Triffin's Dilemma

Jim Rickards, director of market intelligence for scientific consulting firm Omnis, shares his outlook for the dollar.


More info in the Triffin's Dilemma mentioned by Jim Rickards click, here.

China Dismayed By U.S. Money Printing

According to Ambrose Evans-Pritchard of the UK Telegraph:

Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing".

...

"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.

China's reserves are more than – $2 trillion, the world's largest.

"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added.

The comments suggest that China has become the driving force in the gold market and can be counted on to
buy whenever there is a price dip, putting a floor under any correction.

Read whole article here. This may help explain why China is now a net seller of U.S. government bonds. Even Alan Greenspan is now even warning about the potential for double-diget inflation due to U.S. monetary expansion.

The U.S. is addicted to borrowing, credit, and money expansion; if these trends continue the dollar will be worth significantly less. These trends can be reversed. I don't want to see the dollar one day worth the same as toilet paper.

Good News!!! Fed Must Make Public Reports on Emergency Bank Loans

According to Bloomberg:

The Federal Reserve must make records about emergency lending to financial institutions public within five days because it failed to convince a judge the documents should be exempt from the Freedom of Information Act.

Maybe we will get a little transparency now. Maybe we will be able to see which banksters have gotten billions of dollars of our money. Thank you Bloomberg!!!! :)

Read whole story here.

Gloom, Doom, and Boom

Marc Faber and Nouriel Roubini on CNBC today. Must see videos.



Nassim Taleb, principal of Universa Investments and author of 'The Black Swan,' discusses, the markets, the economy and whether Fed Chairman Ben Bernanke should be reappointed.

Taleb says,

We still have a very high level of debt, we still have leadership that's literally incompetent.

The Fed Under Fire

U.S. lurching towards 'debt explosion'

According to Philip Aldrick of the Telegraph:

The US economy is lurching towards crisis with long-term interest rates on course to double, crippling the country’s ability to pay its debts and potentially plunging it into another recession, according to a study by the US’s own central bank.

In a 2003 paper, Thomas Laubach, the US Federal Reserve’s senior economist, calculated the impact on long-term interest rates of rising fiscal deficits and soaring national debt. Applying his assumptions to the recent spike in the US fiscal deficit and national debt, long-term interests rates will double from their current 3.5pc.
...

Should the cost of raising or refinancing public debt in the markets double, “the debt could just explode”, he said, adding that it would come to a head in “five to 10 years”.

Read the whole article here.

Will We See Inflation, Deflation, or Hyperinflation In The Future?

Some people have argued that the United States is going to face a long period of deflation, such as occurred in Japan in the 1990s. Others argue that we will see high rates of inflation like we did in the 1970s. Still others argue that we will see hyperinflation (i.e. an increase in the prices of goods of over 50% per month) such as what happened in the Weimer Republic in the 1930s. So who is right? I think the most likely scenario is that within the next few years we will see inflation rates in the high single digits to low double digits, about 6% to 14% per year.

The rate of inflation is determined largely by three things: the overall supply of money, the velocity of money (i.e. the rate at which the money circulates in the economy), and the supply of goods. All other things being equal, the greater the money supply the greater inflation; all other things being equal, the greater the velocity of money the greater inflation; all other things being equal, the fewer goods the greater inflation. For more information about this read here.

One reason I think we will see high inflation within the next 2-3 years is that the Federal Reserve has been greatly increasing the money supply. According to their latest report M1 money supply has increased 16.2% over the last 12 months and M2 money supply has increased 9.0% over the same period. Unfortunately the Federal Reserve no longer publishes the broadest measure of the money supply, M3. One can only estimate this number. The estimates I have seen have M3 increasing at about a 7% rate.

People who think we will see a debt-deflationary spiral argue essentially that the velocity of money will continue to slow down and that the money supply will contract due to a decrease in banks issuing credit and giving out loans. The velocity of money is really the X-factor that is hard to predict. People who see deflation in our future argue that people are saving more, banks are not lending, and the credit is contracting. This will continue in the future and will cause the velocity of money to slow further. Because of these factors, I think inflation will remain low over the next 3-6 months. However, I think we are already seeing signs of inflation picking up.

Both the CPI (consumer price index) and PPI (producer price index) have gone from negative to positive in recent months. See graph below:


The people who think hyperinflation is coming argue that the huge budget deficits that the federal government is running will force the Federal Reserve to monetize some of the debt because the government will eventually not be able to sell bonds at reasonable interest rates. This monetization will continue leading to inflation. This inflation will cause foreigners to sell their dollars eventually leading to a complete collapse of the US dollar. This is the doomsday scenario and something to keep in mind.

I think, however, there is only a low probably of this happening within the next few years because US debt levels have not yet reached critical levels. During WWII government debt was at 125% of GDP today it is at about 80% but is raising very quickly (see below). We could get to that point one day though.


Once again I think over the next 3-6 months we will see very low inflation. However, within the next 2-3 years I think we will see moderate to high inflation primarily because the Fed is greatly expanding the money supply and leaving interest rates at basically 0%. I am open to the data as it comes in and will change my position accordingly. That is why it is good to know the hyperinflationary and deflationary scenarios in case evidence comes in supporting those scenarios. If it does you can be ready and not surprised.

Bearish News For U.S. Government Bonds

Dresdner Kleinwort Securities has withdrawn from being a primary U.S. government securities dealer. Primary dealers deal directly with the Federal Reserve in buying U.S. government debt. They then can sell the securities to clients or hold it themselves.

They are REQUIRED to bid on U.S. government debt during treasury auctions. This seems to me to be a bearish sign for U.S. treasuries. However Jefferies & Co joined as a primary dealer last week. This somewhat mitigates the bearish news today.

I'll kept an eye on the situation to see if more primary dealers leave.
I found this information at MarketWatch. More to come on U.S. treasuries....