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When The Dollar Rallies, The Market Will Crash


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When the Dollar Rallies, the Market will Crash

by Mike Whitney

Global Research, November 4, 2009

 

Interest rates. The Fed does not need slinky women in plunging necklines to peddle money. All it needs is low interest rates. When rates are pushed lower than the rate of inflation, the Fed provides a subsidy for borrowing. This is not as hard to grasp as it sounds. If I offered to give you $1.00 for very 90 cents you gave me in return, you would buy as many dollars from me as you could. The Fed operates the same way. It generates market activity by creating incentives for borrowing. Borrowing leads to speculation, and speculation leads to steadily rising asset prices. This is how the game is played. The Fed is not an unbiased observer of free market activity. The Fed drives the market. It fuels speculation and controls behavior by fixing interest rates.

 

When Lehman Bros flopped last year, markets went into freefall. A sharp correction turned into a full-blown panic. The bubble burst and trillions of dollars in credit vanished in a flash. Trading in exotic debt-instruments stopped overnight. A global sell-off ensued. Markets crashed. For a while, it looked like the whole system might collapse.

 

The Fed's emergency intervention pulled the system back from the brink, but the economy is still wracked with deflation. Billions in toxic waste now clog the Fed's balance sheet. The dollar has fallen like a stone.

 

When the financial system blows up and credit is sucked down a capital-hole, the economy goes into a downward spiral. Businesses slash inventory and lay off workers, workers have to cut back on spending and credit. That creates less demand for products, which leads to more lay offs. This is the vicious circle policymakers try to avoid. That's why Fed chair Ben Bernanke wheeled out the heavy artillery and launched the most aggressive central bank intervention in history.

 

The Fed dropped rates to zero, but its Quantitative Easing (QE) program (which monetizes the debt) actually pushes rates even lower to roughly negative 2 percent.

 

Bernanke has underwritten every sector of the financial system with government guarantees. He has provided full-value loans for dodgy collateral which is worth only a fraction of its original value. The market can no longer operate without the Fed. The Fed IS the market, which is why it is foolish to talk about a "recovery". The idea of recovery implies a free-standing system based on supply and demand. But, for now, the government provides the demand, which is why there is no market and no recovery. Analysts at Goldman Sachs sum it up like this:

 

"How much of the rebound in real GDP was due to the fiscal stimulus, and where do we stand in terms of the effects of stimulus thus far? Although precise answers are impossible at this juncture, several aspects of the report are consistent with our estimates that the fiscal package enacted in mid-February as the American Recovery and Reinvestment Act (ARRA) would have accounted for virtually all of the growth reported for the third quarter." (http://www.zerohedge.com/article/hedging-their-bets)

 

Positive growth is an illusion created by government spending. The economy is still flat on its back. Consumer spending and credit are in sharp decline. Unemployment is steadily rising (although at a slower pace) and wages are flatlining with a chance of falling for the first time in 30 years. Deflationary pressures are building. The talk of a "jobless recovery" is intentionally misleading. Jobs ARE recovery; therefore a jobless recovery merely points to asset-inflation brought on by erratic monetary policy. Surging stocks shouldn't be confused with a genuine recovery.

 

The Fed faces stiff headwinds ahead. Low interest rates can have unintended consequences. The "cheapness" of the greenback has made the dollar the funding currency for the carry trade. Investors are borrowing low cost dollars and using them to purchase higher interest assets elsewhere. The process, which is rapidly escalating, is fraught with peril as economist Nouriel Roubini points out in an article in the Financial Times:

 

"Since March there has been a massive rally in all sorts of risky assets

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And we've got to get ourselves back to the garden.Crosby,Stills,Nash and Young

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"Mama, bring me another beer. I'm startin' to see double."

Bret Rehart, Nov, 2009

 

:o

 

Not sure what all that talk about "carry trades" and "global assets" is about. Sound like the world is coming to an end. I heard that wasn't supposed to happen until 2012 though?

 

Or is it 2112?

 

(a little RUSH humor) :D

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I see it this way: people want to "invest", which means they want to make money without creeting value. An absurdity in itself. Now put more money into the system by giving it to the banks, what will they do? They will "invest" more, creating more bubbles which will crash again. And then they will whine again, asking the Gov to hand out more money to play with.

The only sad thing is: the real economy still believes the "market" for imaginary goods is relevant to them and then creates a real crisis by reacting to the financial crisis.

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Til, agree with that wholeheartedly.

 

Making money from money is not really something that should be relied on to live in my opinion. Same as gambling. Unless you are really good at it and know how to do it well with a proven track record. In the end though, far more people "lose to the house" then come away winners. I always lose in the markets and at gambling it seems.

 

I won't have much investments in the markets when I retire. Most of my wealth will be in non-liquid assets. Property, businesses, equipment, etc. The rest in relatively safe accounts, spread out across institutions, and other things like cash and gold.

 

I will also be moving from making large amounts of income on relatively few annual transactions (i.e. a paycheck), to making small amounts of money from relatively many transactions. Every body has to eat, three times a day. Filipinos love eating as much as the rest of us. So, food commodities is where I plan to be in my retirement life.

 

If the market crashes, I want to be more or less self sufficient and tucked away on my own little slice of the planet living off the grid.

 

Could have chosen West Virginia or Cebu.

 

Have you seen the women folk in West Virginia? :o

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GoneAsiatic

This theory seems to be predicated on the belief that the dollar will rise (maybe) and when that happens, the market will crash and burn. Mostly what I have noticed lately is that when investors become risk averse, the dollar gains because they put their money in U.S. Treasuries. When they feel there is less risk, they sell their Treasuries and invest in the market.

 

I may be missing something, but I don't see what else is going to make the dollar rise, except a bear market, or eventual and gradual raising of interest rates. So far, we have seen a strong rally with some pullbacks, but the market is still something like 30% lower than its 2007 highs.

 

The article did have many correct findings including speculators selling Treasuries at low interest rates, and buying currencies that have higher rates (carry trade). I think the markets are already aware of this because there has been somewhat of a correction with the DOW falling well below 10,000. The author apparently sees this happening in orders of magnitude. How? I don't know.

 

The organization that printed this article is a Canadian self-styled think tank that specializes in conspiracy theories and will be willing to sell you various books with that theme. Credit cards accepted.

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The Mason

I thought the Global Security website 'reported' that the dollar was going to crash and burn and we're all doomed. Now they're saying the dollar will rise and we're all doomed. Its good that they can publish out of both sides of their mouth. Maybe they're more mainstream media than we think they are.

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sandwindstars

The debt load of the US is equal to its GDP now (I believe), and expected to rise more than GDP in the next few years. A Manila newspaper columnist worte: the Chinese have been selling junk goods to the US for years, and the US in return sold them junk investments. The article doesn't make sense.

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David Spicer

The debt load of the US is equal to its GDP now (I believe), and expected to rise more than GDP in the next few years. A Manila newspaper columnist worte: the Chinese have been selling junk goods to the US for years, and the US in return sold them junk investments. The article doesn't make sense.

 

Pretty close

http://www.usdebtclock.org/

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I thought the Global Security website 'reported' that the dollar was going to crash and burn and we're all doomed. Now they're saying the dollar will rise and we're all doomed. Its good that they can publish out of both sides of their mouth. Maybe they're more mainstream media than we think they are.

 

 

Looks like we're all doomed.

 

 

.

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musicman666

And we've got to get ourselves back to the garden.Crosby,Stills,Nash and Young

 

what...that was jonies song ..always will be.

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