[ Ed. note – The author of the following piece makes a strong case for why the dollar is headed for collapse. The Fed, he says, is planning to deliberately trigger a financial crisis, and he discusses how that will lead to a period of hyperinflation similar to what existed in the German Weimar Republic in the early 1920s. Basically “Quantitative Easing” is being ditched and what will be imposed instead is its reverse, “Quantitative Tightening.” ]
Video Rebel’s Blog
On the Bright side it is not looking good for the US War Machine either.
Jim Rickards is a financial consultant to the CIA and Pentagon. He participates in War Games. Of the 2009 War Games he recently said that the object was not to defeat the enemy or win the war but rather to inflict relatively more damage on them than you. In case you were wondering about the Pentagon that statement should remove all doubts. They are are not looking for another General Patton.
He also mentioned Pentagon plans to strike North Korea in the next 6 months or so. Of course Russia and China have said not to consider a first strike option. More about WW III later.
But first I want to explain why we can conclude the Federal Reserve under Janet Yellen will kill the stock and bond markets and cause foreign investors to flee the US. When foreigners dump dollars by the trillions to flee the crashing US stock and bond markets, we will have sharply higher prices. This will dramatically cut wages and pensions overnight. It will also cut Pension fund holdings so people retiring in 15 to 20 years will also be severely hurt.
Quantitative Tightening has begun. The average person understood Quantitative Easing. It was just another world for Money Printing. It lowered interest rates. It forced bond holders to either buy risky junk bonds or to buy over priced stocks. Central Banks also used QE to keep Wall Street billionaires out of prison. The US government bought trillions of dollars in fraudulent (MBS) Mortgage Backed Securities.
This is how Rickards explained QT. Various Central Banks including the Federal Reserve have been buying a trillion and a half dollars a year of stocks and bonds under the Quantitative Easing program which allowed them to create trillions of dollars, pounds, euros and yen to buy stocks and bonds. But the Federal Reserve has entered Quantitative Tightening (QT). They were buying $10 billion a month less in MBS but upped that to $20 billion a month less starting October 1st. They had been buying Treasury bonds under QE. Now they are letting $20 billion of those bonds mature every month. This forces the US Treasury to sell new bonds elsewhere or more likely to run an even bigger deficit.
QT will, by design, force interest rates higher. The FED under Yellen hopes to reduce their Balance Sheet and to raise interest rates so they can fight the next Depression by lowering interest rates and expanding their Balance Sheet (i.e. Print Money.) This cannot work. The US stock market is at dangerously high levels. It is due for a severe correction. When, not if, foreigners sell their US stocks and bonds, they will take their money elsewhere.
Instead of increasing their Depression fighting tools (i.e. printing money and lowering interest rates), they will be starting one of the greatest Financial Panics of all times. Where would the stock and bond markets be if Central Banks had not bought a trillion and a half dollars a year of stocks and bonds? My regular readers know that the CIA has a secret slush fund from their Afghanistan heroin profits that was used to buy an additional trillion dollars in US bonds to prevent the dollar from sliding into oblivion.
This Financial Panic could have severe consequences.
If foreigners including foreign subsidiaries of US corporations sell a few trillion dollars in stocks and bonds, they might take their money out of the country. They could dump the dollar by buying commodities or foreign currencies, real estate and other assets. This will spike prices to consumers. High prices could force consumers and investors to spend their dollars as soon as they receive them. That is what happened in Germany in 1923 and Zimbabwe in 2008. On July 4, 2008 the price of a bottle of beer rose from $100 billion Z to $150 billion Z between the hours of 5 and 6:30 PM. It won’t have to be that bad here for the US to have Nationwide Food Riots. A 20% cut to wages and pensions will make it impossible for the bottom 120 million Americans to feed their children.
Rising prices cut current wages and pension payments. But think what a Financial Panic will do to pension funds scrambling to fund retirements for tens of millions of people expecting to collect their funds in 10 to 20 years. There are lots of cities, states, unions and corporations with underfunded pension plans. Cutting the value of their stock holdings in half will do them no good. States and cities could ask taxpayers to pay more taxes but good luck with that when 120 million working and middle class people can’t afford to pay for rent, utilities, gas and food.
The US survived the 2007-2008 crisis because the Federal Reserve could print massive amounts of dollars and lower interest rates. No more.
China, Russia and their allies from Brazil and Venezuela, to South Africa to Iran and Pakistan have been challenging both the international reserve status of the dollar and the Petrodollar. The US dollar replaced gold and the British pound as a reserve currency by the Bretton Woods agreement at the end of WW II. The US was represented by Harry Dexter White. John Maynard Keynes represented England. He had wanted to use an instrument similar to the SDR but was over ruled by the Americans.
China is attacking the Petrodollar with their yuan convertibility to spot gold. China’s goal is to replace the US Dollar with the UN’s SDR. Over half of all US Dollars are overseas. When, not if, the Dollar is even partially replaced by gold, the yuan and the SDR, we will hit Hyperinflation. Germany went into Hyperinflation in 1923 because the public lost confidence in the Mark. Velocity increased. People refused to hold Marks. They spent them as soon as they were received. That will happen to us soon. People overseas are only willing to take dollars because they can buy US stocks and bonds and liquidate them in seconds.
I define Hyperinflation as starting at 25% for a reserve currency. At that point everyone would dump the dollar. In 1980 Paul Volcker increased rates to 18%. We barely survived. We would not survive that today, And forget about 25% inflation for a reserve currency.
Janet Yellen and the Federal Reserve have entered Quantitative Tightening (QT). She will cause a Financial Panic which will force foreigners out of the US bond and stock markets. China is inviting them to enter their oil, gold, SDR and yuan markets. China has to finance the New Silk Road initiative. They have promised trillions of dollars in new investments in Africa, Latin America and the Silk Road initiative. These opportunities were not available ten years ago.