I think the best way to explain what is happening to the dollar is for you to understand that your dollars are shares in a company called The United States of America - because that is exactly what a Federal Reserve Note (dollar) is. However there is a problem for America's little shareholders. The CEO and board members of The United States of America keep declaring stock splits but never inform the small share holders (that's you) about it. The big boys always keep the new shares {Federal Reserve Notes (dollars)} to themselves.

Under the management of the US dollar by the Federal Reserve, and with the complete blessings of the US Government, Americans were then, and still are, just as likely to get taxed on their actual losses in the stock market as they are on their phantom gains. That is part of "monetary policy" too.

After Burns resigned, Mr. G. William Miller was Chair at the Fed for the next 17 months, but not much changed. Then Paul Volcker (Fed Chair 06-Aug-1979 to 11-Aug-1987) became Chair on the Federal Reserve. With the "reserve currency" in dire straights Mr. Volcker took action. The action he took is clearly visible on my chart of M-1. The money supply stopped increasing and interest rates soared. The resulting high interest rates were very stressful on everyone, including then President Carter, who I am sure in part blames his losing the 1980 election to Paul Volcker. He would be correct in doing so. But in defense of Mr. Volcker, he really had no choice if the Federal Reserve was to keep the "reserve currency status" for the Federal Reserve Note (dollar) he was managing.

The over twenty percent prime interest rates produced a foul tempered electorate looking for revenge and all eyes were on the current President during the 1980's presidential election. Remarkably, for some reason the recession and high interest rates were never properly pointed at the Federal Reserve by even the outgoing President Carter who took the rap for Volcker. Soon to be President Reagan never lost an opportunity to blame Carter for the economic problems of the late 70ies. Before Alan Greenspan, "monetary policy makers", like mafia godfathers, wisely never sought "Rock Star" status.

Importantly, asset inflation has become a global systemic issue. Mortgage Credit is growing at double-digit rates in the U.S., Europe, and China (and elsewhere). Meanwhile, securities leveraging and attendant liquidity creation is endemic internationally, and there is no international body or coordinated central bank policy response to moderate - let alone rein in - Global Wildcat Finance. Resulting uncontrolled liquidity excess is the new global phenomenon, yet central bank balance sheets balloon all the same on the back of unrelenting dollar flows. It is amazing that marketplace perceptions of quiescent inflation persist in the face of today's unparalleled global backdrop of abundant liquidity and Endemic Easy Credit Availability.

The U.S. Credit Bubble is creating unrelenting and unwieldy dollar liquidity that continues to inundate global financial systems. The marketplace pricing mechanism for global finance is severely impaired, while speculative dynamics are empowered. Excess is only begetting greater excess, and policymakers, meanwhile, function as if deer caught in the headlights.

Does an OPEC country continue to sell its depleting real oil reserves at last year’s price? Or, when a Venezuelan oil minister sees rich nations creating new trillions of dollars in buying power overnight in new digital high-tech currency, does he raise the price? When South Africa and Russia, two near-bankrupt nations, see more money everywhere except where they live, will they raise the prices on their depleting asset that has increasing need in the technological world – platinum? They do control the market! And if this begins a domino-effect in price increases for all raw materials where either basic reserves or production facilities are limited, isn’t a rapid increase in inflation sure to follow? Yes!

Huge worldwide increases in currency supply are already showing up in the most expensive real estate markets, in luxury birthday parties for seven year olds, and in stock prices. When the price of world sugar (something nearly as common as sand on the beach) has doubled from a historic low in less than a year, are other "real things" and raw materials not apt to follow as they respond to the "money flood"? What is the ultimate conclusion to this inflationary bubble?


When anything moves from shortage of supply to an exaggerated surplus, sooner or later the "value" of the item in great surplus is diminished. "Currency confetti" is already a glut on the market, and the high-tech nature of our "money" makes it subject to rapid oscillations. At the extreme opposite, there would seem to be two possible scenarios for the ending:

1. A CRASH – caused by a breakdown in high-tech financial equipment or assumptions. As related in a new book, "When Genius Failed" by Roger Lowenstein, "The 1998 meltdown of Long Term Capital Management was a singular debacle. Markets around the globe plunged and the financial system itself seemed in peril – all on account of a tiny band of secretive bond traders who had been envied as the best and brightest of Wall Street."

Long Term Capital Management was led by Wall Street’s most famous bond trader, John W. Meriwether and the recent winners of the Nobel Prize in economics, Robert C. Merton and Myron S. Scholes. These three men led a group of geniuses into trading a leveraged portfolio of bond derivatives that controlled over $4 trillion of high-tech confetti assets. These assets were leveraged 100 to 1 or more in relation to the real high tech confetti currency that you and I know. It happened, even with the best and the brightest. And without the magic of Alan Greenspan, the Fed, and a lot of banks and investment bankers, the financial system as you and I depend upon it today would have disappeared overnight into a "black hole."

Ever since the crash of ’87, Alan Greenspan and the Fed have been able to organize worldwide financial bailouts on a moment’s notice anywhere in the world. As the "great liquefier" of bankrupt or illiquid markets, Alan Greenspan is a genius.

So, like LTCM, maybe technology gives us a chance to avert or dodge any future crash with the efficient application of more confetti currency, credit and debt.

2. But if there never is a crash that can't quickly be fixed by the "Greenspand Fed"  – what does the ever-expanding creation of currency mean to you and me as we struggle to invest our "savings" in some real "store of value." Most people will not chose to speculate with their entire life savings, so each day it will become more obvious to people worldwide: when currency becomes a commodity, commodities (especially those with limited supply) become money.

An index of the raw materials that we use and consume in our daily lives, like Jim Rogers Raw Materials Index, may become a more important inflation (and currency dilution) indicator than the government’s monthly CPI figures. For the year 2000, the Rogers Index is up 27.53% for the first eight months of the year. This index of the raw materials that are used in our daily lives compares to the 2.5-3% annual increase in the CPI reported by our government (and applied to COLA’s that affect Social Security and government workers pay and pensions).

Conclusion:

As people begin to recognize the real inflation and our inability to use any saved "money" (now currency) as a "store of value," there may be a move and then a rush to reposition financial assets that have been saved into real stores of value.

Welcome to the Bubble Economy, 2005.

There's the housing bubble and the commercial office space bubble. There's the bond-market bubble and its two progeny, the junk-market bubble and the emerging-market-debt bubble. That $2.50-a-gallon price you see at the pump has all the markings of an oil bubble. And the premiums being paid for all those corporate mergers and acquisitions is a pretty good indication of a stock-market bubble.

In fact, nearly every asset market you can think of is showing signs of bubblelike behavior. The reason is pretty clear: The global economy is awash in free cash.

There is an excess of liquidity around, and it is proving very hard to get rid of it," said John Makin of the American Enterprise Institute, using the term preferred by economists.

The 1944 Bretton Woods agreement solidified the dollar as the preeminent world reserve currency, replacing the British pound.  Due to our political and military muscle, and because we had a huge amount of physical gold, the world readily accepted our dollar (defined as 1/35th of an ounce of gold) as the world’s reserve currency.  The dollar was said to be “as good as gold,” and convertible to all foreign central banks at that rate.  For American citizens, however, it remained illegal to own.  This was a gold-exchange standard that from inception was doomed to fail.

The U.S. did exactly what many predicted she would do.  She printed more dollars for which there was no gold backing.  But the world was content to accept those dollars for more than 25 years with little question-- until the French and others in the late 1960s demanded we fulfill our promise to pay one ounce of gold for each $35 they delivered to the U.S. Treasury.  This resulted in a huge gold drain that brought an end to a very poorly devised pseudo-gold standard.

It all ended on August 15, 1971, when Nixon closed the gold window and refused to pay out any of our remaining 280 million ounces of gold.  In essence, we declared our insolvency and everyone recognized some other monetary system had to be devised in order to bring stability to the markets.

Amazingly, a new system was devised which allowed the U.S. to operate the printing presses for the world reserve currency with no restraints placed on it-- not even a pretense of gold convertibility, none whatsoever!  Though the new policy was even more deeply flawed, it nevertheless opened the door for dollar hegemony to spread.
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During the 1970s the dollar nearly collapsed, as oil prices surged and gold skyrocketed to $800 an ounce. By 1979 interest rates of 21% were required to rescue the system.  The pressure on the dollar in the 1970s, in spite of the benefits accrued to it, reflected reckless budget deficits and monetary inflation during the 1960s.  The markets were not fooled by LBJ’s claim that we could afford both “guns and butter.”

Once again the dollar was rescued, and this ushered in the age of true dollar hegemony lasting from the early 1980s to the present.  With tremendous cooperation coming from the central banks and international commercial banks, the dollar was accepted as if it were gold.
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Price inflation is raising its ugly head, and the NASDAQ bubble-- generated by easy money-- has burst.  The housing bubble likewise created is deflating. Gold prices have doubled, and federal spending is out of sight with zero political will to rein it in.  The trade deficit last year was over $728 billion.  A $2 trillion war is raging, and plans are being laid to expand the war into Iran and possibly Syria.  The only restraining force will be the world’s rejection of the dollar.  It’s bound to come and create conditions worse than 1979-1980, which required 21% interest rates to correct.  But everything possible will be done to protect the dollar in the meantime.  We have a shared interest with those who hold our dollars to keep the whole charade going.

Greenspan, in his first speech after leaving the Fed, said that gold prices were up because of concern about terrorism, and not because of monetary concerns or because he created too many dollars during his tenure.  Gold has to be discredited and the dollar propped up.  Even when the dollar comes under serious attack by market forces, the central banks and the IMF surely will do everything conceivable to soak up the dollars in hope of restoring stability.  Eventually they will fail.

Most importantly, the dollar/oil relationship has to be maintained to keep the dollar as a preeminent currency.  Any attack on this relationship will be forcefully challenged—as it already has been.
There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros.  Many believe this was the real reason for our obsession with Iraq.  I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war.  Within a very short period after the military victory, all Iraqi oil sales were carried out in dollars.  The Euro was abandoned.

In 2001, Venezuela’s ambassador to Russia spoke of Venezuela switching to the Euro for all their oil sales.  Within a year there was a coup attempt against Chavez, reportedly with assistance from our CIA.

After these attempts to nudge the Euro toward replacing the dollar as the world’s reserve currency were met with resistance, the sharp fall of the dollar against the Euro was reversed.  These events may well have played a significant role in maintaining dollar dominance.

It’s become clear the U.S. administration was sympathetic to those who plotted the overthrow of Chavez, and was embarrassed by its failure.  The fact that Chavez was democratically elected had little influence on which side we supported.

Now, a new attempt is being made against the petrodollar system.  Iran, another member of the “axis of evil,” has announced her plans to initiate an oil bourse in March of this year.  Guess what, the oil sales will be priced Euros, not dollars.

It is an unbelievable benefit to us to import valuable goods and export depreciating dollars.  The exporting countries have become addicted to our purchases for their economic growth.  This dependency makes them allies in continuing the fraud, and their participation keeps the dollar’s value artificially high.  If this system were workable long term, American citizens would never have to work again.  We too could enjoy “bread and circuses” just as the Romans did, but their gold finally ran out and the inability of Rome to continue to plunder conquered nations brought an end to her empire.

THE PICTURE - Your wealth is being stolen due to inflation, period. Whether you like it or not, central banks continue to churn out a ridiculous amount of paper currencies thereby robbing you of your savings. This is a crucial issue which you must understand if you want to survive and prosper over the coming years.

The global economy has severe imbalances with the US heavily in debt and facing record-high deficits. The total debt monster in the US has now grown to $46 trillion, the trade deficit now exceeds $800 billion and the American consumer is swimming in debt. Similar imbalances can be seen throughout the "developed" economies of the West. Therefore, bankers and governments who want to stay in power at all costs have decided to resort to accelerating the rate of monetary inflation. "But why would they do that?" you may wonder. The answer can be summed up in the following words -

Inflation makes debt less formidable and easier to handle.

Allow me to explain. I want you to imagine that your grandmother took out a loan of $50,000 in 1950. Back then, this was a lot of money and your grandmother would have found it quite hard to service and repay this debt. However, due to inflation over the past 56 years and its consequence (decline in the value of money), your grandmother's debt is now much easier to repay as $50,000 isn't worth that much today. So, you can see that with time and inflation, debt becomes more manageable.

Our world has faced inflation and nothing but inflation since the Great Depression of 1929 as the money supply has increased constantly. However, what concerns me is the fact that the rate of inflation (money supply growth) is likely to sky-rocket over the coming years. Below, I present the money supply growth rates around the world -

Australia +8.1%
Britain +12.2%
Canada +6.4%
Denmark +24%
US +8%
Euro area +8%

Looking at the above figures, you can see that over the past year, a significant amount of money has been introduced into the system. The thesis is that the surging money supply will cause the value of money to drop and make it easier to repay the mountains of debt. "But what about my savings?" you may ask. Frankly, the establishment does not care about your savings. In order to remain popular, the officials almost always cater to the needs of the majority. Today, the majority of the population is heavily in debt and with its back against the proverbial wall! Therefore, you can bet your bottom dollar that the rate of inflation will continue to surge and hyperinflation may not be far away.