The Official Dollar Report
Recent rate cuts, a weak economy, housing crisis, credit crisis and massive debt are all bad news for the dollar. I know there are a lot of dollar bashers, no I don’t think the Euro is good or the Yen, so don’t go there. But lets explore the underlying value of this fiat currency. More to the point why does it have value, and what backs it up?
According to fiat currency, the US dollar is supported by its economy and credit as well as the government’s ability to back it up. There are 5 components giving the dollar value,
- the US economy, measured in GDP stands at 13.84 trillion
- the credit line of the US, no real measurement, but is in poor shape
- Strength of the US government, its still powerful, we got a big military to enforce what we want
- major debt/deposit currency for banks and businesses around the globe
- largest stock exchanges and most business
Thus the US dollars value is supported by each of these different components, although there may be many others like commodities demands vs supply, which I discuss in previous posts.
And the negatives for the dollar:
- large amount of debt, 53 trillion of US economy/government debts
- government has huge fund shortages
- weakening economy, bad times for most people and business
- rise of economic rivals like China and India
- long term wars in the Middle East
- strong possibility of a high tax increase by democrats if elected
*Fed moves, and news or reports can be either pluses or minuses, although it seems to be more of a negative now.
So what does it all mean for the actual value of the dollar, how does all of this give rise to the value of that green paper money? Well according to an estimate of US M3, which is about 13.1 trillion or perhaps more, the FED stopped reporting it a while back in 2006 we have that many transactions with US dollars both printed and as credit loans. The economy in terms of GDP for 2007 at years end stood at 13.84 trillion, so the ratio of liquidity to US economy seems to be undervalued, so the dollar should be stronger, wrong. This neglects the fact that the US has 53 trillion dollars in totals debt and another 53 trillion in obligations for medicare and social security, which are set to go bust in the next 20 years.
The ratio of debt to M3 is 3.82, which means the US has $3.82 in debt per dollar of M3 liquidity, while it only has $1.05 in GDP per M3. Now combine the two -3.82+1.05= -2.77. That means the US has -$2.77 per M3 dollar, which means the currency is leveraged over 2 and a half times. Looks to me like the dollars got along way to slide, because it’s just a little overvalued.
As in this chart bellow, M3 is going to multiply by 4X by 2024, while, the GDP, will at best grow at 3% annually, meaning $13.84 Trillion will grow to $22.2 Trillion, while the US economy will only grow by 1.6X, which means the difference between the M3 money supply and US GDP between it will separate, at a rate of 1.4X per year. By this year, the M3 dollar vs GDP dollars will have equaled each other, and the M3 supply, calculated at an average increase of 10% per year will fly way far faster than the economy. Also compare that to the debt, which will increase at a rate of about 4X as fast as the economy. Last year alone, 4.3 trillion was added to the total debt.
Thus one can see that there is no real end tot his M3 cycle of inflation, debt and the economy, and if the debt bubble is popped, the M3 supply will go out of control, inflation will rise dramatically and the US economy, well it will have just about nothing to hold up its growth and it will collapse. In turn the dollar will fall apart and we will have, HYPERSTAGFLATION. Yes, you heard me there will be negative growth and massive inflation all at once, nailing the coffin shut for the US dollar and perhaps the US economy and power for good. So now that we evaluated what backs the dollar, we can see that the last 20 or so years have been built on borrowed time, money and an ever increasing line of credit, waiting to fail.
This crash will be devastating, and since no one is actually going to fix it, it may be prevented, but it will happen eventually. In terms of devastation, this will be far worse than any economic collapse in the last few millennia, since the demise of Rome. So what should you do to stop the madness, and protect yourself for the coming collapse, save money, don’t borrow more money unless you need it, buy gold/silver, see previous posts on silver and gold, buy hedges in commodities and build up a position, where you can survive the turmoil after the collapse, things could get ugly.
Budgets and trade
M3 and Credit
GDP and Money Creation
Money Supply and Inflation
Liquidity and Gold
Stocks, hard assets, Commodities and Housing
Well that is all folks, hope you leaned a lot and make safe investments to shelter you from what will be the dollars fall from grace.
-ATWDlimited Research, with borrowed charts and data www.nowandfutures.com