Keeping Our Eyes Peeled On The Long Bond & the US$
Jay Taylor
We have been talking almost every week lately
about the importance of the apparent breakdown
of the bond market and the very closely related
breakdown of the U.S. dollar. The long bond and
the dollar are breaking down, in no small part,
because foreigners are getting tired of the infinite
supplies of U.S. dollars that keep coming at
them, and also because the dollar doesn't buy
much any more. No matter what phony CPI
numbers we get from our Labor Department, you
can't fool Mother Nature. Increasingly the
dollar's value is closing in on its intrinsic value
of zero.
James Dines, writing in the June 2007 issue of
his Dines Letter, explained the current situation
as well as it can be explained. "So what's next?
In order to bribe foreign suckers to buy more bonds,
The vigorish of interest rates will need to go up.
Trouble is, rising interest rates also push
mortgage rates higher, which is not good news
for an already wounded American real-estate
market. Higher mortgage payments mean that
consumers can afford to spend less at retail
outlets, and the mortgage-default rate will rise,
further weakening our banking system that is
over invested in sky-high real estate.
Furthermore, higher interest rates will put
pressure on investors' margin accounts and
dampen corporate borrowing, bearish
considerations.
"China used to buy a lot of American debt,
naively assuming that it was a safe place to leave
their savings, but Washington encouraged a
declining dollar that effectively embezzled so
much of it that China exasperatedly announced it
would 'diversify' its dollar portfolio out of US
bonds and into a basket of currencies, real
property and stocks. The world's Mass
Psychology has just noticeably shifted again
toward a 'run on the dollar,' delivering its
comeuppance by taking it down a peg or two.
This is really bad news, and suggests that TDL
should begin increasing its focus on gold and
silver so as to hedge against the currency
upheaval."
The big question in my mind is whether or not the dollar can stay above the 0.80 level shown in the chart above. It is hard to see how it can do so, unless Mr. Bernanke slows down the action of his helicopter printing press to a level required to allow interest rates to rise sufficiently to make the dollar attractive again. Actually, that shouldn't be too hard, what with all the other
nations of the world trying to cheapen their own currencies to gain trade advantages. But the U.S. is playing the same game and in fact it has a worsening trade deficit that desperately needs a weaker, not a stronger, dollar.
All of this makes for an extremely interesting day-to-day watch of the markets. If the 0.80 support level for the dollar is violated (as you can see, it is teetering on the brink), then we could see a freefall for the U.S. dollar.
As I have noted before, if the dollar collapses, that's when Mr. Bernanke is going to really have his hands full, because he will have to choose between an honest day of reckoning for America or perpetuating the dishonest printing press scam that he and prior Fed Reserve chairmen have brought about over the years. Based on his academic work and his policy since joining the Fed, we have to bet he will run his helicopters 24/7 en route to a possible date with hyperinflation a few years down the road. Of course, Mr. Bernanke is now earning a living in the real world. His bosses represent the same interest as those who choose the Republican and Democratic Presidential candidates you and I get to vote for. Those people who are really in charge will do all they can to perpetuate their wealth. And if they perceive a strong dollar as a prerequisite to achieving that end, we will see a strong dollar no matter how much hardship it brings on average folks. I don't know if the powers behind the throne will require a return to a strong dollar, as Volcker gave us in 1980. They may have plans to give us a new currency like the amero and start from scratch in a new massive inflationary game after the carnage of hyper inflation pushed aside. But if they plan on preserving the current dollar regime for global trade, I think America could be facing Ian Gordon's K-winter and not the hyperinflationary vision of John Williams. However once again this week, our Inflation/Deflation Watch strongly suggests that inflation rather than deflation is the prevailing economic pathology emerging from our fraudulent fiat currency system.
July 21, 2007
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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