Monday, December 15, 2008

The imminent collapse of the US dollar

Peter Schiff was right (look it up on Youtube). His timing was dreadful, but his message is spot on. The folks at The Daily Reckoning have clearly summed up the inescapable conclusion of this economic crisis. The theme of the Obama presidency, no matter how the media spin it or ignore it, will have to be one thing - DEBT.

According to the latest estimates, the U.S. Treasury is expected to borrow $1.5 trillion nest year - in addition to the existing debt it rolls over. This puts a huge supply of new debt on the market. Will there be new demand to meet it? Not likely. In fact, the demand is probably going to drop. One reason: the foreigners are borrowing too - hugely - for the same reason. They want to bail out their own economies. Another reason: Americans are spending less on foreign goods - putting less money in the foreigners' hands that they could lend back to us.

Of course, the feds are ready with a solution...and as usual, the fix will make things worse. Fearing a loss of private demand, the feds are already talking about selling Treasury debt directly to the Fed. But that brings us right to the other way Treasury values can go down - the dollar can lose value too. Not only are bonds themselves subject to the law of supply and demand, so is the currency in which they are calibrated. The more dollars; the less each one is worth.

Normally, it is a no-no for central banks to buy Treasury bonds directly. "Monetizing the debt" is what it is called. It inflates the money supply directly and immediately. So, while Fed buying of Treasuries would help support the market for treasuries, it would undermine the value of the dollar itself.

Thats it. Game over.

America cannot delay its day of reckoning for much longer. It is burdened by a mountain of debt, and its credibility and ability to repay that debt will not only be brought into question, but simply destroyed as they continue to pile up new debts to bail out collapsing industries.

The only way to service such a huge debt, running into the trillions, is to make it worth less - destroy your currency and print more dollars. The only other approach would be for the American government to immediately cut spending in half and use its tax revenues to pay down debt for the next decade.

Have you ever met a politician who would cut spending in half ? Obama and his administration are looking to double it, even in the worst of times.