The expected recovery in the US economy has not materialized this year with 0.1 per cent GDP growth in the first quarter which many economists think will be revised down to a negative figure, while at the same time the Fed’s balance sheet is only exceeded by the Bank of Japan as a percentage of GDP. That’s depressed the dollar with prospects in Europe and the UK looking up, at least in comparison with the gloom of the past five years.
The demand for US treasuries and equities from foreign buyers has tailed off as the S&P 500 has struggled to maintain all-time highs against mounting tailwinds that include a topping in the profit cycle, a cyclically high price-to-earnings ratio and recently the geopolitical crisis in the Ukraine.
On the other hand with the risk of defaults seemingly over there has been a rush into European debt, particularly in the once despised periphery nations like Spain, Italy and even Greece. As yields have fallen investors have been counting their profits. That’s money being transfered from dollars to euros.
At the same time yields on US treasuries remain low despite the winding down of QE money printing. Cheap money and a low exchange rate is actually a bonus for the US economy and its recovery. The Japanese, Europeans and British now have the burden of overvalued currencies to contend with as their economies battle to emerge from years of low growth.
Is this perhaps what the Fed has in mind? A low dollar makes the US more competitive in global markets and should stoke up inflation to devalue nominal debt.
Of course that assumes that there is not a rush towards the exit door for the dollar. A currency collapse would be a nightmare of unimaginable proportions. Yet that is what some predict as a consequence of money printing on the unimaginable scale that has followed the global financial crisis.
In short, a hyperinflation in which money becomes worthless unless it happens to be in the form of monetary metals that have no central bank controlling them.
Maybe the currency collapse is too extreme as a scenario but a return to the very high inflation levels of the late 1970s and a bubble in gold and silver prices is certainly not a wild prediction. It is what many gold and silver commentators have been predicting for several years. They may be late rather than wrong in this forecast.
Current dollar weakness could therefore be more than a symptom of what has happened and more a sign of days to come. It’s also most likely flagging up an imminent stock market crash which is a panic to exit US assets.
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