Rumours of the U.S. Dollar Crash in September/ October 2009


Currencies / US Dollar

There have been disturbing stories/rumors going around that the USD is poised for a crash episode in the Fall. The stories are basically anecdotal. One suggests that US embassies have been told to gather a year’s local currency in their host country. That is one example.

That story has also been denied by others in the US embassy organization, again, not officially, but anecdotally to me. We view these particular stories as more or less just rumors.

Putting that aside for a moment, the reality is that the USD has fared far better than a lot of people thought by now. It’s around 78 on the USDX (US Dollar currency basket index, heavily Euro weighted). If you remember in 08, the USD went do around 70/72 around June/July, then bounced eventually up to 88 amidst that commodity crash after Summer 08.

Before we continue, consider this:

If the USD is on the verge of a real crisis, and not just a fall in value, then why is it that:

US Treasury rates are still at historic lows (yes I know the Fed is buying them)?
The USD is still at 78 on the USDX, where the last low point was about 70 a year ago?
There is still a huge demand for USD currency to unwind bets overseas?
And more, these are just a few major points
Now, although the USD has some terrible issues, it has done well despite them, and in fact, from what I can tell, was the only thing that held the world banks from collapsing twice in the last two years, mainly by the Fed/US Treasury backstopping everything out there – every market- with about $13 trillion of various bailouts and guarantees. That was done not only here in the US financial world, but in every major other economy with US money.

For example, when the first panics started in Fall 07, then repeated in Fall 08, there was a run into the USD as European banks and such all saw USD denominated debt and investments unwinding they needed hundreds of billions of USD each month, not rolling over, and the Fed did huge currency swaps (swapping USD for Euros etc) to help the EU/ECB cover that. Those amounted to near $1 trillion or more if my memory serves.

If you recall then, there were two instances in Fall 07 and Fall 08 going to the end of the year where there were runs so bad on European banks that they just about shut down en masse. The US had its own version of this in Fall 08, where a clearly panicky Paulson told the US congress that unless the US backstopped its banks and such, that we were within days of a total bank collapse, bank holiday, and shutdown of the US economy – with unimaginable consequences for not only the US but the rest of the world economy.

The $2 trillion US bank run

In fact, one astonishing story by a US congressman later on the events was that one fateful day in Fall 08, there was a run on US money market funds and banks to the incredible tune of $2 trillion in a mere two hours! And until the US Treasury stated they would guarantee US MMFs, the Fed and Treasury stated they were going to see a $5 trillion run on US financial institutions by the end of that day. $5 trillion in one day. The Fed stated they were not going to be able to stop it until the MMF guarantees stopped it. We were that close to financial Armageddon, and that congressman got in a bit of hot water for letting that out 6 months later in an interview.

If you remember, the UK banks and EU banks had their own versions of this around the same time.

In fact, we have basically made a profession of tracking this mess for two years, and our own counts of the money the US threw at the problems were always ahead of the media, first $2 trillion, then 3, 4, 5, 8, 12, 13 trillion… and counting. Pretty soon, even our heads were spinning, things were happening so fast.

But, rather than recap all this, what I want to do is jump ahead to why I think the USD will hold together, albeit with ongoing scares for a while.

If you can imagine the amount of money the US stood behind the world financial system with, you will perhaps appreciate why the USD is as strong and influential as it is. That is not to say its days are not numbered, just why its still alive and kicking…The USD has the size to accomplish these feats.

If any other central bank had tried to backstop the world financial system to the tune of $13 trillion, often at the drop of a hat, we would have never made it past bank holidays and a total world economic collapse. No other financial entity on the planet has the size and big enough footprint to have done that so quickly.

Albeit, the US did that by basically doubling the national debt. And, believe it or not, the US can still borrow and can still carry on, with heavy strain. But, the doomsday is not yet here. Frankly, that is good news although the new debt is horrifying.

If you look at the thousands of stories of the evolution of this massive USD based world financial bailout, it’s clear that the USD was used to:

Backstop every market out there and every bank/institution who needed it
Got every other central bank/treasury out there who had any money to get behind the USD and backstop it as well, basically like everyone holding hands together, looking over a chasm. So far, it worked, although the ultimate outcomes are not good. But, I am not sure we had a choice, unless you are like the purists who believe that letting a bankruptcy happen is ultimately the only solution.
But, in this case we were talking the complete bankruptcy (insolvency actually) of the entire world, with for sure worldwide anarchy that might have taken 3 decades to get under control, if it ever was got control of. I am not exaggerating.

I know Paulson, with the immense bailouts he scared the US congress into, is vilified as the prime villain of public bailouts, but he was asked recently by Congress what would have happened if he did not do what he did. He simply stated, well put in my view, ‘that he did not know, but fortunately did not have to find out and did not even want to think of what would have happened, and that we would never know since those episodes have passed us. ‘ (my paraphrase)

But from what we know, there would have been a total world financial collapse on two occasions, actually more than two, but I specifically remember two in 07 and 08. And, if you wonder what would have happened if every financial institution had a run on it, and basically went insolvent, imagine food stores running out in less than 3 days, with more or less permanent shortages and riots, and no gasoline either, etcetera, you get the idea. That threat was real enough that the US Congress had a meeting in secret about it, the details of which come out now that they were planning for a possible US insurrection based on a financial collapse and supply chain collapse. Yes, the threat was right on our backs- it was real.

The USD, the US Fed and the US Treasury stopped it from happening. Albeit at great cost. Between massive guarantees of not only US banks but foreign banks, $trillion dollar currency swaps as needed to Europe and the world, and whatever trillions here and there, the mess was averted. Granted, the ECB and others did their parts too, spending way more than they ever wanted to. Recently, the ECB for example just offered unlimited credit to EU institutions, for the same reasons as the last two years, to make them flush with money for the end of the year run on cash. That was $600 billion alone. So the bailouts and backstops are continuing apace.

So, the Western financial system basically slammed down the public credit card when the mess appeared, and is still using it heavily. Let’s not get caught up in the other part of the story, namely that these huge bailouts will probably lead to world stagflation – that is another issue. Getting food on the table now was and is the issue for the immediate term.

So how is it the USD is going to collapse in the Fall?

But, to get back to our story, only the USD had the size and footprint big enough to accomplish that. And here is the point, if the USD is in such a mess (and it is) then how in the hell did it get used to save the world from a total financial meltdown on two occasions? It did get used to do that, and it did work – sort of. That tells me the USD is not right at its final point of collapse. That makes it very unlikely in my view that we are going to see a USD collapse this Fall, although we cannot ever rule out more USD scares and chaos. And we cannot ever lose sight of the ongoing risk of an out of control USD crisis itself appearing either, but this is better than what the alternatives appeared to be at the time. The other central banks voted clearly on that and helped support the USD. And I expect that to continue for a while too.

Now, if the rest of the world had not supported the USD amidst these crises, we would have seen a total world economic collapse. I am not talking about a mere recession or depression, I’m talking empty stores for God knows how long and riots world wide. The US Congress knew this, the ECB knew it, China knew it, and Japan, and everyone else. That became rather clear at the time it was happening. So everyone pulled out all the stops to avert it, even breaking their own financial laws to get it done fast.

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