This chart is from an excellent blog called Sudden Debt. We read it regularly, and suggest you do as well.
Someone sent us this chart and asked: What do you make of this? and by inference: What does it mean, what does it imply?
We make a lot of it, because it has been a recurrent theme at this blog since the first: The Die is Cast for the US Dollar, Is the Fed Monetizing Bad Debt, Is the Fed Accountable? and The Odyssey of Ben Bernanke.
It has also been a recurrent theme at The Crossroads Cafe, postings at various places around the web, and a primary investment strategy in our personal portfolios since about 1999. Let's put it up as a headline, and in one nice simple sentence.
The Fed is being forced to devalue the US Dollar.
At one time the dollar was backed solely by US sovereign debt: AAA Treasuries and a few fully guaranteed agencies like Ginnie Mae. Now it is backed at least in good part by collateralized debt obligations for which there is no market at stated values.
The devaluation of the dollar has been gaining steam relative to the other fiat currencies around the world like the euro and the yen under the Bush Administration. The strong dollar under the Clinton administration was effectively an accounting illusion. Commodities are a real problem because so many of them are controlled by non-G8 countries.
A lot of breath has been wasted debating the Hegelian dialectic between inflation and deflation. In a purely fiat regime it is a policy decision, nothing more.
Japan made their decision for their own reasons and got a protracted deflation, probably because they had a huge national savings at hand, an industrial policy of net exports, and a complex kereitsu controlled economy in cooperation with the bureaucrats at Ministry of International Trade and Industry 通商産業省 or MITI.
The US is making its decisions its way and is getting inflation, probably because it has a huge national deficit and no savings. Debtors do not willingly choose deflation. Without external standards its a policy decision. But the debate masks the real issue, that we are falling into a centralized command economy, and moving away from free market discipline. The further they go, the more the Fed will have to control directly. Some say that dollars can only be created if banks make loans, as if it is some law of physics. Oh really? Who says this? Where and by whom is it written? When will the decisive moment come when this is put to the test.
Its all about moving to a common and interlinked fiat system, not necessarily one currency. Its an arranged system similar to Bretton Woods with a renewed dollar hegemony, except the fix might be more flexible and less explicit. Its does not have its basis in evil. Its fault is hubris, the fatal flaw of all central command economies and those who would rule them.
Its a neo-liberal Keynesian dream in which the country is managed as a command economy by a small group of elites, and the rest of the world accepts their designated place in the grand scheme of things.
An important milestone along the way will be when the Fed runs out of Treasuries to back the dollar currency in circulation. Will people care that the dollar is now backed by questionable Wall Street debt? Will the Treasury find a graceful way to give them unlimited supplies? Will the rest of the world keep providing us with key commodities and manufactured goods? Its an awkward bridge that must be crossed in which appearance slips and the crowd gets a brief glimpse of reality. But its not the last obstacle, and perhaps not the biggest.
Will it succeed? We surely do not know. As the president said, it would be easier to make things happen if we had a dictatorship. We like the idea of hedging against a possible failure.
Until 1971 the US dollar was backed by gold. The Dollar is no longer the reserve currency of the world. Until last month it was backed by the sovereign debt of the United States government. One can presume that it is still backed by the full faith and credit of the federal government, no matter what. Although the nature and character of its backing is clearly changing, the final outcome of what it will become exactly is yet to be decided.
The die is cast
Someone just sent me this April 8 interview with Jim Rogers in which he says similar things. Its worth reading. Jim Rogers: More Pain for the Greenback, and the Failure of the Federal Reserve
