The Dollar

In April, George Soros said, “The US-dollar is not strong because people want to hold the dollar, but it’s strong because people have debt in dollars.” The corollary to this is that people are trying to pay off their debt. They are creating demand for the dollar.

Who are they? Definitely not the government. If anything, they're borrowing more, and printing money out of thin air. So, what happens when the Fed prints money? Well, it makes it easier to pay off the debt, but the payment is also worth less.

The natural reaction of lenders will be to call in the loans, or find ways to limit their losses. Step one is to stop lending more money to the U.S. We can see that China has already started doing this by shifting their Treasury purchases to short-term bills. Japan, another major buyer has seen its trade surplus plunge, which means that they will not have the dollars to continue buying Treasuries as they have in the past. China has also shifted a lot of its investment into procuring natural resources.

Look at the difference between oil and natural gas. When oil it its low of $30 earlier this year, natural gas was at $5. Now oil is at $60, and gas is under $4. Why? My best guess is that natural gas is produced locally, while oil is imported.

And then there's the Fed forecast, which it downgraded yesterday. The Fed now expects unemployment at the end of the year to be in a range of 9.2-9.6%. Are they joking? Their previous forecast of 8.8% made in Janruary lasted only three months, until unemployment hit 8.9% in April. I expect unemployment to hit 10.1% by the end of August. The "stress-free tests" (as Mish calls them) assume a 10.3% unemployment rate at the end of next year.

The Fed has gone down the dollar devaluation road. I don't expect them to reverse course. The Treasury will have massive funding shortfalls this year. Longer term Treasuries are going to be under lots of pressure. The place to be will be in commodities and gold.

The consumer is not coming back soon. Look at California: their sales tax receipts were down 50.9% in April 2009 from April 2008! That's truly an unbelievable drop. This is an apocalyptic and depressionary number. And these are the green shoots?