Sunday, December 14, 2014

John Hathaway - Monetary Tectonics

We scour the internet looking for the best information we can find for readers here on the subject of monetary system change. Since we think change is coming, it makes sense to try and understand the change and prepare for it. Here is an article by John Hathaway (Monetary Tectonics) that is a very good summary of many of the issues we have covered here. Below are a few quotes from the linked article and then a few added comments. Readers should read this entire article to get full contex and because it is a very well written piece.

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"The “strength” in the dollar appears to have been the proximate cause of the recent selloff in gold. The rise in the dollar index (DXY) is taken by most to mean that the dollar is actually strong. The chart below shows the inverse correlation between the DXY and the dollar gold price. This discussion will examine the very meaningful difference between the dollar’s relative and absolute strength, and look at the widening fissures beneath the fa├žade of strength – fissures that, as yet, appear to have had little impact upon the investment consensus."

"The DXY index is not the dollar; it is a measure of the dollar’s relative strength. The principal components of the DXY index are the Euro (57.6 percent) and the Japanese Yen (13.6 percent). The balance (28.8 percent) consists of the Canadian dollar, British pound, Swedish krona, and Swiss franc. Therefore, the DXY index says absolutely nothing about the inherent virtues of the US currency. Instead, it reflects capital flight from yen- and euro-denominated assets from regions where the respective central banks have hatched well documented schemes to devalue those currencies as the antidote to economic weakness. There are many reasons why the dollar may remain strong against the core components of the DXY. However, whatever virtues others may see in the DXY’s ascendant pattern, we see the potential for monetary chaos."


After the introduction above, Hathaway goes on to detail a number of reasons why he thinks the US dollar will lose its status as sole global reserve currency. This is one of our main themes here. So below are some quick bullet points from the artice on this:


- the US dollar is rapidly diminishing as the currency of choice for international trade

-China is moving to get the yuan in position to compete with the US dollar in years to come

-Russia is implementing its own version of SWIFT to bypass the US dollar in 2015

-the recovery being reported in the US economy is deceptive because it is based on Central Bank stimulus both in the US and around the world 

-poor economic performance around the world leads to monetary stimulus abroad which creates the illusion that the US dollar is strong. But this cannot be sustained over time.

-the drop in gold prices in 2014 simply reflects the rise in the US dollar, but will reverse when the US dollar weakens and western demand for gold increases alongside the already strong eastern demand.

Here are the concluding paragraphs of the article:

"Swelling distrust of, and disrespect for, the dollar’s reserve-currency status is becoming another headwind. To us, these developments suggest that the tectonic plates of monetary conventions are beginning to shift in a way that will lead to a significant revaluation of gold. A critical state will be reached when markets and policy makers realize that additional credit creation does not stimulate growth."

"The investment rationale for gold is the inverse of that for all paper currencies. Cheering for the rise in the dollar relative to other currencies, as measured by the DXY, is in our opinion seriously misplaced. The rise in the index is more a matter of sinking non-dollar currencies (or, more precisely, systemic subsidence) than an ascending dollar. No paper currency offers protection from monetary transgressions because of national borders: What happens in Europe, Japan, or China does not stay in Europe, Japan, or China. To function well, the global financial system must be seamless."

"In the absence of robust global growth, debasement of the euro and the yen will ultimately force devaluation of the dollar – but against what? When no paper currency is left standing from multiple rounds of competitive devaluation, there will be no choice other than to reconfigure global financial arrangements. We believe that gold, revalued in a very substantial way, will be integral to the process of reconfiguration."
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My added comments: 

Notice the points made in this article that we have covered here on the blog. Especially the underlined statement in the next to last paragraph "what happens in Europe, Japan, or China does not stay in Europe, Japan, or China". 

This is one of the most important points that Americans need to understand. Here on the blog we say a problem anywhere can lead to a problem everywhere. This is why it is so critical to stay informed and alert. A problem can erupt in any of these major economies at any time. Because the world is now completely financially interconnected, this will impact the US and the US dollar eventually. If it happens suddenly, another global crisis will trigger the change. If it happens slowly, the result for the US dollar will be the same. It will just take more time for it to unfold. Either way, we think the change is coming. We'll follow it here.

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