[Snowrunner]

I was reading Mish's little piece on the rise of the Dollar and he seems to conclude that this is happening due to "risk aversion" and that people are "fleeing into safe harbor".

But is this really what is going on? I know that historically this is what happened, people "came home to momma", but his analysis strikes me to be of the same vain as the Feds and Treasuries response to the current problem: Fighting the last fight again.

Considering the lack of credit, the "age of frugality" and that "Cash is King" (supposedly) my reading of the rise of the USD is that people are trying to get Dollars in order to fullfill their obligations, close out positions etc. all of which are denominated in USD.

Considering the amount of debt that is out there and just how much of it is set up / denominated in USD it strikes me that nobody really would go INTO the USD right now as a "safe haven", that at the same time there seems to be very little buying and selling to be happening on the markets seems to support the idea?

Or am I reading this wrong? Are people piling up USD really as a "safety" device?

[RdSnt]

I would regard cash hoarding as a significant factor in the USD rise. The dramatic inflation of the money supply should be driving the dollar down, but it's not, so where is the cash going? The banks and off shore buyers are hoarding it. Plus, we are seeing an important drop in consumer shopping, which acts like a type of hoarding. Credit card use is dropping as well, which from the banks point of reduces the need for short term borrowing. This slows the velocity of cash through the system.

[patience]

Well, if you consider what happened in Iceland, then I'm sure there was risk aversion/capital flight from there. I've read speculation that as this sort of thing happens, then you get capital flight, so the money goes to the "least bad" as a haven.

Mish may have the biggest reason nailed, but there are other components as well. For one, investors that are simply fleeing ALL paper investments may be going to cash, again in the least risky country......at the moment. As more than one pundit has said, it's a race to the bottom, so the dollar as a safe haven could change quickly. The US being no great shakes anyway, just that others are worse. Which all gets to be moot in a full blown reset situation.

Where is Shortonoil when we need him???

[Snowrunner]

I would regard cash hoarding as a significant factor in the USD rise. The dramatic inflation of the money supply should be driving the dollar down, but it's not, so where is the cash going?

Has there been an increase in money supply? It strikes me that money is still scarce, the 1Trillion + bailout so far was essentially more debt, they were borrowing from one credit card to pay off the other, so no real money ever changed hands in this.

[ColossalContrarian]

I don’t understand why people think the Fed injecting money into the system is inflationary when the amount of money vaporizing from the system is far greater. I don’t know much about economics but if $5 trillion vaporizes from the money supply and the Fed injects $2 trillion then we’re still short $3 trillion dollars which is still deflationary.

basically they aren't keeping up with the black hole

did I over simplify or am I on totally the wrong page in my thinking?

[oswald622]

according to the telegraph, yes, it's because debt obligations are being paid back.

This has been the dollar "carry trade", conducted on a huge scale with high leverage. Now the process has reversed abruptly as debt deflation - or "deleveraging" - engulfs world markets. The dollars must be repaid.

Hence a wild scramble for Greenbacks which has shaken the global currency system and shattered assumptions about the way the world works.

Dollar Roars Back

and as jim rogers has pointed out, it's also because firms are selling off their assets in order to raise cash - to pay off their debts.

[frankthetank]

Hogan-

There is some talk that there won't be any rebate checks, more of a stimulus for building and maintaining infrastructure. They should create a stimulus package to build nukes, lay railroad tracks, etc...

[MOCKBA]

The hyper-inflation scenario will kick in once the US government tries to print it's way out of the coming deflationary depression by sending out very large rebate checks to all Americans, trying to get them out shopping again. Once you start seeing these large checks arriving in the mail, the dollar will quickly become worthless- hence hyper-inflation.

Well, it is useless to argue here that there would be no hyperinflation in US and in fact in deflatory spiral newly "printed" money magically disappear (even more so when dropped from helicopters). I just want to show couple graphs I came across recently modeling what happens to money in aftermath of crisis of confidence.

First is the graph of money supply creating equilibrium in normal conditions (bottom line is cash in the system, topline is total money)


Now, here is what happens when there is a very moderate crisis in confidence 5 years into the graph (modeled as people deciding to keep just extra 10% of the money in cash at hand and all markets still functioning - 10% hoarding of all available cash results in 30+% drop in total money supply)


Here is what happens is you print 40% of new money instantly but confidence remains as low as before (in the model the confidence is nothing compared to what we've seen - people carrying just 10% more cash then normal and that is it)

And finally what happens eventually as confidence in the system returns abruptly at 10 years in the graph


Graphs are taken from popularization in Russian what recent events are all about.
http://schegloff.livejournal.com/219509.html

Deflation is here to stay...

[pedalling_faster]

The hyper-inflation scenario will kick in once the US government tries to print it's way out of the coming deflationary depression by sending out very large rebate checks to all Americans, trying to get them out shopping again. Once you start seeing these large checks arriving in the mail, the dollar will quickly become worthless- hence hyper-inflation.

it's not that linear.

I don’t understand why people think the Fed injecting money into the system is inflationary when the amount of money vaporizing from the system is far greater. I don’t know much about economics but if $5 trillion vaporizes from the money supply and the Fed injects $2 trillion then we’re still short $3 trillion dollars which is still deflationary.

money was created during the leveraging phase of the derivatives bubble. money is destroyed during the de-leveraging phase.

inflation OR deflation ? BOTH. inflation in some areas, deflation in others.

when i say, "it's not that linear", i'm referring to
* recent observed phenomena (dollar rise when our instincts tell us all this dollar printing correlates to a devaluation in the dollar)
* the example of the Weimar Republic. there was a considerable time lag between the printing of the money & the hyper-inflation. sociological factors were a big part of it.

i think the "oh, sh*t" moment that will usher in the devaluation of the dollar is an un-attended Fed auction. they will go to borrow more money, and no one will want to buy their debt instruments. i don't know if that has ever happened, for the US government.

usually it's 15-20 large banks that buy the debt, then re-sell it, for example, to sovereign wealth funds.

[pogoliamo]

Here's what happened:

His Majesty, The Mighty Dollar was this summer on a verge of a collapse. A plain simple, annoying, classical currency run.

You cannot run for safety to a currency which is having a run itself - can you?

But human memory is selective. It was just few months ago, we were there, we all knew it, and still now it is forgotten already. Good, politicians and bankers like that property of the humans! Humans dont like to live in reality, they like to be fed with a bullshit so they get fed with the bullshit.

"fleeing into safe harbor" - bullshit kindly offered to you by CNBC, please help yourselves!

And lets continue. Realizing the dollar is about the have a run Monsieur Trichet and few other equally infamous fellow bankers decided they have to help. We all know when dollar goes down the toilet ultimately with the euro, the yen and the rest of the funny-money goes too. So those fellows tried to cover up their asses and made a small agreement to intervene.

So they did.

But unfortunately by doing so they have triggered unwinding of a highly leveraged dollar shorts. Hmmm. Bad.

They panicked again. This time unlimited swaps were mutually offered to all fellas so they can help "stabilize" the "markets"

In couple of months it's gonna be back. A plain simple, annoying, classical currency run. His Majesty will be on his knees again

PS. Don't be pathetic. Don't tell me I am a wacko and this is a conspiracy theory and don't try to give to me the "risk aversion" bullshit.

[lper100km]

I don’t really understand currency trading, but what is happening seems to be flying in the face of common sense. Could it be simply that ‘those’ who were responsible for the oil run up, now being flush with cash, have turned to currency trading and targeted the US $ as the next bubble of opportunity? Will we have a Euro bubble next? Or another oil bubble?

[lowem]

Folks, keep your eyes on this chart :
http://www.nowandfutures.com/key_stats.html

When the M3 money supply growth (now between 14-16%) goes below zero, then we would have monetary deflation. Which is *not* the same as price deflation.

It still could.

Sure there are $1000 trillion of derivatives out there.

But I sure don't see what's going to stop the printing presses from printing $2000 trillion or more.

[pogoliamo]

lowem, fully agree with you.

Maybe most of the money auctioned lately are in shorts such good reason to print some more, after all the prices are falling