The once Almighty US Dollar got its comeuppance this week at the annual Davos, Switzerland conclave. After too many years of maxing out her credit card at Macy’s, the weak sister of the currency world was strongly chided by her siblings. The Federal Reserve’s unprecedented one-day 75 basis point cut in interest rates was seen as exactly what it was: a desperation measure. Jean-Claude Trichet, the head of the European Central Bank (ECB) said that there is little chance of a European interest rate cut, to match the Fed’s rate cut Soon after, Steve Forbes went so far as to call the US Dollar policy ‘Zimbabwe Economics’. Not surprisingly, the US Dollar Index is still bouncing along the gutter of the high street at around 75.90 (it now takes more than $1.46 to buy a Euro), and the spot price of gold spiked to over $921 per ounce in London and New York trading before settling to around $910.
What does the castigation of the US Dollar at Davos mean to the average American? In the short term, very little. But in the long term, look for a much weaker dollar in foreign exchange. This means that imported goods are going to get a lot more expensive. If you have been forestalling buying any big ticket imported items, buy them soon. That $250 British Berkefeld water that you’ve wanted may cost $400 or more, next year. (That is, if you really need something for preparedness, and you can pay cash.) Obviously recession is right around the corner. That means lower stock prices, big layoffs, a cascade of economic troubles overseas, declining house prices, more mortgage foreclosures, big bailout programs, and so on.
In my estimation, sometime in the next two years the economic and currencies pendulums will reach a collective turning point. Foreigners will simply stop buying US Treasuries–at least at the currently-offered rates of return In order to finance the Federal debt, the Treasury department will have to offer higher rates of return. Then they will be inextricably stuck. Higher interest rates will tank the economy. But then it may get worse: Like the Banana Republic treasury that it has truly become, the US Treasury will get into the spiral of offering higher and higher rates of return to lure overseas investors. Interest rates will start to accelerate, as they did in the late 1970s. Smelling blood in the water (pardon the mixed metaphor) the foreign investors will play the cycle for all that it is worth, pushing Treasury rates up past 20% annual interest.
What does the Federal Reserve’s recent big interest rate cut tell us? It is now apparent that Ben Bernanke and his deck chair rearranging committee are subservient to Wall Street. Rather than accepting the natural outcome of a normal market cycle , they are furiously trying to pump liquidity in hopes of propping up stock prices. They cannot afford to let mutual funds and pension funds collapse. (Nor does the Republican party want to lose their soon-to-be-retiring Baby Boomer political base, in the process.) In the process the Fed is destroying the value of the dollar and making the inevitable economic dislocation of the forestalled recession even worse.
SurvivalBlog readers are hereby advised to batten down the hatches. Be ready to lose your job. (See my previous advice about starting a home-based business that you can fall back on, if need be.) Be ready to relocate on short notice. Be ready for a recession that will go on for so long and get so bad that it will be called The Second Great Depression. Be ready for substantially higher crime rates. Be ready for mass inflation. (As I’ve stated before, given his predisposition, Ben Bernanke will try to inflate his way out of this mess. He will monetize the debt.) Be ready for drastic measures by the government, including “soak the rich” tax schemes–that will actually target the middle class. Be ready to help out your idiot brother (the one with the matching pair of Jet Skis and the 72″ plasma television), who will appear on your doorstep, pleading that he can’t pay his mortgage or his credit card bills. Be ready to feed your family out of your own garden and food storage. Be ready for your employer to get suddenly bought out by a European conglomerate. Be ready for $6 per gallon gasoline and milk prices. Be ready for any stock-heavy 401(k) and pension funds to be “wiped out” overnight. Be ready, folks!