The Interest Rate Canary

Monty Pelerin / EconomicNoise.com

In the early days of mining, miners brought canaries down into mines. The purpose, according to Wikipedia was to signal danger:

If dangerous gases such as methane or carbon monoxide leaked into the mine, the gases would kill the canary before killing the miners, thus providing a warning to exit the tunnels immediately.

Interest rates can be looked at as performing the same function for the economy. This canary is dying or already dead.

Money Abuse

One of the triggers/catalysts for the next economic collapse is likely to be the dollar. The US and the Fed have both abused the privilege of world’s currency. Larger nations are scrambling and making deals with each other that enable them to avoid using dollars. Smaller nations suffer from the inflation that the US dollar policy exports to them.

OPEC’s insistence on dollars for oil trades may be the remaining condition that allows the dollar to continue as the world’s currency. If OPEC begins to accept other currencies in lieu of the dollar, that could end the dollar’s status as the world’s currency. (For a discussion of why this may be changing, see here.)

No existing currency is capable of replacing the dollar because no other country’s economy is big enough. Over time, China may be able to fill that role. Indeed they have signaled their willingness and desire to do so.

All countries are irresponsibly debauching their currencies in the same fashion as the US. A “beggar-thy-neighbor” race to the bottom is underway where no country wants its currency to appreciate in terms of others. The dollar is sinking, but the relative speed at which is deteriorating determines its value relative to other fiat currencies. If all are being debauched at the same rate, then the dollar can appear neutral or strong on a relative basis.

The attractiveness of gold is that no one can debauch its value by creating more of it. create it and it has represented real money for over 5,000 years. In a world of deteriorating purchasing power, it should hold its value (and go up in terms of the deteriorating fiat currencies).

What Is Coming Next

A slow-motion collapse of most fiat currencies is underway. Undoubtedly leaders know what is happening and put in place an alternative when the dollar is no longer acceptable. Unfortunately, it will be a phonier currency than the fiat currencies that are in freefall. It will be a world currency justified as a result of the next crisis.

A world currency (i.e., a world central bank with the power to create money) is the dream of every Statist. It requires a world government. To visualize, imagine Europe, Brussels and the Euro on a world scale. A world central bank will be a bigger disaster than all of the individual central banks combined. Ditto for world government being worse than national government.

No matter. The powers-to-be in the countries-that-are have backed themselves into a corner from which there is no escape. Setting up a world currency will make matters worse in the long-term. However, it will provide the appearance of a “solution” that enables current politicians to skate through their remaining time before the (bigger) tragedy unfolds. That is what matters to them, not the terror they unleash on citizens.

Currency Collapse

Signs the dollar may be collapsing can be found in this blurb from John Mauldin:

That is the biggest monthly dumping of Treasuries by foreign creditors since 1977!

So which of our country’s creditors are doing the most selling? None other than our two biggest creditors, China and Japan.

China and Japan sold a combined $40 billion of US debt last month, but that’s a drop in the bucket. China and Japan hold $1.27 trillion and $1.08 trillion of US debt respectively, and more selling will lead to even more bond losses.

continue article at Economic Noise:

http://www.economicnoise.com/2013/08/22/the-interest-rate-canary/