Handwriting on the Wall

The U.S. Dollar Is Going Down!

“‘Think of it, people were buying (U.S. Treasuries) as if the supply were limited. They were buying government securities, which yielded practically nothing. They were buying bonds denominated in currencies that the central banks explicitly vowed to depreciate. Why did they do that?’ So, I think posterity will ask that question. Certainly I am asking that question now, and I can’t come up with a really persuasive answer.” — James Grant, Grant’s Interest Rate Observer

DXDuring the 1990s, the U.S. dollar was without question the number one reserve currency in the world. That may still be true. But, can there be any doubt that the dollar’s days of being the uncontested number one currency in the world are numbered?

I have been thinking for a very long time that the dollar was on a road toward its demise starting in 1971 when Nixon not only caused the U.S. to default on its Bretton Woods agreement and thus totally bastardized the dollar as defined in the U.S. Constitution. But I began thinking about this issue more directly this week when I read yet another analyst suggesting that it was time to short U.S. Treasuries. My first thought was, “How many times have I heard or thought this over the past number of years, only to see U.S. Treasury rates fall still further?” The analyst I’m speaking of was Douglas A. Kass of Seabreeze Partners.

One of these days, of course, the 34-year bull market in U.S. Treasuries will end. So I wondered what in the world could make it different this time. And then it hit me! It looks to me as if the U.S. is now facing a tectonic geopolitical shift that could very suddenly shake the confidence in the dollar. And believe me, aside from gold market manipulation to keep the price of gold suppressed and a military-backed petrodollar to make sure there is a constant bid under the fraudulent dollar, there is little holding up what is still the world’s reserve currency. And if the U.S. currency goes down, what is there to keep ridiculously overpriced U.S. Treasuries inflated?

A Major Tectonic Force Is Shifting Economic and Political Alliances

The amazingly sudden and defiant turn of America’s closest trading partners to join the Asian Infrastructure Investment Bank (AIIB) is, in my view, HUGE! I think it results from quietly building pressure against the abuse of the U.S. and its money-printing escapades, which have increasingly been hurtful to the world both in terms of wealth confiscation and military force that is depriving nations of their sovereignty. Certainly the spying on citizens and leaders of our closest allies revealed by Edward Snowden started our allies to feel hostility toward the U.S. But the constant use of dollars to bid away assets and to use U.S. controlled institutions like the IMF and the world bank to dominate lending practices and impoverishment of foreign countries to the benefit of the U.S. has been a force that certainly has been noticed by keen observers in America’s allies.

The grease was put on the skids for America when Bernanke started printing massive amounts of money to bail out the fascist bankers who own the Fed and in fact our government. To get a sense of how Bernanke undermined the U.S. dollar, take a look at the chart below. The data points there represent the percentage of Global U.S. Dollar Liquidity held by foreign central banks. With all the Keynesian artificially-orchestrated growth created out of massive debt money creation by the Greenspan Fed, the world was indeed conned into buying American exceptionalism and its dollar-denominated debt.

foreignBut note the precipitous drop in the willingness of foreign central banks to hold U.S. dollars, as evidenced by the chart on your left. Global U.S. Dollar Liquidity, which was a metric created by Charlie Clough of Merrill Lynch during the Asian Crisis, is comprised of the Federal Reserve Monetary Base plus dollars held by foreign central banks. The world was having one hell of a party as it drank all the Fed’s dollar-spiked Kool-Aid it could get its hands on. In fact, the total measure of foreign ownership of this measure of the world’s reserve currency reached 73.4% by September 22, 2008, just before Lehman bit the dust and triggered the greatest financial crisis since the 1930s.

You can see the precipitous drop since September 2008, but the immediate drop below 60% was just the beginning. During 2014 it looked like the percentage of foreign holdings might base at around 45%. Not so! During the past two weeks, it fell to 43.8%.

There is no reason to think this downward trend in popularity of U.S. dollars by foreign central banks will change any time soon. Indeed, one of the events that causes me to think we may start to see an acceleration of decline in dollar popularity—and with that a massive run out of U.S. Treasuries—has been the flood of some of America’s closest trading partners to the AIIB, as noted above. Referring to England’s request to join the AIIB, on Friday, March 13, the front page of the Financial Times boldly declared, “US attacks UK over China Stance.” That was not only a slap in the face of the U.S. by our closest trading and war mongering partner, but it also opened the floodgates for some of our other closest trading partners to tell the U.S. that they too would be looking after their own commercial interests and if the U.S. didn’t like it, they could take a hike! Immediately after England applied for membership to the AIIB, Germany, France, and Australia also applied. In my view, this bold defiance represents a tectonic shift away from the U.S. domination simply because these countries have to do what is in their best interests economically.

In addition, the European countries are not only tired of being asked to pay a heavier economic price for sanctions against Russia and Iran but they are also alarmed at prospects of a major war in their back yard while the U.S. continues to enjoy the benefit of an ocean separating us from war—even a nuclear war that our neocons seem eager to engage Putin in.

And so, I do not think the new lows in the percentage of dollars held by foreign central banks over the past two weeks is an accident. I think we are likely looking at a major turning point in which the world finally is brought to its senses and realizes America is not only robbing countries of their rights to remain sovereign but also is literally picking their pockets through the abuse of power gained as victors of WWII. Keep in mind that the U.S. has never removed troops from Europe and Japan. But it seems to me the rebellion against America may now just be getting started. If so, my guess is the con game engaged in so successfully by Henry Kissinger when he instigated the petrodollar to replace the legitimate gold-backed dollar will also lead to a massive increase in U.S. dollar-denominated interest rates and with that a new currency regime—most likely one that China and the other BRICS have a major say about. And very likely it may include gold, of which I’m guessing the U.S. has far less than it claims to have.

Let me suggest that there may be one more indication of a move away from a U.S.-dominated geopolitical landscape and that is the agreement with Iran to try to control that country’s development of a nuclear bomb. I spoke with Daniel McAdams (you can listen to that discussion at jaytaylormedia.com/audio) about that topic and there is no doubt that the restrictions placed on Iran will most certainly restrict it from threatening Israel or anyone else with nuclear weapons. Neocons will oppose it but if they cause the U.S. to keep that agreement from happening, the U.S. will lose even more of its capital to the Europeans. Indeed, it seems to me as though Obama is simply reading, much more effectively, the handwriting on the wall in terms of geopolitics and economics than hard-line U.S. neoconservatives.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.