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This was added on 4/14/11

The dollar wants to go up - and the economy wants to go down.  The Fed does not want the economy to go down (the Fed is still enforcing a law against recessions) - and the Fed is pushing very hard to make sure the economy does not go down. 

The result - necessarily so because of how the system actually operates - is that the dollar has been depressed more than it should have been under the circumstances (more explanation below), but please also note that the dollar has not yet made it to a new long-term low, which is important. 

We have a debt-based society - when someone wants more money (i.e., a lot more), the way for most people to get it is to go to a bank and borrow it, especially in more recent times when wages have stagnated so much.  And that is exactly what a great many people have done. 

It even goes beyond that - because in modern times, especially since the 1960's, when mainframe computers became widely available, including to both the Fed and the banks, the easiest way for the central bank to increase the money supply, and that is what it has done, has been to put new (electronic) dollar entries into the computers of the banks and then the banks were expected to lend that money out.  That is what the banks did, more and more - until the credit crunch hit in 2007 (when the process of lending out had finally gone as far as it could go). 

Keynesian economists - which include most economists in the U.S. and all the economists in the U.S. government - believe that they can just keep lending out money forever because they do not believe the economy will slow down over the course of time (thus making payback more difficult).  But, unfortunately, the economy does slow down over the course of time - and resource utilization also goes down over the course of time during that process.  So, eventually, it becomes harder and harder for more and more people to pay back their loans.  We have reached that point. 

But Congress did pass a law against recessions in 1978 - and the Fed is still enforcing it (even though the law has expired).  What actually happened was that the law could not be enforced right away - for reasons that are not complicated, but I will explain below, not here - and so it was first enforced in 1987 in the wake of the stock market crash.  It was set to expire in 2000 by the original lawmakers - and did so - but the authorities in the system in 2000 decided they liked the result of the enforcement of it up to that time (basically, up to the end of the 1990's) so much that they decided to continue to enforce it as if it had never expired - and that is what they have done. 

And that is why the dollar is doing what it is doing these days. 

Slightly more clarification.  There are many people who believe we are headed straight for a hyperinflation because of all the recent record money-pumping by the Fed.  If the money were coming into the economy as cash (like it did in 1920's Germany and "modern" Zimbabwe - which experienced a true hyperinflation), those people would be right.  But the Fed still puts the money into the system through the banks - it is still borrowed money to the person or business who gets it.  And so the problem of paying it back is still there. 

When a loan does not get repaid, the part of it that isn't repaid has to be written off - and in a system whereby new money gets into an economy by lending it out, when the money does not come back, so the bank has to write it off, that is a (net) reduction in the money supply, not an increase.  And it is even worse this time because there is a credit crunch going on (banks are refusing to lend out as much as they used to), so not as much new money is actually getting out into the economy in the first place as before.  (What is actually happening is that the banks are lending that money out to the federal government instead and funding Obama's huge deficits). 

So as more and more loans default, the money supply is going down, not up - but the Fed is still trying to enforce a law against recessions (a lower money supply will at least tend to dampen the economy), and is using more and more extreme measures as time goes on, in recent months, to try to do so in the face of the ever-stronger forces working against it, with the result that the perception is that the Fed is destroying the dollar in the process.  And markets, especially financial markets (stock markets and currency markets), do not always operate according to what is going on, they operate according to the perception of what is going on, at least near-term at times.  And so the dollar is being depressed by traders who think it is about to be hyperinflated to death. 

But, importantly, the dollar has not yet been driven to a new long-term low (and if it just stabs one, rather than staying down, that won't count), despite all the record Fed "money-pumping" in recent times - the dollar is basically going sideways in the big picture - and so I think the underlying problem of the debt is really showing itself through in the market. 

I think that what is going to happen is that despite the Fed's increasing and ever-more-desperate measures to keep the economy going, we will soon reach a point where increasing debt defaults simply overwhelm the economy and a lot of the "money supply" is simply going to have to be written off by the banks - which will result in a huge decrease in the money supply, which will result in the value of the dollar going up (the value of remaining dollars going up).  In other words, I think the economy is going to be starved of money, we will have a huge deflation, not an inflation - and I think the dollar market senses that and that is why the dollar has not actually plunged down to new lows in the face of record Fed "easing" during the last couple of years. 

The underlying basis for this analysis is, as noted on this website, my contention that, contrary to what the Keynesian economists think, the Kondratieff wave has not been eliminated (the Kondratieff wave - its dynamics and details - is the key to this analysis). 

I still think the beginning of the next downturn is already playing itself out right now.  Part of that is a rolling stock market top in the context of desperate desires to keep the economy going. 

Here is the other issue I want to clarify right here -

The Fed can't simply put more money into the banks to compensate for the banker's reluctance to lend.  To explain why, I will quote directly from elsewhere on this website:

"From 2005-2007, when there was a huge boom going on that was being fueled by borrowed money (credit), the Federal Reserve was quite often asking, even begging and pleading with, the bankers to cut back on their lending to bring it back down to more normal levels - and the bankers refused, saying the business was just too good to pass up.  The Fed was utterly unsuccessful in convincing the bankers to slow down their lending.  Then the credit crunch hit in 2007 - and from then on, the bankers have been lending less than the Fed wants them to.  Ever since then, the Fed has been begging and pleading with the bankers to increase their lending to support the economy more - and the bankers refuse, saying the risk (in too many cases) is just too high.  (What the bankers are actually saying in many cases is that not enough creditworthy people are actually walking in the door to get a loan.  I think that is, in part, because many people who are actually still creditworthy in the current environment, i.e., can still borrow under the new tighter lending standards and/or have not had their credit ratings trashed by circumstances, are being cautious and not borrowing more money when circumstances look so iffy.)  The Fed has, for the most part, been utterly unsuccessful in convincing the bankers to increase their lending." 

The Fed will continue to be utterly unsuccessful in convincing the bankers to increase their lending as long as the real estate market continues to be in terrible shape, which it still is, by the Fed's own repeated admission over the course of time (and I predicted that the real estate market would remain in terrible shape - see elsewhere on this website).  That problem will not go away because real estate ran out of buyers at the margin a few years ago, which ended the real estate boom - and that is what brought on the credit crunch in the first place because America is a majority-homeowner country and so running out of buyers at the end a big real estate boom (instead of at the end of a more normal cyclical real estate up market) was a BIG problem.  The resulting fall in home prices led directly to the credit crunch (too many home loans out there, too many of which went bad) and will not go away because there are not enough buyers to go around anymore (that is to say, not enough to boost prices).  (In the past, immigration helped solve the problem - but this time, the economy is much too weak for that to play a role.)  So the credit crunch will continue. 

As for the Fed actually maybe providing money directly to the people (thus avoiding the "borrowing" problem), there are two problems with that.  One is that the U.S. is such a large country that providing cash directly to people quickly, at a personal level, is impractical - and that is why, when the government wanted to provide some cash to people during the downturn a couple of years ago, it did so for most people by having the I.R.S. deposit it in people's bank accounts using the auto-deposit information they provided on their tax return for getting their tax refund (which didn't do the government any good anyway - the people were supposed to spend it to help jump-start the economy, but most people are cash-poor and saved it instead, since they were so very insecure during what were very uncertain times for most people).  Yes, some people got checks in the mail (they didn't have to file a tax return or didn't get a tax refund or, at least, did not provide the information to get it electronically) - but to do a check for everyone would have been an enormous undertaking administratively (just printing all the checks would have been an enormous task, and quite costly). 

The other problem is that the law against recessions is, more specifically, a law calling for full employment at low inflation - and was passed in 1978, a time of high unemployment and rising consumer price inflation (and could then not be enforced right away because consumer price inflation took off more than either the government or the Fed bargained for and so they had to deal with that first, which, for the time being, meant a choice between fighting high inflation and fighting high unemployment - but see this website, at the My model link, for why this was inherent to the Kondratieff wave at that point in the cycle anyway).  The Federal Reserve is tasked, in effect, with maintaining a perfect economy indefinitely - and the law specifically calls for low inflation because consumer price inflation was high when it was passed (but I call it a law against recessions for convenience because of the era when it was passed - I lived through the 1970's, I remember well what that decade was like). 

So what is the most basic issue in central banking?  Don't flood the economy with cash - avoid a hyperinflation! 

So there is no way the central bank is going to be willing to risk pumping too much cash into the economy - and is therefore quite content to pump new money into the economy through the banks, which is a (much) more convenient way of doing it anyway in a modern, fully-computerized society. 

But there is a flaw in that thinking - namely, that they think they can keep doing that forever (i.e., loan defaults won't eventually skyrocket) because they believe they can avoid recessions forever, which implies keeping an economy going forever (their underlying assumption is that they can do that).  But the Kondratieff wave puts the lie to that - and that is why I was able to predict the downturn of 2008-2009 in the summer of 2001 already (when I found out about the law against recessions).  I also predicted the slowness of the recovery coming out of that downturn - because I know that an economy will slow down over the course of time, which means resource utilization also goes down, which makes the recoveries slower and slower.  And wages also stagnate toward the end - which is also happening (unlike in a hyperinflation - a wage and price spiral to, effectively, infinity).  So loan defaults have been going up.  All the conditions that I would expect to see these days, per my model, are in place - and they point to deflation, not inflation (which will be evident once people cut back on their spending enough so that prices start coming down).  The Fed is supposed to avoid both high inflation and deflation - so they won't pump the economy full of cash because they want to avoid high inflation - but they won't ultimately be able to avoid deflation because it is an inherent part of the final phase of the Kondratieff wave.  The Fed has not been able to avoid the other parts of the Kondratieff wave - those have played themselves out, with some of them stretched out over (in some cases much) more time than usual because of all the manipulation by the Fed - and the Fed will not be able to avoid the tail-end either, in fact, that tail-end is building more and more, inevitably and inexorably. 

But because the Fed is fighting the trend as hard as it is, the dollar is still falling.  I suspect that the more the system gets stretched to the limit before it pops - the more the gun is cocked before the system blows in the other direction - the more sudden and dramatic the explosion in the other direction will be (stock and bond market down, dollar up) when the time comes. 

Is there a possibility that the dollar will explode downward after all (inflation)?  Yes - if the system gets pushed hard enough in that direction that the dollar futures market accelerates in the downward direction.  But the key word is "explode" - it is likely to be a fast and big, and therefore, destabilizing, move if it happens because the gun has already been getting forcibly cocked in that direction for so long already.  But it is a less likely possibility - all current indications are that the system will go in the other direction (including the fact that sentiment toward the dollar is currently extremely negative).  But, as noted, if the Fed tries to hang on for much longer and then fails, the explosion in the other direction (stock and bond market down, dollar up) will be just as destabilizing - and I do think the Fed will fail, there are just too many circumstances working against it in the meantime.