The Dollar After the Fed's Decision Not To Taper

Egon von Greyerz via KWN (Bold emphasis is mine):

Eric King:  “Egon, astonishingly, you correctly predicted that there would be no Fed tapering this week.  That Fed decision certainly shocked the world and shocked the financial markets.  Where do we go from here?”

Greyerz:  “Yes, Eric.  It did not surprise me at all that the Fed did not taper because for a patient on life support that is not the time to turn off the machine because that machine is what keeps the patient alive artificially.  So how can the Fed possibly slow tapering? 

The US is a country with a total government debt of $220 trillion, unemployment at 23%, the job participation rate at the lowest level since the 1970s, median household incomes at multi-decade lows, and real-GDP declining since 2006.  We have also seen federal debt double since 2006, and consumer credit has been exploding.  So the picture is clear....    

            

“Not only will there be no tapering, but my forecast is that during 2014 QE will increase substantially.  In fact, we could easily see QE double in 2014, and later on I expect trillions of dollars, and eventually even tens of trillions of dollars of money printing each year.  This will also mean increased turmoil and chaos in global markets.

So the US is now on the road to hyperinflation.  Hyperinflation arises as a result of a collapsing currency and this is exactly what is happening to the US dollar.  Back in the late 1960s, when I started working in Switzerland, we paid 4.3 Swiss francs for each US dollar.  Now it only costs us .91 for each dollar.  That’s a decline of 80%!

Just since September the dollar has fallen 3% against most global currencies.  Eric, we are now starting the next leg down in the US dollar.  I see the dollar declining around 50% against most major currencies.  What I am saying is that the dollar is going to collapse against other fiat currencies, even though these other currencies are just rubbish themselves.

The reality is that euro countries, and the UK, are in a mess as well, and Switzerland will probably have to print a lot of money because of the massive size of its banking system.  So the race to the bottom is on, but the dollar will be the winner.  The only other basket case currency is of course the yen.  We might see a close race to the bottom between the dollar and the yen. 

Why will the dollar go down?  For the simple reason that the US has created a mountain of debt of enormous proportions.  This is a debt mountain which can never be repaid with real money.  This is why the US will have to print unlimited amounts of dollars over the next few years.  But this will only add to the problems the US faces.

The collapsing currency will drive prices of goods and services exponentially higher.  But the falling dollar will also start a vicious downward spiral with other countries selling their dollar assets, including their Treasury bonds, and that will lead to even more money printing.  This will cause the dollar to fall even faster and interest rates will surge more quickly during this period as well.

At that point the US government will take Draconian measures.  This will include exchange controls.  US citizens will not be able to transfer dollars out of the country or even buy foreign currencies.  They will also not be able to transfer other assets out such as gold and silver.

Pension funds and savers will also be forced to invest in rapidly plunging Treasury bonds in order to prop up a collapsing bond market.  But all of these Draconian measures will be in vain, Eric.  I know this paints a terrible picture, but this is all likely to start during 2014, and, sadly, it will lead to a hyper inflationary depression.

The political scene will also change and many countries could have anything from totalitarian regimes to anarchy.  So physical gold and silver will be the best way to preserve purchasing power during the coming collapse, but it must be held outside of the banking system.”

Greyerz added:  “Turning to the gold market, Eric, we are seeing a manipulation down in gold today.  This is to be expected after the nearly $60 surge on Wednesday after the Fed announcement.  But, to me, this is absolutely nothing in the big scheme of things.  It’s a Friday move that is being done with paper selling, but it won’t last.  I am absolutely convinced we will see much higher prices in coming weeks, and considerably higher prices in 2014.”

 As I pointed out in a previous post, Why Interest Rates Can Never Rise Again, the Fed will have to try just about anything to keep interest rates down, likely being forced to expand QE as Greyerz above mentioned in order to keep interest rates at a relatively low rate. It cannot go on forever though. At some point the market will demand more than 3 or 4% (Its been around 2.7 lately). No central bank, even the US with its petrol dollar, can print forever without severe repercussions and inflation.