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Thursday 10:10pm EST, Update:
A butterfly flapping its wings can cause a hurricane:
A butterfly flapping its wings can cause a hurricane:
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![[$zilla.png]](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj9Fsw6BzwIbEIsnYmcZouOhEw-9sIXkWeyYVVbmdOLjfw4-8sP2REwSExruk9LO1QkaHuIf_rMCRNFE3Bun4ztl8un8XeuBE0RoBGUnbIQv3V_3XJl6ikRjX4mWy88sZwHiqQPypSGDg/s1600/$zilla.png)
US dollar strength has been growing into a juggernaut for more than a year, doubling in asset buying power in no time, after steadily falling since 1913. US Dollars are so strong now, it actually takes more than a year for the government to create a single penny (2 Year T-Bill yield is 1%).
The $ is getting ready to morph into a giant lizard, shoot fire out of its mouth, screech and stomp all over the stock market, California real estate, ravage prices across the nation, then ultimately, destroy the world.
3M T-Bill Yield
USD/EUR
"The $ is getting ready to morph into a giant lizard, shoot fire out of its mouth, screech and stomp all over the stock market, California real estate, ravage prices across the nation, then ultimately, destroy the world."
ReplyDeleteI love it. I'll now be laughing the rest of the day. All hail Cashzilla!
FDR,
ReplyDeleteI do very much appreciate your marked sense for the dramatic.
the godzilla lizard picture is awesome. nice work. let's see how things play out. the bets are on the table
ReplyDeleteThat pic is awesome. Can you put a image of Ben at the bottom of it.
ReplyDeleteDone.
ReplyDeleteMore accurate would be a picture of King Ghidorah sharing the heads of Bernanke, Geithner and Obama.
ReplyDeleteAll getting stomped on, of course.
how do u know for sure that money going into tbills is coming out of stocks?
ReplyDeletethere is so much liquidity (at the institutional level) that there may be enough to gobble up both bonds and cash.
dont get me wrong. i am fully aware we are now in a bubble and have hedged my bets accordingly. but the excess liquidity has leaked into all sorts of assets including bonds, equities, commodities, carry-trades, derivatives, CDS, etc, etc.
and of course everyone can see that credit is contracting at all time records.
Brilliant, great post and one I am on board with.
ReplyDeleteUS Dollars are so strong now, it actually takes more than a year for the government to create a single penny
ReplyDeletecan you explain this? low t-bill yields indicate to me that demand for govt debt is strong, but it seems like you're looking at it from a different perspective.
makes sense, thanks. how do you explain the recent action in the USD/gold? FX traders are supposed to be smarter than bond traders, no? are people like john paulson & einhorn simply wrong?
ReplyDeleteIt's really the same perspective. Interest rates are an inverse indicator of dollar strength. Weak dollars are easy to spin off from existing dollars (= high interest rates); strong dollars are difficult to spin off from existing dollars (= low interest rates).
ReplyDeleteIronically, really low interest rates, including 0%, during deflations are MUCH more valuable than (accepting them will allow you buy more stuff, because they often should be negative as prices fall) than high interest rates are during inflations. High interest rates are almost always bad deals vs holding assets.
So strengthening dollars (deflation) results or causes (chicken/egg) high demand for cash/currency, vs. a high demand for assets/money which is the result or cause of weakening dollars (inflation).
Bottom line:
You want to hold currency (= cash and Treasuries) during deflation, and you want to hold assets (= money) during inflation. The reason is that strengthening or weakening dollars (currency) are what price assets (money).
I noticed that most of the graphs are of the dollar against the euro.
ReplyDeleteBut since you're expecting all the currencies to deflate simultaneously, why would those graphs have any real meaning? Wouldn't it be more instructive to examine the graphs of asset prices versus the dollar?
Otherwise you're just examining the value of one arbitrary fiat currency against another arbitrary fiat currency, and I don't understand how that can possibly be of much real relevance with respect to asset prices. Cost of imports and exports, perhaps, but not asset prices...
Kcb,
ReplyDeleteYou are correct. It only matters because most people aren't as smart as you are. It is of some importance that we are about to deflate much faster than the EU, but all prices can and will fall either way.
FDR: Thanks very much for the compliment! *Blushes*...
ReplyDeleteIf the cycles work the way I expect then the western world is entering the very beginning stages of reversion back to a production economy. After all, this is a credit crisis, which is occurring because we've been in a trade deficit (more money going out for goods and services than coming in) for the last 30 years or so. That's obviously unsustainable.
When you've hit the limit of what you can borrow and have a big pile of debt, your only real choice is to pay it back or default (the latter of which winds up precluding you from borrowing any more anyway, so the result is more or less the same, but not necessarily the same *degree*). The only way to do that is to spend less than you make -- to consume less than you produce. Reversion to that kind of economy obviously means that people as a whole will be spending less than they make, but for the country as a whole to do this, it has to start making things again. That won't happen in earnest until the price of labor in the U.S., as denominated in foreign currencies, drops below what it is in other parts of the world.
Ramping up to that should first happen as a result of us "eating our own dog food", as it were -- by us making things for ourselves. For that to happen, the price of labor as denominated in dollars has to drop below the dollar price of labor elsewhere. That can happen either as a result of a weak dollar *relative only to other fiat currencies* or as a result of the actual dollar price of labor in the U.S. dropping. I expect we'll see some of each, eventually.
I don't see how the economics of the situation can allow for much else. The world economy is a closed system, and as a result trade is ultimately a zero-sum game. You can play games with exchange rates and such but at the end of the day, you can't escape the fact that the world economy is a closed system. Which means that if a country has a trade deficit, some other country must have a trade surplus. And vice versa. (Note that it's important not to confuse a trade deficit/surplus with a production deficit/surplus. They are related but are not the same).
Labor here in the U.S. is going to get cheap. It'll happen largely as a result of massive unemployment, but I do expect exchange rates to play a role in this as well. The process could be bootstrapped, to a limited degree, by the very careful imposition of import tariffs, but it has to be done in such a way that the dollar price of labor is equalized between here and other countries. Get the balance wrong in either direction and you either don't solve the problem or you encourage sloth on the part of the domestic workforce. My belief is that tariffs have gotten a bad reputation primarily because they were implemented in a ham-fisted way, not because they were/are necessarily a bad idea in and of themselves.
Economic policies and economic systems, like any other policy or system which is used to encourage or discourage certain behaviours or which is used to facilitate interaction between people, are ultimately merely tools that can be used for good or for ill. The current system is quite apparently more for ill than for good, since it serves the few at the expense of the many. This needn't be the case, but it currently is. Frankly, I haven't figured a way out yet, because the beneficiaries of the current system are firmly in control of all means of change at the moment.
Maybe that'll change in time, but I'm not counting on it.
"Kcb,
ReplyDeleteYou are correct. It only matters because most people aren't as smart as you are. It is of some importance that we are about to deflate much faster than the EU, but all prices can and will fall either way."
Agreed, most traders put significant importance on relative exchaneg rates, especially as it relates to the dollar, so it does matter because our stock market is essentially an import commodity (owned by China) with no fundamental basis to support its current lofty price. Other than traders speculating of course.
Hi thx for the interesting article,
ReplyDeletecan i ask you fdr, how will the US dramatcially strengthen the dollar? Surely they wont raise interest rates...
I can see a correction for eur/usd back to 1.35 or so, but even if they crash the market, they still wont be able to achieve the same flight to safety as they did last year, this rally has been on low volume, its just the government/banks together with the speculators and some funds who have bought into this rally. I think the speculators and funds will sell at the first hint trouble
The US will still have to fund massive debt issuance over the next few years, i cant see how they will manage that along with having a strong $
-Adrian
"can i ask you fdr, how will the US dramatcially strengthen the dollar? Surely they wont raise interest rates..."
ReplyDeleteWell, Adrian, the thing is, dollar strength isn't up to us. The Fed has no control over the dollar supply, as many found out the hard way in 2007-9.
This is an interesting topic. I have a lot written on this blog about the impotence (not to be confused with importance) of our private Fed, already...
http://fdralloveragain.blogspot.com/2009/01/can-fed-print-more-currency-to-counter.html
http://fdralloveragain.blogspot.com/2009/01/banker-bailouts-will-never-end.html
http://fdralloveragain.blogspot.com/2009/02/usd-behavior-during-deflation.html
...but there is one angle that I haven't covered that I should write about this weekend. I'll try to get an article out.
"can i ask you fdr, how will the US dramatcially strengthen the dollar? Surely they wont raise interest rates..."
ReplyDeleteWell, Adrian, the thing is, dollar strength isn't up to us. The Fed has no control over the dollar supply, as many found out the hard way in 2007-9.
This is an interesting topic. I have a lot written on this blog about the impotence (not to be confused with importance) of our private Fed, already...
Can the Fed print more currency? (the answer is, no)
How commercial banks control the currency supply
Do exchange rates matter? (the answer is, no)
...but there is an angle or two that I haven't covered. I should write about it this weekend. I'll try to get an article out.
I'd like to know more about the QE and POMO supposedly being performed by the Fed. Is it that far of a stretch to think that the Fed along with other financial institutions are going out and buying up securities in order to push the market ever so higher?
ReplyDeleteFDR, Can you comment on the attached link?
ReplyDeletehttp://jessescrossroadscafe.blogspot.com/2009/09/us-dollar-long-term-chart.html
"FDR, Can you comment on the attached link?
ReplyDeletehttp://jessescrossroadscafe.blogspot.com/2009/09/us-dollar-long-term-chart.html"
It's an interesting discussion about relative supplies, or exchange rates, but those have little or even nothing to do with inflation or deflation. Inflation is a rise in prices caused by an increase in the currency supply, all central banks participate. Deflation, the opposite.
So exchange rates are largely unaffected by a massive meltdown or increase of the currency supply, other than minor differences or ebbs and flows, which might provide some temporary relief for one people or another being ripped off by one central bank or another.
What do you think about parking money in Treasury money market funds?
ReplyDeleteAny safety concerns?
Hi FDR, i've spent some time reading your articles and blogs, i understand your point about the fed's QE having to reach the population through primary dealers lending, which currently isnt happening
ReplyDeleteAs a result reinflation will fail and deflation will occur
I think you have a good point, i can now understand why there are talks of negative interest rates for banks keeping money with the central banks (like in sweden), in order to force them to lend the QE money out
So you think that the dollar will also strengthen against other currencies? if so i still cant see what will drive that dollar demand?
Many Thanks
-Adrian
"So you think that the dollar will also strengthen against other currencies? if so i still cant see what will drive that dollar demand?"
ReplyDeleteWe've clearly entered a new wave of dollar strengthening vs other currencies. But that is truly irrelevant, the dollar could weaken vs all other currencies and still gain massive strength. All that matters is how many paper dollars are in left in circulation as bank lending implodes.
Exchange rates mean nothing, nothing at all, the numbers are entirely and completely meaningless with respect to dollar strength.
But they do drive short term trades since virtually every one has it wrong. That's good, virtually everyone else getting it wrong is a prerequisite to making money in the market.
So...
No demand is required to increase dollar strength, all you need is a bonfire to burn the paper currency which once existed. Literally, burning a mountain of paper dollars has exactly the same effect as bank lending being pulled back.
The only way any of this may or may not get reflected in exchanges rates is the relative size of international currency bonfires.
Ok so many suppliers peg their currency to the dollar, but surely fx rates are important for prices of some imports?
ReplyDelete-Adrian
Adrian, Certainly there are some influences on the paper supply that originate externally, but the only thing that sets macro prices is a resulting reduction or increase in the paper dollar supply relative to the amount of money (tradable assets) in existence.
ReplyDeleteFor the dollar to increase in value, one of two things must happen: the asset supply must grow faster than the paper dollar supply, or the paper dollar supply must shrink faster than the asset supply.
We have the latter.
Other major currencies are not (directly) a term in the equation.
A lot of this currency thing is getting over my head.You mean to say exchange rate mean nothing at all and the numbers are quite meaningless with respect to the dollar strength.If that is the case then how do you measure the relative strength of the dollar or can even say that the dollar is strengthening? Does it mean that you dont expect dollar index to rise to newer highs say beyond 100-120++?Also does it not mean that if that if the dollar index does not rise much and remains flat or rangebound then all other assets worldwide may not fall much? Another thing is that if the dollar may infact weaken against all other currencies even though it is internally strengthening itself then where is the question of a global meltdown ? Would that not mean that if other currencies like the Yuan or the chinese RMB were to strengthen vs the dollar then the chinese or other global assets prices would infact appreciate or not fall at all? So where do you see the dollar without strengthening relatively against other currencies can ravage the world stock markets and the world economy.
ReplyDeleteSimple, paper dollars are stronger when they buy 10x as much California real estate as they bought two years ago. Please do the "Read Me First" section then tell me if you are still confused.
ReplyDeleteI see your argument for deflation.
ReplyDeleteHowever, what happens if the Fed leaves the money supply high and takes 20 years to pull it out rather than any faster rate that most people are expecting?
Also, what happens if the currency gets switched in an attempt to hide the inflationary QE that's been going on?
Thanks!
It looks like cashzilla has had a setback this morning. Is the scenario for a massive jump in the dollar now more likely?
ReplyDelete