"Why quantitative easing is likely to trigger a collapse of the US Dollar"

[Yossarian]

Found here: http://www.hussmanfunds.com/wmc/wmc100823.htm

Note: In my opinion, Hussman is one of the few economists that I've read in the past several month's that seems to be honest and actually makes sense. I've been watching him and his weekly market comments for that reason. I believe they are all worth reading, IMHO.

August 23, 2010
Why Quantitative Easing is Likely to Trigger a Collapse of the U.S. Dollar

John P. Hussman, Ph.D.
All rights reserved and actively enforced.
Reprint Policy

A week ago, the Federal Reserve initiated a new program of "quantitative easing" (QE), with the Fed purchasing U.S. Treasury securities and paying for those securities by creating billions of dollars in new monetary base. Treasury bond prices surged on the action. With the U.S. economy predictably weakening, this second round of quantitative easing appears likely to continue. Unfortunately, the unintended side effect of this policy shift is likely to be an abrupt collapse in the foreign exchange value of the U.S. dollar.

How exchange rates are determined - a primer

To understand how currencies fluctuate, it's helpful to understand two forms of "parity" that operate in the foreign exchange markets.

1) Purchasing Power Parity (PPP): This describes the tendency for long-term exchange rate movements to reflect long-term changes in relative price levels between countries. Suppose for simplicity that a given basket of goods costs $10 in the U.S., and costs FC40 in some other country (where FC is simply a unit of foreign currency). If the goods are identical and can be transported costlessly without any barriers, one would expect that $10 = FC40, or that $1 = FC4. So the exchange rate would satisfy purchasing power parity if one dollar traded for 4 units of foreign currency. ..............................................."

 

[Mike]

QE combined with China basically stopping the buying of US treasuries and then below is possibly going to have an impact. I've been thinking that the economy has been on life support for a number of years though. Just a matter of when the puppet masters pull the plug.
http://cryptogon.com/?p=17296

Via: Financial Times:

A number of the world’s biggest banks have launched international roadshows promoting the use of the renminbi to corporate customers instead of the dollar for trade deals with China.

HSBC, which recently moved its chief executive from London to Hong Kong, and Standard Chartered, are offering discounted transaction fees and other financial incentives to companies that choose to settle trade in the Chinese currency.

“We’re now capable of doing renminbi settlement in many parts of the world,” said Chris Lewis, HSBC’s head of trade for greater China. “All the other major international banks are frantically trying to do the same thing.”

HSBC and StanChart are among a slew of global banks – including Citigroup and JPMorgan – holding roadshows across Asia, Europe and the US to promote the renminbi to companies.

The move aligns the banks favourably with Beijing’s policy priorities and positions them to profit from what is expected to be a rapidly growing line of business in the future.

The phenomenon will accelerate Beijing’s drive to transform the renminbi from a domestic currency into a global medium of exchange like the dollar and euro.

Chinese central bank officials accompanied StanChart bankers on a roadshow to Korea and Japan in June. The bank held similar events in London, Frankfurt and Paris.

Lisa Robins, JPMorgan’s head of treasury and securities services for China, said there had been a “spike in interest” from international clients.

An increasing number of Chinese companies have been asking foreign trading partners to accept renminbi as payment, said Carmen Ling, Hong Kong head of global transaction services at Citi.

 

[Neil]

Just a matter of when the puppet masters pull the plug.

Hmmm... I've found this sudden shift of sentiment by the MSM to be quite curious. About three weeks ago, 90% of their correspondents were yapping about the recovery and how we may not be going back to boom times, but everything was going to be more or less OK and economic indicators were steadily rising. You'd occasionally get someone on there who would look at less superficial indicators and basically say that the "recovery" was due to market manipulations of various sorts, but that was rare. That has been their stance for about a year now. Then all of the sudden about three weeks ago, there was all of this talk of a double-dip recession, possible depression, the Hindenburg Omen, miles of bad statistics that just "suddenly" and "unexpectedly" appeared, etc. Why is the MSM suddenly releasing all of this bad news about the economy when anyone with half a brain to look at the data could see that the recovery was mainly due to so-called stimulus, market tricks, and inventory building? Why are they suddenly telling us about the unreality of the "recovery" when it was sooo obvious from day 1?

There now seems to be a mild degree of panic among the financial community and this seems to be very much a repeat of 2008. The MSM suddenly releases all of this information about the economy in conjunction with an equity sell-off and then a crash occurs which creates pandemonium which led to the bailouts last time around. It'll be interesting to see whether the media is priming the populace for another October Surprise. One of the most interesting points of this whole economic situation is the fact that the world economy is an illusion. In my opinion the fundamentals have already gone to zero. Max Keiser states that 70% of stock trading activity is just computers pushing trades back and forth in order to create the illusion of demand. I think everyone in the alternative community knows that there hasn't been demand for US Treasuries for quite awhile. The Fed buys the treasuries either directly or through offshore havens such as the Cayman islands. Somehow, this foreign demand just magically appears, supporting the fantasy that the dollar is still "safe." This used to be a fairly controversial idea, but the Fed almost openly admits to the fact that it is the only customer for US debt nowadays. Anecdotal evidence now suggests that most "average Joe investors" have fled the markets entirely and are expecting some form of Armageddon as more and more money piles into metals. So that basically leaves the entire system being supported by a handfull of the PTB's fraudulent supercomputers. At this point, I don't think the PTB even have to create a crash, if they unplug their computers for a couple of days, the crash will probably come on its own. The fact that they seem to be pushing it now will only make it that much worse. And that is the "problem" with predictions. The PTB themselves control so much of the economy now that they can make the indicators do what ever they want regardless of the fundamentals. I think the structural problems they created are too deep for them to ever create a "good" economy again, but they could create another small crash, profit off the volatility, steal more money, and then recreate this veneer of business as usual for another year or two. Or, this could be the "big one" and the global economy could literally evaporate in a matter of hours. The trend so far seems to be a gradual "winding down" of the financial system. There are some days where the "spring" decompresses more than others, but all catastrophic predictions of a big crash have been overstated so far. I do think that most people and big players in the markets are far too dependent on the system as it is to really call Wall Street's bluff. If there is going to be a collapse, it is because they are being driven by the climate/ice age phenomenon, 4D STS, impending cometary bombardment, the Wave, or some other "far out" thing which will make their current comfortable system completely untenable.

As an interesting aside, both the Cassiopaeans and Clif High have hinted at something big emerging in the July/August timeframe that would define how things play out over the rest of the year. Clif sees it culminating in a November tipping point that would manifest as either climate change, economic collapse, or war on Iran. He also said in his ALTA reports that late July would be the absolute last peak for the world financial system and that the May 6 flash crash was a signal for the PTB's minions to stop supporting the economic system in August. In addition, the MSM would no longer be able to cover up the severity of the problem. I don't know if I believe all of that or not, but I can't quite throw it out yet either. It certainly is interesting how this economic situation has suddenly reappeared in the body politic. We do, at the moment, appear to be heading for another economic crash, but how it will play out and whether it will even be that big of a deal compared to the other things happening on the planet at the time remains to be seen.

 

[Mike]

Hi Neil, very nice summation. What was startling and what I think got everyones attention was how fast the housing market dropped in July and the subsequent things you pointed out.