Monday, October 06, 2008

A tiny revelation

If you have been watching the US financial system gasping for breath lately, you can be forgiven for wondering why the US $ is as strong as it is. Many gold-bug type pundits are predicting the death of the dollar and the soaring of gold and yet the greenback is hanging in there quite well. Why is this? An article by Ambrose Evans-Pritchard sheds some light.

The dollar is high because so many dollar-denominated loans are being called, and borrowers need dollars to pay their called loans, dollars right now, in large quantities. "There is a wild scramble for dollars as a $10 trillion pyramid of global lending based on dollar balance sheets “de-levers” with a vengeance...International banks are facing margin calls on their dollar leverage."

For now, the dollar is in demand. Later, as all this new money supply works into the system, there will be inflation. Unless (as we read earlier) the central banks can't push things up over the edge into Inflation-Land and the whole mess rides the credit collapse backwards into deflation.

Note my fearless predictions last May that oil and gold stocks would do well. Hmmm, this has yet to happen, in fact a dollar worth of a decent gold stock 5 months ago would be worth half that today. Good thing this is a blog, not an investment advisory service... Having said that, I stand by my opinion that gold, not paper, will offer the greater monetary value in the years to come.

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