Monday, August 23, 2010

Why Quantitative Easing is Likely to Trigger a Collapse of the U.S. Dollar

From the standpoint of the two parity conditions, the very long-term implication of quantitative easing is a gradual devaluation of the U.S. dollar (an increase in the dollar price $/FC of foreign currency). If this increased inflation risk was reflected in interest rates (so that real interest rates were held constant), the U.S. dollar would simply move along that gradually sloped PPP line, and likewise, foreign currencies would gradually appreciate against the dollar.

However, because of economic weakness and credit strains, coupled with the demand for Treasuries by the Fed, quantitative easing instead moves U.S. interest rates in the opposite direction, falling rather than rising. From the standpoint of interest rate parity, capital market equilibrium then requires the U.S. dollar to depreciate immediately, by a sufficient amount to set up the expectation of future appreciation in order to offset the shortfall of U.S. interest rate returns.

In short, quantitative easing is likely to induce what the late MIT economist Rudiger Dornbusch described as "exchange rate overshooting" - a large and abrupt shift in the spot exchange rate that occurs in order to align long-term equilibrium in the market for goods and services with short-term equilibrium in the capital markets.

This adjustment is depicted in the diagram below. In response to the monetary shock, a modest but long-term depreciation in the dollar (a rise in the U.S. dollar price of foreign currency) is required, depicted by the blue line. However, since nominal interest rates in the U.S. actually decline, ongoing equilibrium in the capital market requires that the U.S. dollar must be expected to appreciate over time by enough to offset the lost interest. As a result, quantitative easing is likely to result in an abrupt "jump depreciation" of the U.S. dollar (that is, a spike in the value of foreign currencies).

Read more: Here


  1. well duh. you can't print money out of thin air and expect it to have any meaningful value. u can't print money to prosperity.

  2. god so much explanation of the prolonged inevitable, when is this collapse suppost to happen finally? not that wish for collapse and chaos is just that i have invested patience and time on following all these predictions etc..

    and i just cant walk away, empty handed.

  3. There is no collapse coming. It will be the opposite and you will all look like fools.

  4. this is like waiting for your newborn to say its first words as much as you tell them to repeat mama/dada they just dont until there ready...

  5. and then the hard part is that when you withdraw from all this and return to "reality"
    and realize that this "collapse" was just a probable scenario you tell yourself in your mind
    "f.u.c.k" and return to your daily routine.

  6. i mean i cant complaint i am a happy-camper i have a decent job "income" that pays for my nececities.

    and finally if such thing were to happen people move forward and rise and everything turns out better then before, these are different times.

  7. 1 36
    why are you here?
    sounds like the truth is to scary not to beleive.
    run forrest run

  8. When the dust settles, so many things will have happened that no-one saw coming and it will be clear in hindsight. One thing for sure is that things will be different than they have been in the past 50 years. My plan is be flexible in every aspect of your existance and dont use the past to plan your future.

  9. All of the worlds problems and wars are the result of one evil people who own the money and thus control all governments for their own gain. Those people must be taken from power to have a peaceful and prosperous world.

  10. Wait a minute. Lets be fair. There is a chance that thousands of years of history and logic itself could be turned on it's head. Just because we are running up debts we cannot pay and printing money which will make our currency worth less doesn't mean bad things have to happen! Maybe we will all be lucky and win the lottery. Maybe Obama, the smartest man in history, has a plan we simple people just don't understand. I say lets keep giving money to labor unions and "friends of Obama" and see what happens.

  11. 3:01 AM

    i am responsible for 5 of the post the first 1:36 is not mine.

  12. The collapse already pretty much happened. It will just be the same as the Great Depression pretty much, a prolonged period of low economic numbers.

    It might get a bit worse than it currently is, but there won't be a system wide true stone age level collapse. Anybody that truly believes that we are suddenly going to just lose all our value of currency and services is a fool.

  13. Too much disinfo on here now, like 926, does not know his history, he is the true fool as every fiat currency has failed, not one has survived time, except for pm's.

  14. 9:26 is stupid I agree with that 9:42. All currencies are failing, what a... fool.

    He somehow thinks the USA is the same as it was prior to the Great Depression, depressions do have a different nature.

    Returning to the stone age? No. But will we recover and go about our business? NO. Western Society is crashing, all social order is dying out.

    This is not an isolated predicament as if an empire is collapsing, today the whole world is mixed together. We are all falling together this time, there is no nation to bail anyone out. People who have power/wealth now are getting smaller in number as everyone is getting weaker/poorer.

    When the wealth is crushed, or dwindles below a relative minimum, those on top of the pyramid will fall since those below will not be able to hold it up any longer.

    The world has never experienced what it's about to, the only people who can't comprehend that (9:26) have linear focus and are debilitated from learning/changing.

    Technology will still be there, but the current human order will not be. There will be much reconstruction, particularly in the assembling of a new foundation.

  15. 10:51: You claim it always happens then claim it never happened before. I guess you mean the degree, but it is still rather vague and easily misconstrued.

    Empires have fallen before. Britain, France, Germany, Turkish, Roman, Islamic, Spanish, Portuguese, these are all former empires that fell. They are all still around. There are of course many more.

    Now I admit, I don't know if any used a fiat currency, I do however know Rome used coins that did not have the value of gold behind it, which you can consider the beginnings of a fiat currency.

    The US isn't just going to disappear off of the face of the map, and it's not going to descend into utter chaos. It will shrink like Great Britain did, similar to what it is now.

    People will still be around, services will still happen. I agree we won't ever go back to pre-depression levels, I just don't agree on the mass chaos theory that believes the world is going to end. We will have high unemployment, more families living together, less consumerism. Credit and this current economic model have only been in place for maybe one hundred years maximum, human civilization has been around much longer than that and will continue to exist.

    We won't be driving around or flying like we do now, we won't have all this processed food or these useless electronics. Things will just shift back a bit. You won't need to however put up barbed wire fences, hoarde food and water, and shoot anybody that comes near your house however.

  16. 1:12 I totally disagree with you. We have:
    1. Possible World War 3 SOON
    2. Massive Climate Change (think food)
    3. Housing Collapse
    4. Mass Unemployment
    5. Huge Tax increases
    6. Biggest Debt In History
    7. Debasing of Current Currency (Down 90% since 1913)
    8. Immigration Problems
    9. Future Uncontrollable Diseases
    10. Genetically Modified FOOD
    ..and many more problems that cannot be fixed. We are in a different collapsing era with MUCH bigger problems then in the past.

  17. I still have a good job,pay----go fast boat with an SUV to pull it. Life is good

    I just come here for the comedic relief,LMAO.

    This is about as funny as the boy who cried wold, difference being the wolf will never show up here and your canend goods and ammo will rot in the cellar

  18. 1:45 you come here because you NEED this info. Your comments are of a 19 year old. You're just an ARROGANT and STUPID kid. Fess up. You can't spell or speak, probably have someone else reading this right now...hillbilly

  19. 9:26`s idea is actually bang on! It`s much more realistic and allows one to stay more focused than would this Mad Max scenario. If you get too far off the beaten path too soon, you start getting goofy. You gotta think outside of the box instead of down the rabbit hole-this caper`s gonna require everybody keeping their noodles together rather than bashing each other over the heads with stone clubs.

  20. 2:38 and what makes you so certain? Refute 1:39, ANY OF THEM. Any and all of them puts us into a "stone club scenario".

  21. This time is most certainly different. The states are bankrupt. The country is bankrupt. Incredible many businesses are bankrupt - you can't re-build that in a day. The crash has already happened, and just like the Great Depression, you can't even see it right before you as it is happening, because you need history books to tell you about what happened, many years from now. Stop waiting for it to come, because you already missed it. We are there. Right now. Look around you. It already crashed. The hardship though has far far to grow. And if you think that the US will stand as it is to wave hello in a hundred years, then you don't know china very well. They smell the weakness, and they are already testing the waters. When they can smell the blood they will attack. If by 'shrink' you mean we withdraw from a few bases in other countries, you are wrong. If instead by shrink you mean that china and russia will attack from the west and take some states and mexico will attack from the south and take some states, then you are probably more on the right line. Our enemies loathe us and have already been living in turmoil and pain for decades - they want us to share in that pain - they need us to fail miserably. They want nothing more than to tare our hearts out and by heart I mean our national core our national soul...the 'who we are'. They want to destroy not just our money, but our ability to prosper - they want us to have the stories of our dead children - they want to kill us many. They are coming. When you let a moron president run this country into the ground, these countries are coming for blood. They can smell a mile away that this guy is not protecting us - does not want to protect us. He is opening our borders for attack, and they hear the message loud and clear. Hunker down and if I were you I'd move a few hundred miles away from the borders. We'll be hugging canada and kissing the southern and western borders goodbye by the time this all breaks loose. Our only hope is a big time, huge time, reformed republican win in November, and chances are that still won't be enough to hold back the fate that has already been unleashed. The collapse isn't bringing mad max - the enemy attacking and blowing us up is bringing mad max. You think it can't happen? Then you take your kids and you move on down to the coast. Enjoy it while you can. It won't be for very long. We'll hold the northern border while you guard the west. 50 states too many? - maybe 20 by the time it's all over. When your president isn't looking out for the country, then the country has to look out for itself. Protect the borders. Protect the flag. Protect America. Together we stand.

  22. I`m not refuting any of that. By the same token, it`s not all one day going to fall on us like some localized razor rain, either. It`ll come in varying degrees. It`s a big world out there, and the absorption factor will come into play. If you want to worry about an instantaneous scenario, think about an EMP blast from the sun-now that would be a real ¨whose yo daddy¨ hit! YIKES!

  23. Aw fuck china !

    Get real Pal - we stop buying Chinese shit for 6 months= one bankrupt fucking nation.

    You all miss the important point

    It's global now - we ARE ALL LINKED AT THE HIP





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