Tuesday, August 23, 2011

Axel Merk Remains Bullish on the Euro

Axel Merk, who manages Merk Hard Currency Funds (MERKX), is interviewed on the Daily Ticker (Yahoo Finance) by Aaron Task on the 23rd of August 2011.

Merk thinks the Euro will outperform the US Dollar because the ECB prints less money than the Federal Reserve and Europe has implemented austerity measures, which we have yet to see in the US.

He also believes that after a European fiscal framework is implemented, we should see Eurobonds. However, he warns that this is a long process and there is no silver bullet to solve the current European currency crisis.

Friday, August 19, 2011

Peter Schiff: No ceiling for gold prices

Peter Schiff interview on Russia Today on the 19th of August 2011 about the Gold market, explaining why it is not a bubble (Gold mining companies shares are only 10% higher than when gold topped at 1000 in March 2008) , that he cannot put a floor on the price of currencies (and no ceiling on the price of gold) and that the bubble is instead in US treasuries.

Jim Rogers: World to suffer a new currency crisis by fall

Interview with Jim Rogers on Russia Today on the 11th of May 2011 where he discusses the possibilities of a US dollar currency crisis by fall 2011.

Thursday, August 18, 2011

Why is the US dollar a doomed currency ?

First of all, the US dollar is a weak currency because of the USA current account deficit which stands at 561 billions dollars in 2010 according to Wikipedia List of countries by current account balance. The US is actually last in this ranking (191), with Spain being number 190 with a current account deficit of 6.740 billions.

A large current account deficit is the result of an imbalance between exports and imports.

Second, the USA also has massive debt obligations with current government debt of 14.6 Trillions (Source: Debt Clock) excluding unfunded liabilities. That debt represented 92.7% of GDP in 2010 according to the IMF, and is close to 100% now. Some historical studies (cf. "Growth in a Time of Debt", Reinhart and Rogoff)explain that when a country debt to GDP is over 90%, the likelihood of paying down the debt decreases significantly as it affects economic growth rates negatively.

There are no clear number for unfunded liabilities, as the total debt varies between 60 Trillions and 115 Trillions. But consider this: The total net worth of households and non-profit organizations in the US amount to less than 60 Trillions as of today (See Business Insider Chart below).

Such a large amount of debt will never be repaid, and the US has few options:
  • Default on the debt directly. This is highly unlikely.
  • Massively cut expenditures (e.g. military) and decrease benefits (social security, unemployment benefits) and possibly increase taxes at the same time. This is not very likely and its implementation may not be successful. This would actually be supportive for the US dollar, but painful for the economy in the short term (1 to 2 years).
  • Print more money (e.g. Quantitative easing) in order to pay for debt. This is called monetization of debt. This is the easy way out and the most likely. However, this creates inflation and will lead to a decline in the value of the USD dollar overtime and may even lead to a full blown currency crisis leading to hyperinflation.
  • Tuesday, August 16, 2011

    Mike Maloney: The Coming Debt Collapse and Currency Crisis

    Great 90 minutes video with Mike Maloney where he shows long term investment cycles including a part explaining how a debt collapse will occur followed by massive money printing where a currency crisis will happen with the US Dollar (hyperinflation).

    Monday, August 15, 2011

    Currency Crisis Definition

    A currency crisis - also called a balance-of-payments crisis - is a speculative attack in the foreign exchange market. It occurs when the value of a currency changes quickly, undermining its ability to serve as a medium of exchange or a store of value. Currency crises usually affect fixed exchange rate regimes, rather than floating regimes.

    A currency crisis is a type of financial crisis, and is often associated with a real economic crisis. Currency crises can be especially destructive to small open economies or bigger, but not sufficiently stable ones. Governments often take on the role of fending off such attacks by satisfying the excess demand for a given currency using the country's own currency reserves or its foreign reserves, historically usually in the United States dollar, Euro or Pound sterling.

    There are 3 generations of currency crisis models:

    • First generation models: Speculative attacks in the gold market (Fixed exchange rate with a commodity)
    • Second generation models: Doubts about whether the government is willing to maintain its exchange rate peg (Fixed exchange rate with another fiat currency)
    • Third generation models: Interactions between the problems in the banking and financial system and currency crises