Market GPS (2)

Statement: The only way to pay off the massive US debt and stimulate the economy is to devalue the American dollar.

And so you ask why? Lets look at what might happen....

1.The most obvious conclusion is that it lessens the debt paid to foreign countries. Example: Japan purchases US treasury notes at a certain value (x). So when they eventually sell the notes, they receive the devalued dollar (y) which has less buying power for the Japanese. This has been going on for decades, and the only question is... for how much longer?

2.The biggest fear in the administration is the forbidden word "deflation". A synonym for an even more deadly word. DEPRESSION. There is no solution to deflation, which creates huge unemployment and everything that goes with it. So they will continue to print paper money until prices begin to rise.

3.A falling USD  creates the following scenario(s).

A.All commodities are denominated in USD, therefore their price will rise. A rising price of, say a barrel of oil will cause the energy sectors on stock markets to rise. The same goes for gold, copper and, basically all assets denominated in US Dollars. This in turn will reverse the flow of funds from the markets and create rising markets. Rising markets will draw investment, and investment creates employment. Profits rise and therefore more taxes collected and so on....

B.All imports to the US will rise in price, creating inflation (most desired). Inflation creates a movement of funds out of cash and into assets like real estate, jewellry, furniture and anything else of value. This also reverses the flow of funds from different markets, and everybody from Wallmart to Apple to Google benefits. Wall Street rises and fear and worry are on the decline.

C.Exports become more profitable and industry goes back to work.

So right now, this appears to be working, albeit, slowly. Markets are up. Gold is jumping, commodities are on the rise and "quantitive easing"  will continue. What a great expression that is. Invented by economists and politicians to separate themselves from the man on the street, while appearing to be knowledgable. Somebody would think they had invented the wheel! It means "printing of paper money".

So if everything is so good, then what's the catch? 

1.This can only work if the world continues to accept the USD as the reserve currency. As we know, a country's economic power is measured in the strength of its currency. China is definitely manouvering to take over world economic leadership. They have time and patience. They are also quietly diversifying their currency reserves....but that's a story for another day.

2.As long as the devaluations are slow, the danger appears minimal. However, a sharp quick drop by the dollar will create uncertainty and all the good work will be undone.

3.Loss of confidence in US treasuries would cause yields to rise, and another bloated market would be in danger of deflating.

So, not so easily done. The only sure thing is that the printing machines will continue, and you can take that to the bank!

Check out  http://stockcharts.com/charts/gallery.html?$USD
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