Fears of Quantitative Easing Affect Already Weakened Dollar

The US dollar is once again facing downward pressure, part of a much longer trend.

The dollar began a descent in 2002, and has ultimately declined by one-third since then, measured against a basket of six other currencies. From its high in summer 2001, the dollar had actually dropped 38% by the end of 2009.

Even worse, over the 25-year period since 1985, the dollar has lost more than half of its value. And if it wasn't the world's reserve currency, it would have declined even further.

What this means is that, in global terms, the purchasing power of U.S. consumers has declined dramatically.

A combination of ultralow interest rates, deficit spending by the government, and a large expansion in the money supply has had a very negative influence on the strength of the dollar.

So-called "quantitative easing" has an inflationary effect by increasing the money supply without a commensurate increase in the amount of goods and services in the economy. This is ultimately negative for the dollar.

It is widely anticipated that the Federal Reserve will announce the initiation of another round of quantitative easing at next week's policy meetings, on November 2 and 3.

Just the fear that the Fed will once again be printing as much as a trillion dollars – the very definition of inflation – has inflamed concerns about the value of the eroding dollar. The last round of easing sparked a worldwide flight to other currencies.

The IMF says that dollars currently account for about 62 percent of the total currency reserve at central banks -- the lowest on record. Clearly, those banks have lost faith in the dollar.

The declining dollar has a huge effect on investments that are re-paid in dollars. Investors and central banks are being paid back with a currency that has been continually losing value over time. That hurts confidence, and confidence in a currency is everything.

If it continues to decline, the dollar's status as the world's reserve currency would be put at risk. If the US ever lost this privilege, it would result in dramatically higher interest rates, as well as more-expensive oil and other imported goods.

A combination of savings, spending, interest rates, inflation, money supply, economic growth, government policies and trade balances can all affect the dollar's value.

The dollar index, which measures the dollar against a group of six other currencies, fell to 77.25 on Thursday. That's not so far off from its record low of 71.99, set in March of 2008.

Since September 20, the day before the last Fed meeting, the dollar index has dropped 5%, hitting its lowest level this year in the process.

The Fed knows that the dollar is facing heavy headwinds, so it will most likely take an incremental approach, starting with something in the $100 million range. That will give it leeway to conduct further rounds of easing as it sees fit in coming months.

Yet, it would hardly be surprising if the Fed ultimately prints $1 trillion, or more, in the next few months.

That money will be recycled into even more US Treasuries and, perhaps, mortgage securities, with the hopes of pushing historically low interest rates even lower.

However, any additional easing, above and beyond the $1.7 trillion already pumped into the banking system over the past two years, will be greeted inhospitably by bondholders and anyone that holds dollars.

After all, the yield on the 10-year Treasury was just 2.66% yesterday. Yes, it's well above the inflation rate, but it is historically paltry nonetheless.

Meanwhile, yields on 2-year notes stand at just 0.36%, barely above the record low set on October 12 (0.33%).

Only the fear of even lower returns elsewhere would compel any investor to lock up their money for years at a time at that those meager rates.

Right now, there is a lot of fear and uncertainty in the markets. While next week's Fed meeting may end at least some of the uncertainty, it will likely end up raising the fear level.

Quantitative Easing and the Declining Dollar

The US dollar is the world’s reserve currency, so most international trade is conducted in dollars. Since WII, the dollar has reigned supreme. Gold and oil are also bought and sold in dollars. Therefore, confidence in the US dollar is critical.

Fluctuations in the US dollar influence the price of gold and oil, and even US stocks. In other words, when the dollar falls, the price of gold and oil goes up. This is due to the diminished purchasing power of the dollar.

And as confidence in the dollar declines, interest in the safety of gold increases. The precious metal is historically viewed as a store of wealth.

The US government and Federal Reserve — like other governments and central banks — typically don't like gold's competition with the dollar.

Gold can't be printed at will, and it can't be loaned into existence. Gold doesn't generate interest, therefore it isn't a fundamental part of the banking system. And since it isn't a form of currency that can be exchanged for goods or services, it isn't a fundamental part of the US economy either.

However, the federal government is quietly championing the dollar's decline since it reduces the value of its debts. In essence, the US can pay back fixed costs (debts) more cheaply with devalued dollars.

Additionally, President Obama has pledged to double US exports by 2015. The only way that can happen is by devaluing the dollar relative to other currencies, making US goods cheaper overseas.

Yet, the US is not alone in this goal. All export-dependent nations (China, Germany, Japan, etc.) want to hold their currencies down in order to increase exports. Essentially, the entire developed world wants to devalue their currencies because this makes exports more affordable and competitive in world markets.

Call it a race to the bottom. As Treasury Secretary Tim Geithner has noted, no country — including the US — can devalue its way to progress and prosperity.

What's at risk is protectionism, tariffs and outright trade wars.

Meanwhile, the Federal Reserve has virtually assured that it will soon begin another round of "quantitative easing," or an intended money-creating stimulus for the sputtering US economy.

In essence, the Fed will be printing hundreds of billions more dollars out of thin air. In return, it will purchase even more long term government bonds.

This is on top of the $1.7 trillion the Fed already pumped into the banking system over the past two years, which should scare the hell out bond investors.

However, the banks already have plenty of money to lend. They just lack qualified or interested borrowers. Nearly one-third of US consumers, or some 70 million people, are considered sub-prime and cannot qualify for a home loan. They're considered to be too much of a credit risk for lenders.

As this point, it's reasonable to ask why lenders weren't this risk-averse during the past decade? But I digress.

Additionally, millions more Americans either have no jobs or no confidence in keeping their jobs. And they have no confidence in the overall economy either. These are not prospective borrowers.

Meanwhile, US corporations are sitting on more than $1 trillion in cash. Count them out as potential borrowers as well.

The Fed can make more money available at very low rates, but it can't force people to borrow what they don't want or need.

More quantitative easing will put even further downward pressure on the dollar, the sum total of which will be increasing without a commensurate increase in the amount of goods and services in the US economy. That's what ultimately leads to price inflation.

Most of that freshly printed money will eventually find its way into the stock market, inflating the market's value regardless of corporate earnings. That's exactly what happened when the Fed undertook its last round of money-printing.

The market seems to have already priced-in the pending rush of Fed money; the Dow recently broke the 11,000 mark once again. When you consider the historically low rates of return for Treasuries, it's easy to see where all that money is instead flowing.

Quantitative easing will also devalue the dollar, which will just encourage other nations to devalue their own currencies so they don't lose export shares to the US.

The process of money creation will lead us down a very dark road in so many ways.

Inflation and an even greater devaluation of the dollar are two obvious consequences. Yet, those may be the objectives of the Federal Reserve, which actually seeks inflation as part of its mission.

Additionally, there is an increased risk of trade wars, tariffs and protectionism — which won't be good for anyone.

The eyes of the world will be on the next Federal Open Market Committee meeting, which take place on November 2nd and 3rd. Other governments and central banks will be watching with particularly keen interest.

Many other economies have a lot riding on the Fed's decision. Some have their currencies pegged to the dollar. Many nations, through their central banks, own enormous amounts of US debt, which could be negatively affected by more money printing.

In simple terms, holders of US Treasuries could suffer significant losses if the dollar continues to weaken. Obviously, that won't go over well — especially if it's seen as having been intentionally orchestrated.

Owners of gold and other commodities traded in US dollars will also have a particular interest. Further declines for the dollar would mean further increases for dollar-denominated commodities.

In part, the Fed hopes to push down long term interest rates even further. Savers will continue to suffer the consequences of low interest rates — at least in the short term.

However, in the long term, the massive and continually mounting US debt will likely lead to much higher rates. That's especially true if the dollar continues its long descent. Nobody wants to buy a falling currency, or debt denominated in that currency.

Markets rely on confidence, and if the Fed does anything to rattle that confidence, there will be a series of uncomfortable, if not unintended, consequences.

FBI Investigating Banking Industry; Justice May Be Served

Despite the banking industry's best attempts to portray 'Foreclosuregate' as a simple matter of clerical errors, most people just aren't buying it. What's most worrisome for the banking industry is that the FBI and all 50 state attorney's general aren't buying that line of bullshit either.

The AP reports that the FBI has begun the initial phase of an investigation into whether the banking industry broke criminal laws.

The Bureau won't have to look far. It is well-established that the Big Banks committed gross fraud at every step of the way: in the loan documentation process, the mortgage-writing process, the mortgage-transfer process, the title-transfer process, and in the foreclosure process.

What the FBI will be looking for, in particular, is criminal intent. Here's a projection that they will find it in spades.

The criminal proceedings aside, the banks have years of legal battles, and absolutely massive legal bills, ahead of them. The civil proceedings alone will be overwhelming. The banks are hoping for quick rulings that lead to quick resolutions, but undoubtedly there will be numerous trials, and they will be lengthy.

Filing false documents simply doesn't go over well with most judges.

Banks, such as the former GMAC and Bank of America, say they have fixed the problems in the foreclosure process. Authorities in most states are highly skeptical, and have said so publicly. There are tens of thousands, perhaps hundreds of thousands, of bad documents. It will likely take extensive time to correct all of them. Bank of America alone has to re-file documents for more than 100,000 foreclosure cases.

But that's the least of the banks' worries. If there was criminal intent, and not just negligence, fixing the documents will be the easy part. Doing hard time will be the hard part.

Officials from the Federal Housing Administration have found clear disparities in how five major lenders have been responding to distressed homeowners after a four-month review of their practices, according to the AP.

At a minimum, the government has the power to fine lenders not complying with FHA guidelines.

And now the federal government is getting involved on multiple levels. Housing and Urban Development Secretary Shaun Donovan, Treasury Secretary Timothy Geithner and other officials met to discuss the issue on Wednesday.

Even the White House has said federal agencies are investigating the allegations of flawed foreclosure documents.

This story is huge and, as much as the banks clearly wish it would, it is not going away any time soon.

The gang of clowns that comprise the House and Senate have scheduled hearings for next month, but that will be nothing more than a dog and pony show and an opportunity for grandstanding.

What the banks truly fear is the FBI and the state attorney's general, who are not led around on a leash by the banking industry.

And what the banks also fear are the enormous losses they have already suffered, but have yet to figure onto their balance sheets. And if they are forced to repurchase tens, even hundreds, of billions in bad (read, fraudulent) mortgage-backed securities, that could be a death blow.

Bank credit has also declined substantially, meaning that banks are making less money from lending these days.

When you combine these factors, the Big Banks may not only be on the verge of bankruptcy, they may already be insolvent.

Since all of the banks' counter-parties — the ones who bought all those toxic "assets" — know this, they will not line up in orderly fashion to be reimbursed. There will be a mad scramble to get whatever money they can, while there is still money to be had. When the music stops, lots of these players will be left without chairs.

The banking industry is used to getting away with all of its high crimes, usually with nothing more than a fine. And even when paying those numerous fines, they are typically allowed to do so without an admission of guilt.

However, the Big Banks' way of doing business — in fact their very existence — is now finally, thankfully, at stake.

May justice be served.

Bank of America Facing Crisis

Bank of America is in big Trouble. Yes, Trouble with a capital "T".

You see, Bank of America now owns Countrywide Financial, the scandalous lender that gave out countless home mortgages to people who never could have been reasonably expected to repay those loans.

Bank of America bought the crippled lender at the height of the financial crisis in 2008, when Countrywide was on its knees and ready to go belly up.

Countrywide never worried about the capacity of a borrower to repay a loan since it was just an originator. The lender soon sold those loans, many of which ended up being packaged in residential mortgage-backed securities. They believed they were off the hook when those loans eventually, inevitably, went bad.

Not so much.

The investors in those securities are now demanding that Bank of America repurchase tens of billions worth of mortgages. And these aren't the demands of mom and pop investors in some class-action lawsuit either.

No, the investors demanding repayment include lending giants Fannie Mae and Freddie Mac, as well as the New York Fed, which is seeking to force B of A to buy back a whopping $47 billion in bad mortgages.

Naturally, Bank of America shares tumbled today as reality set in. B of A is in very deep shit.

Investors are demanding the repurchase of loans that were originated “in violation of underwriting guidelines.” Giant bond holders, such as Pimco and BlackRock, are among those also seeking repayment.

B of A never imagined this nightmare when it acquired Countrywide, some say at the insistence of the New York Fed, then headed by Treasury Secretary Tim Geithner.

B of A, the nation's largest bank, is now facing tens of billions in losses. The question is, could it be enough to tank the bank?

As I've noted in my last couple of posts, the level of fraud perpetuated was deep, widespread and included: the loan documentation process, the mortgage-writing process, the mortgage-transfer process, the title-transfer process, and the foreclosure process.

The level of fraud is simply stunning. There is no better way of putting it. And there is no way for the banks to reasonably or credibly play down this fraud, or write it off as a matter of "simple clerical errors."

Just by misstating a borrower's income or debt levels, a bank leaves itself vulnerable to having to repurchase mortgages when the loans go bad. As is widely known, those sorts of manipulations were rampant and widespread.

Simply put, Bank of America is facing a crisis. Even before the specter of having to repurchase at least $47 billion in bad mortgages was made public, the banking giant had already announced a third quarter loss of $7.3 billion, a rather grim figure.

The nation's biggest banks have a strangle-hold on the US economy. It is not inconceivable that B of A will need yet another government intervention because it is "too big to fail". As of last year, Bank of America’s assets were 16.4 percent of GDP.

In total, the three largest US banks (B of A, JPMorgan Chase and Citigroup) comprise 44 percent of the US economy. That is not safe for our economy or for the taxpayers, who may be on the hook should another unpopular bailout proposal be presented to the American people.

This is a remarkable story and it warrants our attention. The fallout could be as devastating as it is fascinating.

One thing's for sure; this is only the beginning.

Foreclosure-gate: a Historic Mess

With each passing day, we get new perspective on the size and magnitude of the mortgage/foreclosure scandal. We now know that this scandal goes beyond mere foreclosure fraud and is, in fact, a mortgage-transfer fraud of epic proportions.

The banks have been trying to cover up their massive mortgage fraud by circumventing foreclosure laws, thereby creating a entirely new level of fraud. And it's all finally coming to light.

On Wednesday, officials in all 50 states unveiled a joint investigation into mortgage companies’ conduct during foreclosure proceedings.

That was a timely decision. The very next day, RealtyTrac announced that U.S. foreclosure filings rose 3% in September from August levels, when 25% more homes were repossessed than the same month the previous year.

The foreclosure freeze and the concurrent investigations will have huge implications.

A drag on the foreclosure process “could delay any recovery in the housing market that might be on the horizon,” said analysts at FBR Capital Markets in a note that same day.

The markets know just how bad this could be for the banks; it has the potential to level them. That's why bank stocks tumbled this week.

The cost of default protection against U.S. bank debt also jumped this week on worries that financial institutions could be on the hook for losses as a result of the nationwide investigation. Bank of America’s spreads are now at their widest levels since July 2009.

This scandal involves more than just technical errors, or simply forgetting to cross the t's and dot the i's.

The examples of mortgage fraud are widespread and include wrong signatures, missing documents, falsifying documents, and false use of notary publics. The improprieties cast doubt on the entire foreclosure process. They reveal a systemic disregard not just for process and procedure, but for the law itself.

Yet, the banks are saying they simply didn't read the fine print — which they themselves wrote. And they're trying to foreclose on homes they don't even legally own. In many cases, they can't even provide proof of ownership.

There are cases of banks changing the locks on foreclosed homes while the inhabitants are still inside. However, it is illegal for a bank to enter a property unless they have retaken it at a foreclosure sale, which can be months or years after a foreclosure suit is filed. And the banks are certainly prohibited from entering a home when it is occupied.

What's worse, banks have been caught changing the locks on homes for which they don't even hold a mortgage.

The entire process is a mess. Basic property rights dictate that banks should not be attempting to repossess homes they don't even own. After all, the US is guided by the rule of law.

If lenders didn't foreclose properly, buyers could find themselves without clean title, opening a Pandora's box of risks. If title and ownership are in question, buyers could become reluctant to purchase foreclosed properties. Just the fear of such an outcome could be devastating to the already crippled real estate market.

Confidence has been lost. And in times of great uncertainty, confidence is the only thing that matters. If large numbers of homebuyers lose faith in the system of property ownership, title, and transfer, home sales will move from slow to stop. Prices follow sales volume, and if sales dry up significantly — especially in markets dominated by distressed sales — prices will collapse.

Unless the housing market is allowed to go through an uncomfortable, yet orderly, process of foreclosure and cleansing, all of the distressed properties cannot be cleared and a sustainable floor in prices cannot be found. Only through repossession, through the efficient reallocation of bank-owned properties back into the market, can housing truly heal.

Perhaps the biggest concern is the health of the Big Banks. If they are ultimately revealed as insolvent, it will wreak havoc on what's left of America and its economy. Yet, this might actually be a good thing in the long run because it would finally break the Big Banks and end their grip on our government.

It will be quite fascinating to watch the process unravel. The upcoming mid-term elections and the rise of the Tea Party are all about the bailouts, the hatred of the banks, and the fear of creeping socialism.

Another bank bailout would be political suicide for any politician that supported it. The public would never stand for it. Yet, so many Republicans have now backed themselves into a corner by opposing bailouts for political reasons.

However, in the fall of 2008, we were all warned that not bailing out the Big Banks would be economic and national suicide. We may still get to find out after all.

The fallout from this scandal could be historic and watching it all play out will be nothing short of intriguing.

We can only hope that all those politicians who carry water for the banks will be excoriated for not calling on them to follow and uphold the law. And if the banks won't, then the lawmakers are supposed to.

This is a great opportunity to see them all for what they are; liars, cheats, thieves, political partners and opportunistic bedfellows.

They are all in league with each other.

Massive Banking Crisis Starting To Unfold

With Bank of America halting foreclosure proceedings in all 50 states, it's just a matter of time before the remaining Big Banks follow suit — whether they want to or not. Given the level of fraud committed, the government will surely force them to. As it stands, GMAC and JP Morgan Chase have also decided to at least delay additional foreclosures.

The repercussions of this will be extraordinary. Such a moratorium will slow any attempts to clear the backlog of foreclosed properties across the nation, and it will cut off the flow of mortgage payments that the banks heavily rely on. These payments are the banks bread and butter.

Already, millions of people have stopped paying their loans and are living for free as they wait to be foreclosed upon. Many are demanding to see the paperwork trail, knowing that the banks can't prove ownership of their homes. They don't have the titles. No one knows where they are.

And the looming lawsuits will be disabling to the banks. Even if they win most of the cases, the legal costs, the time in court, and the further bad publicity will be highly damaging.

All of this is putting massive strain on the banking system, which could potentially collapse without a government intervention. How unpopular would that be?

If the Republicans take control of the House in November, they will fight like hell to prevent such an intervention. Their constituency would revolt in open rebellion. Another bailout could potentially spark a revolution by an increasingly seething American public.

“Rising operating costs in banks will be more significant than in past recessions and could force the U.S. government to restructure some large lenders as expenses overwhelm revenue,” said Christopher Whalen, managing director at Institutional Risk Analytics.

The foreclosure process will take some time to unwind. The shadow inventory has been growing rapidly. According to Morgan Stanley, 8 million foreclosure-bound homes have yet to hit the market.

According to Whalen, “We are less than one-quarter of the way through the foreclosure process."

UBS Investment Bank managing director Thomas Zimmerman cites statistics that predict there could be 11.5 million foreclosures over the next few years.

These are very bad signs of what's to come, and how long this nightmare could play out.

If the biggest US banks were forced to recognize their actual losses, and the true value of the residential and commercial properties on their books, they would be insolvent.

We have a massive banking crisis on our hands, folks, and things are about to get very ugly.

Prospectors Piling Onto Gold's Bandwagon, But Fundamentals Remain Strong

There are plenty of analysts who believe that gold prices will continue to rise, and some (such as Jim Sinclair and Chintan Karnani) see the possibility of $1,450-$1,600 early next year.

Many people view gold as a store of value. Central banks cannot print it out of thin air. And it cannot be devalued at will by governments to pay off their debts more cheaply, as a currency can.

However, other people are jumping on the gold bandwagon as a means of making money. And there are reasonable concerns about the rapid influx of retail investors into the gold market. The sudden increase of these gold prospectors has helped to drive up prices.

These investors are not buying gold as a hedge, or as an insurance policy to protect them from exposure to dollars or other fiat currencies. Rather, they are buying gold with the hope of eventually cashing out and taking their profits in the form of even more dollars.

They are the last to invest in any bull market and the first to exit. And right now, these investors have started buying gold all over the world. Mutual funds and ETFs have also increased their allocation of gold.

Given that, a significant correction from gold's highs could be imminent. But at some point thereafter, gold should continue its ascent because of the instability of fiat currencies and the size of sovereign debts.

The possibility of a currency collapse is a very scary, yet quite realistic, prospect. All fiat currencies are under great duress. Sovereign debts are massive and unsustainable. Gold's continuing rise is a sign of the instability in the dollar, of global stock markets, and in the bond markets.

Central banks don't like gold because they can't print it at will, and they can't control it. They had previously been dumping gold on world markets in an effort to keep prices suppressed. However, they've recently changed course.

Over the past 12 months, the IMF and central banks have reportedly sold the smallest amount of gold since an agreement to cap gold sales was put in place in 1999.

As Europe continues to reel from its sovereign-debt crisis, central banks there and elsewhere have stopped selling gold. Instead, they're now buying.

Central banks account for about 20% of above-ground gold in the world, and fewer sales mean gold supplies are likely to continue to lag demand, boosting prices in the long term.

And that's what's important to those who own gold due their legitimate concerns about unstable fiat currencies and unsustainable sovereign debts.

Prepare for Higher Oil and Gas Prices

John Hofmeister, the former president of Shell Oil and now CEO of the public-policy group Citizens for Affordable Energy, has some rather stark projections for the price of oil and gasoline. If he's correct, the outcome will adversely affect drivers, home-heating oil users, and American consumers in general.

Hofmeister says that future US energy production will be hampered by the offshore drilling moratorium that will effectively be in place until at least the middle of 2012. The oil industry veteran says that new rules won't even be in effect until the end of 2011.

Due to the moratorium, Hofmeister says Gulf oil production will be reduced by up to 1 million barrels a day. Imported oil now accounts for 67% of usage, but will rise to 75% by 2012. As a result, Hofmeister predicts that by 2012 crude oil will be up to $125, and gasoline will be between $4-$5 at the pump. And from there, he sees things getting even worse.

The heavy reliance on foreign oil puts the US in a precarious position as a super-power. In 1970, the US was still the world’s oil largest producer, but its crude production peaked at a level never since exceeded.

The US is currently the world's third-biggest oil producer, but its seemingly unquenchable appetite for oil also makes it the world's largest oil importer, by far. The US imports almost two barrels of crude for every one it extracts.

With consumption at roughly 21 million barrels per day, the US uses more oil than any other nation and equals the consumption of the next five largest national consumers combined (China, Japan, Germany, Russia and India).

However, demand for oil is increasing globally, particularly in developing nations, creating a growing competition for this finite commodity. In fact, global usage is outstripping new discoveries. For every four barrels of oil consumed, only one is discovered.

The International Energy Agency (IEA) notes the decline rate for oil production appears to have increased to about 7% annually. However, the IEA says that global demand should increase by 1.4%, or 1.2 million barrels per day, every year through 2015.

What is evident is that supply and demand are moving in the opposite directions, or, more accurately, the wrong directions. And what this tells us is that prices are going to rise.

“As excess supplies … shrink, oil prices should rise,” says Michael Bodino, head of energy research at Global Hunter Securities.

Perhaps Bodino hasn't seen the IEA data about the decline rate for oil production. Somehow, he envisions a 1% growth in global supply and 2% growth in demand. Based upon those projections, Bodino envisions $90-$100 oil in 2012.

Kevin Kerr, editor of Kerr Commodities Watch, thinks that may optimistic. For now, Kerr says he expects oil prices to range trade a bit longer and, "Then I expect a sharp move above the $90 level and a range of $90-$110 for some time, baring any unforeseen problems in the Middle East or other choke points.”

However, according to Kerr, within two years, crude’s record high price of around $147 “may seem cheap.”

“The long-term prognosis for oil prices is much higher simply due to growing global demand,” says Kerr. “While the economic turndown has slowed usage, the growth in places like China and India are increasing demand rapidly [and] as the economies of the planet improve, so will demand for oil and gasoline.”

Absent the ability to rapidly increase supply, that will result in higher prices for all of us, perhaps much higher.