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Expect raising rates…for decades

By Great Iota:

               It is all about the US dollar, the all mighty greenback.  We as a nation are approaching dangerous times.  Yet everyone is missing the economic catastrophe that has already started.  You are probably wondering what is this catastrophe and how can everyone be unaware that it is happening.

                Let me take a second to explain how the global economy is linkage together (probably better than most economists).  Few will deny that the US dollar is the reserve currency of the world.  With this status, comes the fact that nearly all global commodity contracts are written in dollars.  So, when the US dollar strengthens like it did yesterday, commodities will feel a pressure down because they become more expensive for other countries to purchase (the reverse is also true).  This is perfect for the bankers of the world because it makes manipulating the economy easy just by controlling the flow of the US dollar.  For example, in a secular bull market, you will see interest rates decreasing because the cost of borrowing dollars must to go down to make investing desirable (last 20 years ring a bell?).  In a secular bear market, you will see interest rates increase because the cost of borrowing dollars must go up (next 20 years maybe?).  Guess who is borrowing dollars nearly every day (hint 10 year notes yesterday)?  Yup, you guessed it; the Federal Reserve.  Guess who will be lending dollars as rates go up a few quarters after they stop borrowing?  In case you didn’t understand what I just said…I just basically told you that rates will be going up for many years every time equities go up.. 

One of my favorite quotes is by Thomas Jefferson, “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs. “

                This is a powerful quote because it is inherently true, but I can’t agree with Jefferson for one simple reason.  That reason is who else should control the issuance of money?  Goldman? Politicians?  I much rather have private bankers who’s fortunes depend on proper management of the flow of money.  If they screw up, they basically wipeout all their personal wealth (and most liked get hanged) by the masses. 

                But here is the problem that an engineer can see but an economist cannot.  The currency system is now broken.   There is no amount of manipulation that can keep a broken system intact for ever.  Something has got to give and that has already slowly started to happen.  Other countries are realizing that for them to grow, they most break their dependency on the dollar.  When we have a limitless supply of dollars with increasing population and decrease natural resources…at some point either the dollar will become worthless or people will be dying by the millions.  Other countries will want to buy resources as they develop.  As they use their reserve dollars (USD gains in value against their home currency) the price for the natural resources goes up until it reaches a level that they cannot afford. This means to prosper they have to hold other things beside the dollar.   Yet, because China is pegged to the USD every transaction that China makes will someday be a huge dislocation in the currency market when they do decide to float their currency.  Like the 10 Billion oil purchase from Brazil.

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