US Dollar

[Buff]

Originally posted by wig@Dec 4 2003, 02:11 PM
Buff,

I won't take issue with your analysis. I too believe the US dollar is the midst of a bear market that will last into 2006 at the least, BUT...

The Fed has been creating money steadily for a long time. Why did the Dollar peak in 2002 and not sooner?

Wig, most Americans have never even heard the words Partial Reserve Banking System, much less know what it is. Fewer have any idea what the Federal Reserve Board actually does aside from setting an interest rate.

But even for those of us who do know, we know it takes time for all that new money to work its way through a system. First the big banks get it, then they lend it out mostly to financial institutions who in turn lend it to other financial institutions and capital investment lenders and businesses.

Then these lending institutions, looking for a return on all that new money, lend it at low rates for startup capital for new businesses or as loans for expansion for established ones. And business can hardly pass up these monster loans at low price (low interest rate), so they borrow and produce more goods and services (by employing more people and buying more capital and equipment and other factors of production) -- and the economy looks like it's growing.

But, of course, we get a bust when it turns out the demand for these new/extra goods and services never really existed -- it was all a monetary phenomenon brought about by expansive monetary policy. Inventories pile up, business cuts back, workers lose jobs, etc.

In other words, it takes a while for the inflation to be recognized recognized.

Mark my words: the dollar is gonna keep dropping and gold is gonna keep climbing.

If you're a betting man, shorting 10 year bonds would be a good idea -- as inflation jumps, so to will interest rates, and bond prices will plummet.