Is the Dollar's Fall Over?
Reader Daniel P wrote in a recent comment on the Half-Life of the US Dollar page:
Dear Sir Charles, thank you for an exciting and informative site it is much appreciated.
When was the last time the USD moved +60% above the trend line (are there similarities to the big jump just before dot.com crash in 2000?), and should we expect a corresponding deviation to -60% as a correlation to the upward move? Would this mean we could expect a gold price of around $2,800-3,000 when the USD reverses to -60% below the expected trend line?
I think you your idea and concept of the “Half-Life of the US Dollar” is a very smart and a useful indicator for the predicted trend of the USD. It would be interesting to see the graph in more detail for example where it follows your “The US Dollar since 2006” graph? Any thoughts on how I can make my own “Half-Life of the US Dollar” graph?
Best regards,
Daniel P
Daniel raises some very important points. My theory is that the Fed made decisions and took actions after the tech-bubble crash that started them on the path they have been pursuing since. This path involves devaluing the USD at a relatively steady rate of decay.
Someday they will choose (or be forced) to abandon this policy, or the public will come to distrust the Dollar so much that it will lose most or all of its value. At that point, the half-life curve will be obsolete. So even though I chart it out over decades to come, I don’t really think that it will play out that way – the curve just shows roughly what to expect if the policies and actions, and the market’s response to them, continue as they have over the last decade or so.
Does this big deviation from the curve mean that the policies are at an end, that the half-life curve is now obsolete, and that a new era of USD strength is beginning? Maybe, but I doubt it – based on the fundamentals of debt levels, Fed policy statements, and the way the US Empire is tracking the demise of every earlier empire in history, I expect we will see the decline stretch out over many years, if not decades.
My guess is that the current large positive deviation will be followed fairly shortly (over the next year perhaps?) by a large negative deviation. To actually reach -60% deviation by the end of 2014, the USD would have to fall from its current lofty level of 24.5 mg to its predicted value of around 14 mg, and then fall 60% further to about 5 mg. That's a HUGE swing, implying a USD price for gold in excess of $6,500/oz. Unless there is an abrupt loss of confidence in the Dollar, I doubt we would see that in one straight decline; much more likely, to reach that level we would have a series of declines and rallies over several years. The half-life curve suggest that we should see $6,500 gold during 2020.
A more typical level of "undershoot" for the USD would be 10 to 20% (10 to 11 mg), implying a gold price between $2,800 and $3,200 by the end of 2014.
As Niels Bohr observed, "Prediction is very difficult, especially if it's about the future." And that goes double for gold prices! But until we see a dramatic shrinkage in the size of governments and their spending habits, a return to sound free-market economics and sound money, I think it is safe to say that the trend for fiat currency values will, in spite of occasional updrafts, be down.
PS – to make your own half-life curve, just import gold prices into a spreadsheet, divide 31.1035 by each gold price to get a price for the dollar, and run a logarithmic curve-fit function on the data points (in my spreadsheet, it's an array function called LOGEST).
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Comments on Is the Dollar's Fall Over?
The half life of the dollar has much more to do with the inability of the Fed to curb the spending habits of the Congress in any meaningful way as was originally intended when the system was put in place. Since the Congress is continuing to outspend the economy, the only ways out are
1) The Fed could cause another great depression by restricting the money supply. After the fiasco of the 1930s this will never happen.
2) The Congress could find the political willpower to tie Federal spending to economic growth in some meaningful way. This has about as much chance of happening as 1).
3) The Congress could explicitly default on its debt. This course of action is about as unthinkable as 1) and 2).
4) The Congress could revoke the charter of the Federal Reserve and start issuing its own currency, for which it would not have to borrow and pay interest. This is what they should do, so of course it is the least likely thing that they will do.
5) The Fed could continue on its current long term course of accommodating Congressional spending by growing the money supply as imperceptibly as possible, which may or may not be very imperceptible at all.
Course 5) is being actively aided and abetted by the Big Money Banks and the Bullion Banks. They are fluffing the value of the dollar up as high as they can get it against the euro, other currencies and against various commodities. Since they lose money long term by maintaining such market distortions, they'll have to stop eventually. The Fed is loaning them the money to do it, of course, so it's all just a game of Monopoly in the end.
Sir Charles' half life chart gives us an accurate roadmap of where we really are without all the market manipulations of the BMBs and BBs. Buy and sell accordingly.
Except for Ron Paul and maybe a few others you could count with your fingers, politicians that can be trusted, the whole lot of the rest of them should be fired and replaced by CEO's of corporations that have at least a10 year history of success and profits.
I know the word "profit" is a dirty word among many classes of society, but they are essential if an economy is to grow organically as opposed to the "pushing on a string" practice of quantitive easing, what a joke.
For all the education people in positions of power possess, in terms of RESULTS they can only be classified as "educated fools" at least in terms of understanding economics. The following essay addresses just how BLIND they really are, unless you want to acknowledge it as a conspiracy to hold the masses in debt slavery!
The financial establishment along with the politicians they have in their back pocket consider gold to be a "barbarous relic" even Warren Buffett has painted it as a relatively "useless" mineral. We dig it up at great cost, then bury it in secure vaults where it earns nothing and costs money to protect. HINT, could that be because it HAS real value?
Sounds logical on the surface that it is not a good investment, but as the late Paul Harvey used to say, "now hear the rest of the story." Gold and silver have been utilized as money for thousands of years until the Babylonian temple priests acting as the original "bankers" (what safer place to keep your money?) realized that hardly anybody ever came for their gold because the paper receipts they issued were readily accepted by merchants for trading purposes.
Thus was born "fractional reserve banking" i.e. issuing MORE paper receipts than actual gold held by the issuer, and this FRAUD devolved into a gigantic Ponzi scheme that European Bankers foisted off on Congress to legalize their fraudulent practices that in 1913 became the Federal Reserve Act. These "paper receipts" eventually became to be viewed as money itself, rather than just currency proving ownership of REAL MONEY and once the connection to gold was terminated in 1971 by President Nixon, it was all downhill from there.
Irresponsible bankers and our elected politicians soon learned how to "game the system" by unrestrained spending and unrestricted currency printing to benefit their "inner circle" of crony capitalists while saddling the middle class with un-payable debts! Seems to me the logical question to ask is, by what reasoning or logic should our supply of currency come into existence as DEBT on which a privileged ELITE are allowed to collect interest? Being interest is mathematically impossible long term, hence my labelling it a PONZI scheme, or if you prefer, a "legalized counterfeiting scheme" from which all but a few are excluded, ask yourself, has the Constitution not been breached to the point it is only a historic relic to those who have the financial backing to get themselves elected.
The mantra of the banking establishment is "the magic of compounding" to get the masses borrowing and investing in debt instruments without disclosing that this is itself a FRAUD, because mathematically not everyone can be a net recipient of interest, otherwise there would be no-one left to pay it. Why is interest long term impossible you ask?
Mathematically the answer is very simple and it amazes me that all the "high muckety mucks" with their college degree's from Harvard and London School of Economics either can't figure it out, even though it is staring them in the face, OR, they are in on the deal and are afraid to speak out because it might threaten their ability to hold a high paying and prestiges job?
It was no less than a Canadian Central Banker, (Graham Towers) who "spilled the beans" in sworn testimony before Canada's Parliament in 1939 when he testified truthfully that "every bank loan is a new creation of money, and when it is paid back it ceases to exist' which explains the financial dilemma the whole world seems to be in to-day. Even our grandchildren can not ever pay back in real money the "Pyramid of DEBT" that has been created since the establishment of the Federal Reserve Act.
Since ONLY the principal of a loan is ever created, it necessarily follows that the only way that interest can be paid, is with exponentially rising levels of DEBT that replaces old loans paid back, PLUS the growing debt pyramid of interest that is not created and therefore not payable except through inflation, (read expansion of debt). Inflation figures are then manipulated by government bureaurats to hide the simple truth that fiat currencies eventually return to their intrinsic worth of ZERO! Central Banks inflation target of 2% is designed not to alarm the masses but in reality, actual inflation is much higher than officially promoted figures. This is why the average life of a FIAT currency is about 40 years before it become worthless and has to be replaced.
I would like somebody in government to explain to me why we as natural born citizens who elect them to represent OUR interests, are instead "on the take" from the bankers who are ripping us off? There is no logical reason I can see why our currency should not come into existence as a CREDIT based on the natural resources of the country, that are given added value by human LABOUR!
How about a "for-instance" to make my case? Anything physically possible and desirable, (good for the citizenry) CAN and should be made financially possible. Since all we do any-way is print paper currency, is it not time the government supposedly representing US, the taxpayers, took the printing plates (which they have the power to do) back from the elite bankers, destroying their ill gotten MONOPOLY?
The government on our behalf could print the money needed for all infrastructure, roads, airports, electric grid, sewers and waste treatment plants, schools, hospitals ad infinitum as a CREDIT against the natural resources we possess and the wages needed for the private sector to build whatever is needed for the benefit of society. In other words "currency" would be backed not only by gold BUT all the infrastructure society needs at ever more prosperous levels, but without "PAYING TWICE" by being beholden to the banking cartel. That was the problem with the Breton Woods agreement, it relied solely on gold for backing while still promoting "fractional reserve banking" that by demanding more money creation to cover interest, outstripped the available supply of gold.
What would this CREDIT BASED system accomplish? Well it would simply cut out the middle men (bankers) who contributed neither the raw materials needed, or any labour, and using an average 25 year payback, (useful life) the government would only need to tax back the original principal created as credit based currency, saving on average about 50% of the cost of the things society needs.
Instead of the wage earners DEBTS increasing out of all proportion to wage increases, imagine your taxes being REDUCED by 50% or more, your house costing 50% of what it does now, because you would pay only the cost of materials and labour paying back only the principal in half the time of a conventional mortgage. Would things not be much better for a shrinking middle class compared to current conditions that keep the average wage earners in the "paycheck to paycheck" perpetual debt existence the masses are mostly experiencing to-day?
Our financial problems are solvable except for the fact that nobody in authority has the guts to stand up and say, "the emperor has no clothes" so where are our supposed leaders? While changing to a CREDIT BASED SYSTEM would potentially be disruptive unless skillfully handled, the real problem is human greed, the type of people in positions of authority to-day could not be trusted to implement a new, honest and fairer system, they would just find a new way to "game the system" for their own benefit. On that basis I am not hopeful for positive change, but when it comes to identifying the foundational problem that has created our present dilemma, it is so simple a precocious 8th grader could figure it out by simple mathematics.