total assets of $927 billion—before quantitative easing and other stimulus poured into the markets. (Source: Federal Reserve, January 3, 2008.) Now, the same balance sheet stands at $2.9 trillion. (Source: Federal Reserve, December 6, 2012.)

The Federal Reserve’s balance sheet has grown by almost $2.0 trillion—200% in less than five years all from money created out of thin air!


One goal of the Federal Reserve was to buy mortgage-backed securities to stimulate the economy, and then to start selling the mortgage-backed securities back into the market in mid-2015. (Source: Bloomberg, December 7, 2012.) This way the central bank is not stuck with these securities while it gets back to its “pre-crisis balance sheet.” I wonder if we will ever really see this happen.

My concern? Quantitative easing has caused the U.S. dollar to decline steadily. Like everything else in economics, the more of an item there is in supply, the less the item is worth.

It was with the help of printing money out of thin air that the Federal Reserve was able to get its balance sheet to these levels. The Federal Reserve is stuck at a crossroad. If it does nothing, the risk of the economy falling back into a recession in 2013 increases; if it goes out and buys more mortgage-backed securities or provides other monetary stimulus (anything that results in creating more money), then the U.S. dollar will decline further. Since many countries are on a race to devalue their currencies to stimulate exports, the latter could be welcome.

Most definitely, rising interest rates are not a concern now, as the Federal Reserve has practically guaranteed they will stay artificially low for the next few years. Of course, that’s unless inflation gets out of hand.

My belief: the Federal Reserve will continue to create new money, buy more mortgage-backed securities or more U.S. Treasuries, and keep interest rates artificially low. If that’s the case, you can expect the U.S. dollar to keep declining in value and the buying power of Americans to fade away.

Michael’s Personal Notes:

Newsflash: the central bank of Germany, the Bundesbank, is raising red flags about the growth of the German economy. The bank expects Germany’s gross domestic product (GDP) to only grow at 0.4% in 2013, compared to a previously forecasted 1.6% in only June of this year.

Similarly, another eurozone country, Austria, slashed its forecast for the next year. Austria’s central bank now predicts its economy will only grow at the pace of 0.5% next year, much lower than the bank’s previous forecast of 1.7%.

I really don’t have to go into details about how badly the other debt-infested eurozone countries are performing. These pages are often filled with that. What I want to say today is that the entire region is deteriorating quickly, and the dynamics of the next recession there are going to be much different than in 2008.

The stronger nations in the eurozone are starting to suffer. And it’s not only Germany and Austria slashing their GDP growth targets.

France, the second-biggest economy in the eurozone, narrowly by-passed a recession in the third quarter of 2012, when its GDP growth fell to 0.2%. (Source: Associated Press, November 15, 2012.) Going forward, the French government is skeptical about economic growth prospects.

While the media is fixated in North America on the pending fiscal cliff, the picture developing in the eurozone is alarming. The region’s governments simply have too much debt and do not have enough tax revenue coming in. The European Central Bank (ECB) wants to take the same approach to avert the crisis as the Federal Reserve took here in the U.S.—and we all know how well that’s working.

I, for one, would not be surprised to see the eurozone region fall into a depression. I see Greece in a depression right now; Spain is not far behind. (Anytime you have an unemployment rate of 25%, how can you not be in a depression?) So until the stronger countries like Germany and France decide to either kick the weaker countries out of the eurozone union or leave themselves, the situation will deteriorate.

For us here in the U.S., with the entire eurozone region now teetering on the brink of recession, American companies in key stock indices, like the S&P 500, will suffer. Almost half of the companies in the S&P 500 derive sales from Europe. The year 2013 does not look good for North American stock markets.

Where the Market Stands; Where It’s Headed:

The stock market is not disappointing us yet. It is delivering its annual Christmas rally like it always does. But, as I have been writing, I expect 2013 to be a poor year for North American equities. My biggest concern is American corporate earnings growth turning negative.

What He Said:

“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I have written over the past three years how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S. peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming? No. How about a severe deflationary recession? Yes!” Michael Lombardi in Profit Confidential, January 21, 2008. Michael started talking about and predicting the economic catastrophe we began experiencing in 2008 long before anyone else.