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By PosFCF
March 19, 2009

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A lot has been discussed here lately and I've got a few thoughts on the macro picture running around inside my skull. In an effort to capture them, I'll use this post.

Dollar Strength/Weakness versus Gold:

"Why were gold and the dollar rising at the same time?"

The dollar index is a portrayal of the value of a dollar when measured by other currencies. In many cases the other currencies used are those of our major trading partners. So...another way to look at the dollar index is that it is a measure of the popularity of the dollar versus the popularity of the other currencies.

During this worldwide economic contraction, several of our major trading partners had their currencies become more unpopular than our own. This then had the effect of having the US dollar appear to be strong.....and it was, but only if one keeps in mind that it is strong relative to those other currencies.

However, if the value of a dollar was truly increasing, then the price of gold would be steadily getting lower when measured by how many dollars it takes to buy an ounce of it. That has not really been the case with gold having recently touched $1000/oz.

Therefore one should not confuse a rising dollar index value with a rising dollar intrinsic value. Comparing it to gold is a good way to keep the two clear. If the dollar index is rising and the price of gold as measured in dollars is falling then the intrinsic value of the dollar is truly increasing.

THE FED ACTION TODAY:

With no Congressional debate, the US government has increased today its financial obligation by $1.1 trillion dollars. This occurred as the Fed announced it would increase its balance sheet by buying up to $700 Billion more in mortgage backed securities, $100 Billion more in Agency paper, and up to $300 Billion in longer dated Treasuries.

That brings the total increase of the Fed's balance sheet for this crisis up to $3 Trillion dollars. This is not money that is subject to open debate, not subject to Congressional approval.

This is also money over and above what the federal Government needs for its budget and budget deficit.

The question in my mind is no longer where will we get the money as printing it is a foregone conclusion. The question is, rather: "What will the ramifications be on the other money we need to borrow from the world?"

I can foresee a scenario in three to six months where the Fed's buying won't be enough to meet the amount we need to borrow because the other lenders have all pulled back. If that happens then what? The Fed increases its balance sheet some more (i.e. prints even more money?) If that happens everything goes ballistic. If they don't print more money and we can't get enough from overseas, that means interest rates skyrocket and the US recovery hopes get quite a drubbing. Rock, meet hard place.

RAMIFICATIONS:

My sister-in-law is a German National. She believes that saving is good and markets are risky so she likes to be debt-free and to keep the bulk of her assets in CDs.

I was talking to her this afternoon because my brother has an investment account with me and it had JAVA in it which I had bought for him in January. I was recommending he take his 89% profit by selling JAVA. He was out, she was in, so we talked....

She is familiar with what happened to Germany during the Weimar years. I suggested to her that it is possible that the US is in the early stages of what could become a Weimar-like outcome for the US.

That this is the first major world-wide economic contraction when all the major currencies were fiat only, none backed by gold or other tangible hard assets. That the pressure on the policy makers to "do something" is so great that they will inevitably yield to the pressure and print more money. That the Russian economist Kondratieff developed a business cycle and in it I thought we were in the competitive devaluation stage. See where that is on this chart: http://www.safehaven.com/article-3452.htm

I told her that the people who were, in effect, storing their money in safe places (like under the proverbial mattress) in Weimar Germany eventually needed a wheelbarrow full of that money to buy a loaf of bread.

I suggested that she consider buying some gold bullion and putting it in a safe deposit box until we see what the outcome of all this printing is going to be. That if she was considering buying bullion, to buy gold coins (like the Gold Eagle, Maple Leaf or Krugerrand) because then she wouldn't have assay problems when she wanted to resell.

I didn't push her on the topic, just urged her to consider it and to perhaps take action if she saw inflation coming into the pipeline.

I mentioned that the ones who haven't yet gotten wiped out were the savers who only used CDs and savings accounts, but that I thought it becoming increasingly likely that these folks might be soon in line for a major deterioration of their net worth.

Anyhow, I hope I'm wrong on a lot of this stuff, because the world and my life would be a whole lot easier if I am.

Poz