Friday, November 5, 2010

Dollar Crashing

In a follow up to yesterday's headline of the Federal Reserve printing $600 billion more dollars...we have this expert confirming some of the thoughts we have expressed;

Federal Reserve policies have put the US dollar the risk of crashing, which will hammer consumers through higher prices, strategist Axel Merk told CNBC.

"It's with the best of intentions but I think it's a very, very wrong policy," Merk said in an interview.

"One of the key things here is a weaker dollar has traditionally not been inflationary because Asian exporters like to absorb the higher cost of doing business," Merk said. "There comes a breaking point when Asian exporters can no longer absorb that higher cost of doing business. They'll raise prices and guess what? They will stick.

Merk said forex investors still can navigate a difficult environment but need to be diversified and should focus on countries that will be looking to clamp down on inflation by boosting rates and backing their currencies.

"There's no such thing anymore as a safe asset. Cash is no longer safe," he said. "Do what central banks do, they diversify to baskets of currencies. That's what we try to do. It's a pity for any savers out there, but we'll survive. We'll get through this."

See it here; http://www.cnbc.com/id/40007252

Let me make one more stab of explaining how this all may come apart and lead to potentially huge inflation.

Let's say you have a yo-yo store in Minneapolis and you import all your yo-yos from China. You currently have 10,000 yo-yos on your shelf that you have priced to sell at $4 each. You paid $2 each to your supplier in China. Sometime in the future you will need to order more yo-yos from China to replenish your inventory if you are to stay in business. When you call your supplier, he says he now wants $4 each for the yo-yos. He explains that he hates to raise his costs on you but that the U.S. dollar simply isn't buying what it did last time you ordered...and he needs to stay in business as well. You have no choice so you order another 5000 yo-yos but now you have to raise your prices. Now for the yo-yo buyer in Minneapolis who comes into your store, the cost of yo-yos just went up 50%...but your wage (because unemployment is still 15%) hasn't gone up in 10 years. This is how the middle class will be crushed when the currency is devalued. Now take this example and apply it to just about everything you buy....because most of the stuff we consume is imported from other countries...and they will demand more U.S. dollars to supply their goods.

And this is what happens when the Federal Reserve prints copious amounts of money....and has nothing backing it. It just devalues the dollars that are already outstanding.

Hat tip to Mike S.

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