An article today titled ‘The Dollar’s Tipping Point’ questions whether the Fed’s March 18 move to buy up to U.S.$300 billion in long term treasuries and bonds will “change the world as we know it”. While I seriously doubt any one event will do that, it is in my view a ‘directional move’ that has been done for reasons I don’t fully understand and with consequences I can only speculate on (I expand on this later in this post). The article’s author, Jennifer Bawden (Bawden Capital, a the technology and private equity consulting firm) says – based on data taken from Martin Weiss (Money and Markets) – government funds committed to economic ‘rescue’ plans by world governments so far is close to U.S.$13 trillion, and credit default swaps total over U.S.$57 trillion. Ms. Bawden, assuming I have interpreted her comments correctly, in the recent past has thought:

• (paraphrased) “the thought that you will not even hear whispered is that an unhinging of the reserve currency could happen and that would cause financial panic, plummeting stock markets, oil to rise way over U.S.$100 a barrel and the gold price to quickly jump over $1000 an ounce as investors seek protection in safe havens”;

• the U.S. Government’s reserves would be gone in a few days if it had to support a dollar dive, but that if the U.S. is able to keep its $ strong foreign capital from the developing world will buy the US dollar and help finance the huge liabilities of social security, Medicare and interest on the national debt; and,

• if fear of US instability creates more selling of the dollar, interest rates will have to eventually rise considerably to lure the world back to buying the greenback.

In the referenced article she expresses what I take to be her current views that:

• the day of reckoning for the U.S.$ has come based on the Fed’s March 18 U.S.$300 billion move, and that this ‘day of reckoning’ inevitably will push the dollar down;

• foreign government saber rattling by Russia and China has finally brought attention to the viability of the US dollar as the world’s reserve currency, and Ms. Bawden wonders if “a planned New World Order complete with a New World Currency backed by gold and silver all a part of the puppet show unfolding before our eyes?”; and that

if U.S. currency devaluation does come as a result of massive spending and bailout packages, a fear based rush out of the dollar, and a planned devaluation of all G20 currencies the following things will result:

• in order to bolster the its dollar the U.S. will have to squeeze out inflation and excessive liquidity by raising interest rates which is not part of the current Fed policy. Absent that, “one day soon, inflation’s invisible tax will soar”;

• as the dollar falls there will be swift restrictions to moving money out of the country to safer currencies and banks;

• demand destruction and deflationary forces could pull oil below U.S.$50 per barrel;

• gold mining companies seasonally sell off in May which (ifd this happens this year), in combination with a general ‘spring market bounce’ probably with instill fear into the heart’s of even avid gold investors;

• China, Russia and the Middle East’s commitment to moving big capital into gold will be reaffirmed. To me this seems inconsistent with the previous point;

• other then gold, Ms. Bawden’s three favorite ways to safeguard cash from a falling U.S. $ are the “commodity rich currencies” of Canada, Australia and Norway; and,

• in a deflationary environment Ms. Bawden thinks there may be a chance this coming summer to pick up gold, silver and oil at lower prices.

Whether or not Ms. Bawden proves to be correct in her surmises, to me the important question with respect to Mr. Bernanke’s March 18 announcement is: What caused him to make such a decision? One obvious possible reason is that he acted because foreign buyers of U.S. Treasuries and Bonds are not stepping up to the table to purchase those Treasuries and Bonds as they have in the past. This strikes me as a likely scenario given the current U.S. economic turmoil and the economic problems those ‘foreign buyers’ themselves face. If I am right it seems to me that what Bernanke has done is indirectly ‘open the U.S.’s kimono’ and has shown us that in the end the U.S. increasingly may have to become the predominant ‘buyer of last resort’ of its own debt. Given the U.S.$ trillions committed and about to be committed for bail-outs, stimulus packages, and the Obama budget now under discussion, this leads me to think the U.S. may have a huge circular financing problem. I stress I am not an economist, can only address these matters in what to me are common sense terms, and may be entirely wrong in the conclusions I reach. That said, to me common sense dictates that no person or country can succeed in the long term by attempting to create ‘wealth out of thin air’ – yet that is what it strikes me America will be doing if time proves it must predominantly print fiat currency and ‘borrow from itself’ in an attempt to sustain and re-generate its economy. If this ‘internal financing’ occurs to any significant degree I can’t see how that can be positive for either the near and longer term future of the U.S.$. Because of what I see as the possible significance of this I urge readers with more economic knowledge than I to comment on my views as expressed in this paragraph.

I suggest you read the referenced article and form your own views on what the author has said.

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