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A US dollar currency crisis just a stone throw away

Posted by Adrian on June 30, 2008

There is doubt we are in a perfect storm of global financial problems; the credit crisis, the bank liquidity crisis, rapid depreciating value in housing markets (globally), inflation, high oil costs, high food costs, growing trade account deficits in most western countries. This storm could just be the precursor to widespread damage of the global financial system, in other words in the wake of this storm, there is going to be a lot of rubble.

The Central Banks of the world have all in some ways taken their cue from the US central bank; when the Federal Reserve made a move, the other banks followed. There hasn’t really been a decoupling from US reserve bank policy. Most of the central banks have copied a similar patten of the US Fed, others have quickly increased interests rates to contain hyperinflation, the countries that come to mind are the commodity export powerhouses Brazil and Australia. But both the Reserve Bank of Australia (rate set at 7.25%) and Brazilian Central Bank (rate at 12.25%) have had absolute no choice but to increase rates, even though slowing domestic growth and consumer sentiment is down. More so in Australia as consumer confidence is at a 16 year low. Both economies may be slowing rapidly, namely Australia.

So with a minority of countries having larger spreads on interest rates compared with the majority with low rates. It is an interest rate conundrum that the central banks face with global inflation and a rapid slow down within the global economy. The central banks of the world are either stuck with low interest rates or high ones. Like the US Federal Reserve, most central banks will hold rates indefinitely and hope that inflation is brought down by slowing economies or a global recession. Of course this is a false dichotomy, as oil, like certain food stocks namely wheat, rice and soy are now scarce commodities.

But current runaway inflation is also blamed on the extremely low US dollar which now sits on the dollar index of 0.72 (refer to *graph, click for larger image).

*

The de-pegging on the USD is very close now, if the European Central Bank does increase interest rates, which they will do; on the escalating inflation in both the European Union and Asia. As I mentioned in my blog post ‘Inflation and the EUR, the USD will further decline – ‘buy’ signal on the EUR’ – Europe has been put in a precarious position with interest rates and inflation, the ECB may have no choice but to increase rates on the back of the declining USD.

There is a very probable chance the USD will be de-pegged from the Saudi Riyal. The ECB will just grin and bear a weak USD, as Europe will tip in to a severe recession – which was unavoidable.

The depegging of the USD from the Saudi Riyal will inevitably cause the USD to collapse further in the short term, this could essentially depress US treasuries and we may see a massive sell off off the USD, namely from China – so long term collapse may be invertible, unless the Fed in an emergency meeting increase interest rates. In my opinion, if the US enters a stagflation depression (severe recession with rising costs), The Fed may cut further from their 2% (Ben Bernanke has indicated through speeches and thesis on the 1920′ 30′ Great Depression that a lack of liquidity was the reason the depression was as severe as it was) . This could essentially send the US dollar into a currency crisis as the world will shift the peg from the USD to the EUR, or a basket of currencies.

This would leave the US economy in a very serious situation, a depressed economy and a currency with no purchasing power or trade power.

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4 Responses to “A US dollar currency crisis just a stone throw away”

  1. […] A US dollar currency crisis just a stone throw away – This could essentially send the US dollar into a currency crisis as the world will shift the peg from the USD to the EUR, or a basket of currencies. This would leave the US economy in a very serious situation, a depressed economy and a … […]

  2. Dear Sirs : August 17, 2008

    While mainly submitted for (1) & (2) below, you might be curious about the common fate of individual inventors (as sent to T.B. Pickens — pasted-in below).

    For the cocktail circuit :
    ——————————–
    (1) Have public morals declined so much, that upon another stock-market crash, no one will have been found, afterward, to have jumped off of a tall building of their own
    accord (as in 1929) ?.
    (2) Since many homeowners have property insurance (until they have to collect ..),
    were ever ‘al Qaida’ and the ‘anti-christ’ to clash overhead and then crash (into a heap
    of unforgiveness), they’d be covered. It’s just that there’d be no ‘prophet’ (profit) in it.

    ================================================

    Dan La Course
    Altered to fit within 25110 Franklin
    columns 2–60. South Lyon, MI 48178-1011

    dantad@umich.edu
    248-437-9007

    Friday, July 18, 2008

    My verified-by-NIST_(then NBS) fuel-and-
    smog saving program was stolen by industry
    (as is the norm, worldwide and locally).

    Review and Engineering Staff
    T. Boone Picken’s Energy Plan
    Boulder/Snowmass, Colorado

    Dear Sirs :

    I’m quite hopeful of some consideration from your institute
    on account of :

    My program-invention, the copyrighted “Meister Grind”,
    since improved, which has already saved the world at least
    a begabuck of fuel from April of 1983 … by its use having
    reduced the art of camshaft grinding to a science for the
    first time after a century of tries : facilitating a
    cam-profile’s realization in production. It’s pirated,
    disguised copies are still useful, worldwide.

    Back then there were 7–8 producers of production camshaft
    grinders (and 4 of one-at-a-time such); now but 3–4 in
    three countries. Worldwide, less than fifty production
    works satisfy the world’s demand for camshafts. All of the
    above saving would have accrued via vehicle users (say a
    dollar or more_! per year) — never mind the tedious trial
    and error machining previously required even with
    masterless cnc machines (which my program can also model).
    Once specialized patent-copyright searching firms or
    departments find relevant software for a client-company,
    it’s then put through ‘clean rooms’ — divorcing the
    creators’ ownership and style from them as much as
    possible. Colloquially speaking, only about one out of five
    hundred inventions makes money; a further four pay for
    themselves. As that sycophant and phony hero from day_1,
    Mao Tse-tung, proclaimed_1958 “…let a hundred flowers
    bloom “.

    The business world (especially the Japanese, and other
    Asians) is quite viciously methodical and (quasi-)
    legalistic at stealing intellectual property and at other
    anti-competitive practices (selling somewhat faulty
    machinery to competitors of an allied company which
    introduces defects into their products, for example).
    Vendors (e.g., the defunct Eonic of Detroit, which made two
    and three dimensional cams) often have trouble getting
    needed info from their clients. Entering a building in the
    wee hours of a sunday morning to fine-tune a machine they
    were demonstrating decades ago, Eonic’s staff found their
    possible client’s (General Motors) engineers “pouring over”
    it. GENERAL ELECTRIC paid FONAR CORP. 35 million for
    MRI-patent infringments. John McDougal’s “electronic
    octane” invention was stolen by many auto firms, and his
    patent attorney of two years was hired-away by Chrysler in
    1986-+.

    Please at least skim over my public files on “http://
    www-personal.umich.edu/ ~dantad/meister “, first reading
    mg_rusia.txt, mg_readr.txt, and octane_1.txt.

    Sincerely,
    Dan LaCourse.

  3. […] think back to a blog post I wrote in June called A US dollar currency crisis just a stone throw away, this post was written prior to the risk aversion that has occurred in the FX markets for the last […]

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