Tags: ashish | advani | dollar | easing | fed | us | economy

In Race to the Bottom, the US Dollar Easily Wins

By    |   Wednesday, 10 Nov 2010 10:43 AM

It was back on Aug. 11 when I had written about QE2.

While I was jesting about the fact that QE2 meant a cruise ship to me when I was a child, I was very serious about the consequence of QE2 and what it would mean for the US dollar.

For those who do not remember – QE is short for quantitative easing.

For those new to this class, QE means when the central bank decides to print money (conjure up cash from nothing) and circulate it in the market. The central bank lives in a mythical world where it believes that its actions will spur the economy.

The fact that this is not true has been proven time and time again in many countries.

Yet, our central banker, Ben Bernanke, the honor student of the Great Depression, has not learned his lesson.

Despite watching other central-bank interventions in the free market and failing, watching Japan fail during the last 12 years at QE, having himself failed at the first attempt last year – Bernanke took it upon himself to issue an additional $600 billion during the next few months into the system.

And the reaction: Gold soared from $1,350 per ounce to $1,420 (5.2 percent). Silver jumped up from $24.50 per ounce to $27.50 (12 percent) during the past one week.

Why?

Welcome to the class on inflation.

Let me put it in very simple terms. Let’s say the United States (the country) was a corporation: USA Corp. And it had intrinsic value of $1 million.

And let’s say USA had issued $1 million in bills. So the value of each dollar was $1.

Now let’s say the central bank decided to issue another $1 million into the market in fresh dollar bills. Mind you, the intrinsic value of USA Corp. has not changed. It is only that we have $2 million in dollar bills.

So the value of each dollar bill is now 50 cents. And that folks, is what quantitative easing means.

So, Bernanke has effectively devalued the value of the U.S. dollar by another $600 billion. What a travesty.

And the world's response:

Russia: Vladimir Putin, premier, has demanded that the U.S. should consult with the G-20 before enacting such drastic measures.

China: Dagong Global Credit Rating, a state backed rating agency, has downgraded the U.S. to A-plus from a double-A rating.

Germany: Wolfgang Schauble, finance minister: With all due respect, the U.S. policy is clueless.

USA: Sarah Palin: Bernanke should cease and desist from debasing the dollar.

This list is long and full of very senior financial officials around the world who believe this to be a very poor idea.

The reality of the situation is that QE will not work. It will only increase the problems in the future when inflation comes at us in a tsunami fashion. We will have dug a hole and cemented our feet in it as the tidal wave approaches.

But for now, the stock markets are treating this with joy. Similar to a heroin addict who has been given a fresh stash to feed their habit.

The spin doctors at the White House and other government goons such as Tim Geithner are trying to convince the world that this will dramatically help the U.S. and therefore the world.

What they do not acknowledge is that the world is getting used to dealing with each other without the aid of the U.S. economy.

While I will be the first to acknowledge we are not quite there yet, the situation is getting grim.

The U.S. languishes with 2 percent GDP growth while Asia grows at 8 percent. Even exports in Germany and France are beginning to show real life.

At the current rate, the day when the U.S. economy and U.S. dollar become irrelevant, is not too far into the future. I can predict that it will come in the next decade.

Watch your wallet – Bernanke is on the prowl.

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Advani
It was back on Aug. 11 when I had written about QE2. While I was jesting about the fact that QE2 meant a cruise ship to me when I was a child, I was very serious about the consequence of QE2 and what it would mean for the US dollar. For those who do not remember QE is...
ashish,advani,dollar,easing,fed,us,economy
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2010-43-10
Wednesday, 10 Nov 2010 10:43 AM
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