Tuesday, August 16, 2016

Clive Maund: The U.S. Dollar, The Year Thus Far, And What Comes Next


THE DOLLAR INDEX and HELICOPTER MONEY...

We have already figured out that, faced with the choice between doing “helicopter money” and allowing a deflationary implosion to occur, those in power will elect the former, because it buys them more time by keeping the system limping along for longer, and we have now arrived at the stage where it will be one or other. The market has already figured it out too, which is why gold and silver have started a new bullmarket.

If you were to decide to alleviate your own personal liquidity problems by setting up a printing press in your backyard and doing copious print runs of $100 bills, you would be branded a counterfeiter and sent to jail, probably for quite a long time. Yet the government does this shamelessly, and uses the euphemism “Quantitative Easing”. It should be called what it is – counterfeiting – and it is a fraud perpetrated against the entire population of the country, whose buying power is reduced as a result. This fraud was made possible back in 1971 when Nixon got rid of the Gold Standard, opening the door to reckless Keynesian fiat money expansion. This ruling should have been overturned and all those responsible for it sent to jail. By comparison Watergate was a minor misdemeanor, although few realized it at the time.

The stark choices now facing Central Banks, governments and the elites themselves as the entire mess of debt and derivatives created by decades of fiat excess threatens to bury them, boil down to just two, both are which are awful. One is to simply let it collapse under its weight like a neutron star in a deflationary implosion, which would be dramatic and rapid, and the other is to hit the afterburners and go for broke with so called “helicopter money”, where they print ever more money to maintain liquidity and service debt etc until the system consumes itself in a hyperinflationary firestorm. This is the logical route for them to take because it buys them more time than the deflationary implosion option. The proposal for helicopter money has until recently been laughed at as absurd, but now in their desperation it is being seriously talked about.

It is important to understand that Helicopter Money will be a whole order of magnitude higher than what we have seen so far in the form of Quantitative Easing, which is why it is called Helicopter Money. They won’t call it that of course, just as they wouldn’t call QE by its true name, counterfeiting – it will be ascribed some sanitized name that will make it more acceptable to a dumbed down and passive populace.

A key point to understand is that the impending helicopter money policy will not be confined to the United States, it will be global, just as QE was, with Europe and Japan involved in a big way, and, anxious to keep its currency from rising, China can be expected to join in too. What this means is that the money supply will be expanding at an ever increasing rate all around the world. You don’t need to be a genius to figure out that the result of this will accelerating inflation and an increasingly rapid loss of purchasing power of fiat currencies generally. This will stoke a major bullmarket not just in gold and silver, which has already started, but in a wide range of tangibles, such as base metals, agricultural land and collectibles, and these bullmarkets will run regardless of the state of economies.
A big question concerning many investors and even ordinary citizens is what effect this new helicopter money will have on the dollar. This question has two answers depending on whether you are talking about the dollar itself and its purchasing power, or whether you are talking about the dollar in comparison with other major world currencies. The 1st question is easy to answer – the dollar will lose purchasing power at an ever increasing rate – so if you want to maintain the purchasing power of your money, you will have to invest in things with intrinsic value and/or whose supply is finite, that maintain their value no matter what. The 2nd one, which is really the subject of this article, is by no means so easy to answer. It all depends on the rate at which the money supply is expanded, and by this we aren’t just referring to cash in circulation but all electronic money created by the Treasury, such as is used by the Fed to buy up Treasuries to stop this market from collapsing, in comparison with the rate it is expanded in other nations and trading blocs, such as Europe and Japan. If the US is expanding its money supply faster than the others, the dollar index will drop, if slower, it will rise, and the timing of this expansion will also be a determining factor. Another factor that will have a big impact on the relative performance of the dollar will be the rate at which the global dollar carry trade continues to unwind – it was the carry trade unwind that drove a massive rally in the dollar in 2014 – 2015 when the Fed duped the markets and global investors into thinking that it was going to raise interest rates, and then ended up doing one token rise so that they couldn’t be accused of lying.

Now we will turn to the technical aspects of the outlook for the dollar index. The fact that it is impossible to determine in advance who will start the helicopter money drops, and the timing and magnitude of drops by different countries and trading blocs, means that it is impossible to predict fundamentally whether the dollar index will rise or fall, and this is reflected in the charts for the dollar index, which show that a giant trading range has formed from the Spring of 2015 that could break in either direction. However, even though we don’t know which way it will break, the fact that support and resistance at the top and bottom of the range are clearly defined means that we can be reasonably sure which way the wind is going to blow when the index breaks out, one way or the other, and a crucial point for Precious Metal sector investors or other investors in Hard Assets to take note of here is that even if the dollar breaks out upside to start an uptrend, it shouldn’t provide too much of a headwind, because global currency dilution will mean all major global currencies are going down the drain in lockstep.

The conclusion to all is that we must now wait for the starting gun to be fired marking the final stage in the fiat “race to the bottom”, and see who will have the dubious honor of being the first to make helicopter money drops, and to see which way the dollar index breaks out from it giant trading range. Just how dire the situation is becoming is neatly symbolized by the hopeless choice facing American voters at the next election - between a blue collar billionaire with the taste of a Russian oligarch and a marionette of the Military - Industrial complex, who will start World War 3 if she wins – so much for democracy!

End of article.

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