For All Those Who Said It Couldn’t Be Done

Economics, Premium POM11 Comments

Well, the Federal Reserve just raised rates once again.  This is something which so many stated without a doubt could never happen without the whole system imploding.  But it is in fact happening and the Fed has even now rolled out their plan to reduce the amount of Treasury bonds and mortgage backed securities which they hold on the books while increasing rates even further within this calendar year.

This normalization of monetary policy and reversing of QE is something which we have been predicting here on POM since the beginning of 2014.  This prediction of course went against almost all others who predicted doom and gloom.

The first Federal Funds rate hike happened in December of 2015.  This was the first increase in almost a decade.  The rate moved from the 0% – 0.25% range to 0.25% – 0.50%.  This was followed in December of 2016 with another increase to the range between 0.50% – 0.75%.

A few months later in March of 2017 the Fed increased again to 0.75% – 1.00%.  Now in June the rate increased for the fourth time 18 months to 1.00% – 1.25%.  With each increase the doom and gloomers yelled that the system could take no more increases.  Each increase was a step closer to destruction.  Some even claimed that QE could never be stopped or even reversed.  We conveniently forget about all of these horrible predictions.

The truth is we all make bad predictions from time to time.  I made one a few years back that gold was going lower.  It did for awhile and than recovered again.  I still believe that it will go sub-$1000 once the Chinese renminbi reaches a level of internationalization which will force it to sever the exchange rate arrangement it still maintains with the USD.

But these end of the world predictions were so wrong about everything that it’s a wonder anyone even listens or reads the material of those who made them.

Of course there will be some volatility and some companies and banks may not make it as the system rebalances and monetary policy is normalized so it can  be aligned with the multilateral framework.  Even some average people who are over-leveraged may lose their shirts.  But such situations will in no shape or form reflect the type of devastation which has been predicted for so long.

Additionally, this will not kill the dollar.  The dollar is not going to die.  The dollar will be around for a longtime to come after its powerful reserve status has been reduced.  Just like the British pound still exists now almost a century after it lost its exorbitant privilege.

It is more likely that the rate increases and normalization of policy will strengthen the dollar to the point were it will be having a negative effect on the international monetary system and other nations.  China will use this as the pretext to end the fixed rate band it maintains with the dollar.

The Trump administration have already made it clear that they don’t want a strong a dollar.  As such, a strengthening dollar could provide the perfect pretext for the Treasury to make sudden and dramatic changes to the dollars exchange rate arrangements.  Negotiating new trade deals will be a part of this process.

It should now be very clear to longtime POM readers that the thesis presented here for the last 4 years is almost spot on, with only minor fluctuations in timing and tweaking.  Such huge and foundational changes to the worlds monetary and financial systems do not happen over night.  It takes time and patience with minor adjustments made to account for real world changes.  But the trend is clear.

More rate changes will come.  Bond reduction and the reversing of all the QE that took place will continue.  There will always be those who push the doom scenario for what ever reason that encourages them to do so.  Every time there is a drop in the market or something goes negative the chorus will get loud and exclaim the end is near.  – JC

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JC Collins can be contacted at jcollins@philosophyofmetrics.com

11 Comments on “For All Those Who Said It Couldn’t Be Done”

  1. If the dollar loses reserve status, would that not result in a lower demand for dollars, making them less valuable relative to other currencies, commodities, services etc, therefore the price of gold in dollars would increase?

    1. “All things being equal” is the preface to every economic axiom. Let’s look at the first part of your statement, “If the dollar loses reserve status, would that not result in a lower demand for dollars, making them less valuable relative to other currencies….” This is true, all things being equal. But all things will not be equal. So what scenario could include *both* a loss of reserve status and a leveling or increasing dollar value? Well, it so happens the SDR scenario fits nicely here. As I appreciate it, part of JC’s thesis includes a new wave of “liquidity” in the form of SDRs being issued in quantity. But the IMF can’t just massively “print SDRs” and have it suddenly accepted as a defacto global currency. How then? Like every central bank, the IMF will/must create currency out of debt. What debt? Consider the massive debts of the U.S., Japan, E.U., U.K. and China… the very components of the SDR. Upon the next international financial (debt) crisis, the major power central bankers, along with the IMF, get together and announce a plan. The IMF will rescue the global financial system by buying the collapsing sovereign debt of nations, in exchange for newly created SDRs. This is the liquidity injection of the new currency, and it “mops up” massive amount of dollars, yen, euros, pounds and renminbi in one fell swoop. Mopping operation complete, the SDR currencies are rebalanced and live on without failing. As to your question about the dollar value of gold, I would expect it to surge during the referenced financial crisis, then crater when the crisis is “solved” by the SDR. If so, and if you’re holding metals or crypto currency, be ready with an exit plan because just as gold surged circa 2008 then dropped, so it likely will again when the crisis is activated and “solved.”

      1. It seems that each country is securing or repatriating their own deposits of gold. I read somewhere a while back that China would not let their gold leave the country as such I would suspect other countries to do the same as part of a strategy to back their regional currencies within the basket of currencies comprising the SDR. If this is the case then why would regional gold need to rise and fall with the regional currency which it would be pegged to?

        Just a question from an ignorant mind to all this gold stuff.

        1. I need to fine tune this question and reword it.

          “why would regional gold need to rise and fall with the regional currency which it would be pegged to?”

          Should be why would regional gold need to rise and fall against the regional currency which it would be pegged to?

  2. Thanks for bringing another confirmation of your thesis to our attention, JC. It’s good to see that the ship keeps traveling in the predicted direction. Appreciate your sensible approach instead of the clickbait fearmongering.

  3. “They said it couldn’t be done, they said nobody could do it L&M is low in tar, with more taste to it! ‘PALL MALL, where particular people congregate! ‘Call for Philip Morris!’ ‘Walk a mile for a Camel!” Virginia Slims’! All brought to you by the Bernays boys and the mad ad men from Madison Avenue! Smoke,smoke, smoke that cigarette, smoke, smoke, smoke, yourselves to death! Come on bitches, lite ’em up, fuck what daddy says and fuck you to old man!(I abhor lazy profanity, and so seldom if ever use it. Those of you who know me understand that is my truth. Either I feel strongly about this, or am in a mood).

    If I had a fat sack of Benjamin’s I damn sure would not want them to become worth less than coppers overnight. JC you missed the mark on gold for the moment. A couple of years ago you predicted that the USD would fall by 30 plus percent in the next year then you extended it to maybe 18 months 2 years.

    Well my friend let me give you a report from the heartland. I went to Sam’s club the other day and saw almost all food prices up 10% from a year ago. About a month ago my food stamps were cut from $200 down to $170. Looks and feels to me that your vision is clear if only off by some months. Is my situation indicative of a mass. Well yeah, 90 million of us on the stamps.

    JC awhile back you spoke of a self-limiting elite. I am considering that the QE’S,1,2,3,4, etc where just that and now it is time to get back to business as usual.Am I wrong or will we see more self -limiting in the future from some elites v our own lovely establishment??
    PTM

  4. I never doubted the astuteness of your thesis, but thanks for the confirmation. Keep up the good work! We count on your insights and wisdom in these most tumultuous times.

  5. Mr. Collins:

    If the $USD continues to weaken and eventually is replaced as the world reserve currency, then how will the USA pay for its massive volumes of imports? On multiple occasions I have watched tens of thousands of filled containers being off loads at the Port of LA, CA and the Port of Long Beach, CA. Both ports have recently been modified to accept and process larger volumes of such containers. The foreign manufacturers who filled and exported these containers are going to want some of relative value in return for their products other than worthless paper with ink, pictures, and holograms printed on the surface. The USA has not the gold or silver to pay for such imports.

    On another sad note. I have also watched as other containers are reloaded at these same ports on the same ships. However, the containers departing the west coast ports of the USA are empty.

    Oz

    1. With a lower valued dollar American exports will increase. Trade deficit will decrease. A balance between deficit and surplus is ideal but will only likely be possible when something other than a domestic currency is used to balance trade internationally. Keep in mind the USD is not going to become worthless. It will still be the most widely used national currency in the world for a longtime to come. The renminbi will close the gap but by then the SDR, or a version of SDR, will be used to balance trade.

  6. Hey Peter, I’ve been feeling the same at the grocery store over the last couple years. Its a bit curious that at the same time we are noticing higher food prices amazon.com is purchasing whole foods market…

    “When Wal-Mart Stores Inc bought online retailer Jet.com for $3 billion last year, it marked a crucial moment – the world’s largest brick-and-mortar retailer, after years of ceding e-commerce leadership to arch rival Amazon, intended to compete.

    On Friday, Amazon.com Inc countered. With its $14 billion purchase of grocery chain Whole Foods Market Inc, the largest e-commerce company announced its intention to take on Wal-Mart in the brick-and-mortar world.”

    Wonder if amazon.com will deliver US organic groceries by drone? Hope no birds interfere with delivery… 🙂

    https://www.reuters.com/article/us-whole-foods-m-a-amazon-com-walmart-idUSKBN1990HH

    But then about a week ago I was instructed what body position to assume at the gas pump with $3.09/gallon. You would think vasoline would be provided free of charge since it’s all petroleum products but the greed seems not to allow it, so I drive on. Lmao.

    Perhaps the self limiting is an international stand point. If so as those international deals dry up the businessmen and the politicians milking off them turn to domestic profit. It may be up to the American people to help limit these folks here at home. The way it’s worked in the past is to avoid buying their products and vote them out of office.

    You know, politicians like McCain and Schumer. One pushes war the other peace, two extremes on the same plane but a great starting point.

    Something inside says that if we just place the change we want to see in the hands of that elusive invisible force we all want, that change will never come about. Seems that’s why WE were put here doesn’t it? “Be the change we want to see in the world.” Unless of course someone wants to see war and all that suffering the news pumps out. In that case please skip this comment.

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