The "Vergulde Draeck" Omen
(The "Gilt Dragon" Omen)

A Foreign Exchange Rate condition that will announce then end of the US Dollar


 

Abstract


There is an ongoing collapse of the US Dollar (USD) against most of the world's fiat and quasi-fiat currencies. This collapse in value has been taking place for at least 40 years. As a long term phenomena the "USD decline" has been ongoing since the 1960s on a selective basis.

There have been some emergent trends that will accelerate the collapse due to the global set of dependencies on the USD and USD denominated assets. 


Trends to expect
Expect a more substantial and substantive exodus out of the USD (and USD denominated assets). 

Expect a direct exodus out of USD denominated Sovereign Bonds, and State & Municipal Bonds (most if not all have reached a rating near "junk")

Expect an ongoing increase in the exodus out of lower grade US corporate bonds to increase exponentially, as many US corporations will collapse in this downturn as many have been used as pawns in finance system speculation since the 1980s 

Expect USD exiting conditions far beyond the 2000 to 2010 global finance system conditions [that have essentially caused a decade of money flight from the USD (and USD denominated assets)]

Expect bank accounts in the USD zone to be confiscated, but due to dependency reasons the Australia, Canada, Ireland, the UK and New Zealand will not be exempt from this.

Expect
Precious Metals (as an asset class) to increase in value against the USD quasi-exponentially.





 
The decline of the US as a meaningful world economic and military power will begin with a substantial and substantive currency collapse -- separate from the onging collapse in USD value that has been onging for the past 40 years.

After these financial events have run their course : there will be so substantial or substantive return of the trading power of the USD.

Many observers view the ongoing collapse of the US currency and economy as having started in structural changes made in the finance system as far back as the late 1960s to mid-1970s. A substantial number of observers of the US economy view the conditions for the collapse of the US dollar as having originated in structural changes made from the 1910s to 1940s.

The collapse of the USD and the entirety of the US economy may simply be inevitable, a price for failing to live within a nation state's natural limits.









The Quadruple Witching Condition


The Maths
Currencies : ({Australia: AUD; Canada: CAD; NZ: NZD; Switzerland: CHF})
(Maths) : "=>" (alternately "= | >" or "≥") is "Greater Than or Equal to"
[Binary] function (Gilt Dragon)
{
AUD => USD;
and
CAD => USD;
and
NZD => USD;
and
CHF => USD;

} returns True for "Duration"


Duration

All of these duration conditions should be seen in terms of probability curves. Most of these probability curves are (and will be) by nature nearly identical to each other. The parameter "loss" (floor, ceiling) will change as expected, but this is explicitly understood. However, triggering of the "omen" greater than an hour, but less than 2 days will signal unclear but known (yet reasonably expectable) "predictable losses" in value of the USD.

Note
Accountancy Cycle in this text means 7 years, the internationally required time for retaining accounting and tax records.
More than 1 day, but less than 3 days
Less than one week continuously
Less than one month continuously
 



The American Deep State, and the Rise and Fall of the USD
Analysis of the flaws in the logic & reasoning







The term “Deep State” was coined in Turkey in the 20th Century -- and is said to be a system composed of high-level interlinking elements within the intelligence services, military, security, judiciary and organized crime.

In British author John le Carré’s novel "A Delicate Truth" a character describes the Deep State as :

“… the ever-expanding circle of non-governmental insiders from banking, industry and commerce who were cleared for highly classified information denied to large swathes of Whitehall and Westminster.”

Actually this use is a good idea -- as the Military and Intelligence agencies are not absolute in their power or influence even within the US Deep State.

For Israel of the 2000s or the USSR of the 1960s this usage would not be unrealistic.




In this analysis "Deep State" means the hybrid association of elements of the US government and parts of top-level finance and industry that are effectively able to govern the US without any reference (or contact with) the general population.

The US civil society (and economy) has not functionally collapsed this far yet.

The original use of the term may be more realistic as time goes on.







One way to understand the ' American Deep State' is to trace the many vectors of its dependencies.
A Deep State with few internal dependencies is possible, but rare in the 20th Century.

The American Deep State needs the nation to survive, but the nation does not need the Deep State to survive.

There is a lot of 'groupthink' within the US Deep State along the lines of  “we are the only thing keeping this thing together.”

The US would and could survive without the Federal Reserve Bank, but the Federal Reserve would not survive without the Deep State.

The Federal Reserve Bank is not the Deep State.

The Federal Reserve Bank is (within reasonable margins of probability) merely a tool of the Deep State.

Deep States are not guaranteed to be bound to the nations that they originated in or from.

To assume that a [Private Corporation] Central Bank is this important in the wealth and power of nations may be overstated. Wealth comes from the rule of law and a properly functioning civil society.

The [Private Corporation] Federal Reserve Bank has been around for at least 100 years -- and it is unclear if the general population can actually survive without it.

To assume full sovereign government control here is an ambiguous call -- as there is no clear evidence to support the claim fully.


This brings us to the USD and the American Deep State.

The Deep State does not overall substantively care about the broad economy – mortgage rates, minimum wages, unemployment -- any more that it cares about the political circus that passes for government in the US ... or the bickering over regulations by various camps inside and outside politics and the industrial sectors.

What the Deep State clearly seems to care about are :
  • the USD
  • Water
  • Energy
  • Minerals & Agriculture
  • ... and access to those commodities (trade & military alliances, sea lanes ...

Deep States -- that do not care about the functioning of the population or resources they control or influence -- are truly Failed States.

Normal "Nation States" that cannot (or will not) provide any help or support the the population they govern are called Failed States.

Deep Sates caring more about resources and alliances is a classical endgame sign of a total systemic and functional collapse.

This was exactly how the late Roman Empire, and Austro-Hungarian Empire were run.


Consider this :

The trade enabled by the Reserve Currency (the USD) makes it possible to create (print) money out of thin air and exchange this money for oil, commodities, electronics, etc.

If this isn’t "the greatest trade on Earth" – exchanging mere paper for real stuff – then what is?

Reserve currencies in the 20th century (as a rule) have behaved this way, but less so before 1950. The 21st Century has had noting but largely artificial money creation for trade.

The fiat FOREX trade is a strange an nebulous one.


While it is possible to be sympathetic to the strictly financial arguments that predict hyper-inflation and the destruction of the USD, they are in effect touching the toe of the elephant.

The financial argument is this: money can be printed indefinitely -- yet there is no way to create more oil, coal, ground water, etc.

So eventually the claims on real wealth (aka USDs) will so far exceed the real wealth that the claims on wealth will collapse.

Hyperinflation is attributed to the general population loosing all faith in a currency. Not all hyperinflation is purely structural.

The commodity fetishes that leads to a currency being created ... and it is true that accounts will have to be settled from time to time.

What is a claim on real wealth?


What is the geopolitical and strategic perspective of the Deep State on the USD?

Why would the Deep State allow policies that would bring about the destruction of its key global asset, the USD?

There is simply no way the US Deep State is going to support policies that would
  • fatally weaken the USD
  • or passively watch a subsidiary of the Deep State (the Federal Reserve Bank)
damage the Deep State itself.

Like the Falkland Islands: America is just an accounting province of resources, labour run by a political elite that only functions (or exists) to provide favours to the Deep State.

The support for polices that wipe out the USD for good will probably be made by 'multi-generational inherited' ruling elites that have lost ties to the functioning economy and civil state.

The Federal Reserve Bank is moot in the bigger picture of things. The Deep State is beyond reach of its display windows.


The strictly financial arguments for hyper-inflation and the destruction of the USD implicitly assume a system that operates like a line of dominoes: if the Federal Reserve Bank prints money, that will inevitably start the dominoes falling, with the final domino being the reserve currency.

Setting aside the complexity of Triffin’s Paradox and other key dynamics within the Reserve Currency system, we can safely predict that the Deep State will do whatever is necessary to maintain the USD’s Reserve Currency status and purchasing power.

Most currency collapses in the 20th century have not been directly related to any kind of state or private sector 'deck of cards' structural problem.

There is no guarantee that the resource reserves necessary to keep any currency viable are infinite in any nation state, or that a nation state's ruling elites will be capable of using the necessary resources to rescue a currency.



Triffin’s primary point

Nations (like China) that run trade surpluses cannot by nature host reserve currencies, as that requires running large structural trade deficits.

This point originated in an era of expanding global trade and population and resource consumption.

When all of these variables are decreasing this point may be null or even void.


There is at least some margin to say that the EURO currency is a regional experiment in the “bancor” model.

The bancor model is where a supra-national currency supposedly eliminates Triffin’s Paradox by it structural design.

The Euro has failed, partly because supra-national currencies do not inherently resolve Triffin’s set of dilemmas and paradoxes.

Supernational currencies merely obfuscate the Triffin Dilemma -- with sovereign credit imbalances that eventually moot the currency’s ability to function as intended.  

The EURO has been in a state of turmoil for some time, and like the USD it is based on debt.

The EURO has not succeeded in escaping the overall properties of the Triffin Paradox.

Adoption of the EURO -- for some EU nations -- been a total disaster that has practically extinguished national sovereignty. 

The overall EUR debt levels of Greece and Italy are good examples of this.


Many people assume the corporatocracy rules America, but the corporatocracy is simply another tool of the Deep State.

Many claim the 'Powers That Be' want a weaker dollar to boost exports.

Yet this strictly FOREX 'financial concern' is only of passing interest to the Deep State.

Yes. BUT -- how sovereign is the American state (or its ancillary states) when only a multi-generational political class rules?

A weaker USD may not boost exports if there is no demand for what the US produces. 


The "US corporatocracy" (banking or financialization) has captured the machinery of regulation and governance, but these are surface effects of the electoral government that rubber-stamps policies set by the Deep State.

The US corporatocracy is a useful global tool of the US Deep State, but its lobbying of the visible government is mostly distant background noise to the Deep State.

The only sectors that seem to matter to the US Deep State are the defence, energy, agriculture and international financial sectors that supply the Imperial Project and project power.

What would best serve the US Deep State is a USD that increases in purchasing power and extends the Deep State’s power.

It is widely assumed that the Federal Reserve Bank creating a few trillion dollars has created a massive surplus of USD denominated paper assets that will guarantee a slide in the USD’s purchasing power and its demise as the Reserve Currency.

The US political leaders that rubber stamp the finance sector's regulation demands are effectively finance employees in all but name.

Lobbying occurs at the federal and state levels, the role of the states seems to be ignored here.

The US Deep State oddly cares hugly about the entertainment and broadcasting sectors as oceanic expanses of entertainment keeps social unrest down. Some 80% of these sector jobs are not sustainable without government subsidies of all kinds.

A currency necessarily having more buying power did not help the UK Pound (1918 - 1939).

There has been a massive surplus of USD outside the US for decades. If this USD is dumped back into the US hyperinflation is highly probable.


Those who believe the US Federal Reserve Bank’s expansion of its balance sheet will weaken the dollar -- are forgetting that from the point of view of the outside world -- the Federal Reserve Bank’s actions are not so much expanding the supply of dollars as offsetting the contraction caused by deleveraging.

It is not impossible that the USD may soon be a scarce trade good in the global economy.

The simple but profound laws of supply and demand will push the USD’s "value" not just higher -- but perversely higher.

This is the classic hyperinflation argument, influenced by European hyperinflationary currency collapses. To what extent this can be bound to the US fiat currency is unclear.

The scarcity idea here ignores the value of the currency, and financial assets denominated in USD.

Just because something is rare does not mean it will be valuable.


The problem in the near future for exporting nations will be the scarcity of USD available for international trade.

If one considers the US Federal Reserve Bank’s policies (tapering, etc.) solely within the narrow confines of the context of corporatocracy (or a strictly financial sector context) -- we are in effect touching the foot of the elephant and declaring the creature to be short and roundish.


The USD's role in international trade has declined since the 1960s, but the decline has substantially accelerated since 1992 and even more so since 2002.

If US corporations are so lacking in sovereign power, why are the US federal and state governments (and the US military and all levels of the civil service) so obedient to them?


The elephant is the Deep State and its Imperial Project.
Is the Imperial Project benefiting whom?
Who controls the Imperial Project?
The US is not the British Empire...







Understanding the "Exorbitant Privilege" of the USD

Analysis of the flaws in the logic & reasoning






To understand a Reserve Currency, we must understand Triffin's Paradox.

It seems very few grasp the implications of the Triffin Paradox, and even fewer relate it to Global Trade.

The general conditions in which Triffin's Paradox becomes unsustainable is this :

"To supply the world's risk-free asset, the center country must run a current account deficit -- and in doing so become ever more indebted to foreigners -- until the risk-free asset that it issues ceases to be risk-free."

"Precisely because the world is happy to have a dependable asset to hold as a store of value, it will buy so much of that asset that its issuer will become unsustainably burdened."

In other words :

If the US issues too many USD, that could destabilize the dollar.

Triffin's Paradox is not the only key to understanding the properties of reserve currencies.


The sales of US Treasury bonds have dwindled to almost nothing since the end of the Cold War.

The Federal Reserve Bank is now its best customer in 2014.


The almost total cessation of US Treasury Bond purchases by China, India etc ... has forced a beginning of an overall rethink about how the entire USD system works.

The rest of the world is swimming in USD assets. Getting rid of  USD assets by converting them into Gold or Silver etc ... is about the only safe thing to do in this long running depression.


Yet this is only one aspect of Triffin's Paradox :

The basic idea is that when one nation's fiat currency is used as the world's reserve currency, the needs of the global trading community are different from the needs of domestic policy makers.

Trading nations need USD to lubricate trading and as Foreign Exchange reserves that bolster the value of their own currency and provide the asset base for the expansion of credit within their own nation.

Within the confines of the Mixed Gold & Silver system evident in Triffin's era this would seem logical and reasonable. But even in his era the UK Pound was also a reserve currency of both primary and secondary importance.

The need for the USD is not absolute for world trade. Other currencies are available.


US exporters want a weak dollar to spur foreign demand for their products, while foreign holders want a strong dollar that holds its value or purchasing power.
The US as an exporting nation (except for agriculture, and a limited amount of technology) has practically vanished. So how could this be true, and with a Fiat USD as well?

This is one aspect of Triffin's Paradox that is intuitive.

Yet this view is misleading in several important ways.

This part of the Paradox is intuitive in the Gold and Silver system of the 1950s and 1960s. The way goods are made can change the meaning of the paradox.


Consider Apple's iPhone. It is a U.S. product, right?

The iPhone it is counted as a US export when it is shipped and sold in Europe.

BUT ...
  • How much of the iPhone is manufactured in China?
  • How is the "value-added" part of the product accounted for?
  • What if Apple partially owns the foreign factories that make the parts that are in its "export"?
This example shows how complex and potentially misleading it is to simplistically assume an "export" manufactured with imported parts is somehow purely a US export that would be severely impacted by a strengthening USD.

If the dollar strengthens, wouldn't Apple be able to buy imported parts for lower costs? Wouldn't a stronger dollar actually lower production costs?

This also ignores the fact that most large US (global) corporations already earn >60% of their revenues overseas, in other currencies.

If the iPhone parts are made in Asia and the completed phone is sold overseas in exchange for other currencies, then exactly where does the strong USD come in to destroy this trade?

The only impact the dollar has is when overseas earnings are reported in USD.

This is an accounting "trick": as the dollar weakened, global corporate profits skyrocketed as earnings in Euros, Yen, etc. rose when stated in USD.

As the USD strengthens, overseas profits will decline when stated in dollars. But since roughly two-thirds of global Corporate America is already overseas -- its factories, labor forces, back-office, etc. -- and two-thirds of its revenues are earned in other currencies that are used to pay local labor and materials, then the supposedly devastating effect of a stronger dollar on corporate sales is illusory.

This supposedly horrendous impact of the USD rising also completely overlooks the premium of necessity.

If you need grain and soybeans to feed your people, and the only available surplus available is American grain and soybeans that cost 25% more when priced in dollars, you will pay the premium without hesitation.

If the US starts exporting natural gas, buyers will happily pay a premium due to a strong USD. The US gasoline price could double in price and still be less than half the current price Europe is paying.

Let's not forget that exports are 14% of the US economy. The truly domestic-only part of that 14% is less than meets the eye, as so many US exports (such as Boeing airliners) are assembled from globally manufactured components priced in local currencies.

If the USD strengthens, the price of all imported goods and services declines significantly. That helps 90% of the economy, for recall that imported components used in the manufacture of exports (such as oil) also decline in price as the dollar strengthens.

Does it make sense to demand a policy that helps at best 10% of the economy (and even that "help" is marginal for all the reasons outlined above) while hurting 90% of the economy? No it does not. A stronger dollar will help the U.S. and foreign holders of dollars.

Lastly, we need to understand the flow of US dollars.

Generally foreign nations don't end up with USDs by magic -- they end up with US dollars because they sold the US more goods and services than they bought from us.

The US got the goods and the exporting nation got the dollars.

The exporting nation ran a trade surplus with the US and now has dollars. It can hold them as reserves, either in cash or US Treasuries, or it can "recycle" the dollars back into the US economy by buying real estate, investing in companies, going to Las Vegas, and so on.









What happens in global recession? Trade declines along with everything else.

And what happens when trade declines? Trade deficits also decline.

In the case of the US -- which exports large quantities of what the world needs (grain, soy beans, etc.) while buying mostly stuff that is falling in price in recession (oil), the trade deficit could decline significantly.

It is as if there is a hidden unprovable argument that a Global Recession could fix the US governmental debt and deficit problems.

Trade Decline ~= Trade Deficit Decline is by no means proven or even true in the current situation.


What does a declining trade deficit mean?
It means fewer USDs are being exported.

Think about this: the global economy is about $60 trillion, of which about 25% is the US economy. Into this vast sea of trade, the US "exports" about $500 billion in U.S. dollars via the Trade Deficit.

To put this into some perspective, these numbers are not that big compared to the machine it is lubricating.

It is an astounding privilege to conjure up dollars out of thin air and exchange them for real goods.

So what happens when there are fewer dollars being exported?

Demand for existing dollars goes up, pushing the "price" of dollars up -- basic supply and demand.

USD are not backed by Gold nor Silver or anything else. Fewer USD being exported does not cure the glut of USD held outside the US.

The way the world economy is measured is borderline voodoo, the US's role in it is overstated in the modern era.

The USD is not the only currency lubricating the global economy.

All fiat currencies create value from nothing and allow for goods to be traded.

The supply and demand relationship here has not factored in FOREX machine trading.



It also means that there will be fewer dollars seeking a safe haven in US Treasuries, which will slowly but surely exert pressure on Treasury yields to rise.

Higher yields on Treasuries will then feed back positively into the value of the dollar, pushing it higher.

We can now understand why global recession will actually boost the value of the US dollar and push interest rates higher in the US, even as the stronger dollar lowers the cost of imported goods.


The rest of the world's finance system is fleeing from US Treasury Bonds because they are simply too risky.

Treasury Bond yields are going up because the USD system is on the verge of an overall functional collapse.

US interest rates are not likely to go higher than 4%. The flow of cheap money to the US finance system is more important that any supply or demand issue.



Rather than be the catastrophe many believe, a stronger dollar will greatly benefit the U.S. and anyone holding dollars.

The strength of the USD may be no more than a corpse being warm.

Triffin wrote in an era of rapidly expanding global trade (1950s-1970s).

One can understand why the interests of domestic and international holders of USD might align.

However, eras of declining global trade where dollars would actually become scarce were not the focus of his analysis.

Triffin's analysis may prove insightful -- but totally useless -- in a world with declining available resources, overpopulation and global warming coupled with peak corruption in the public and private sector.

How can something that be created artificially and hyperinflationarily become scare? The accounting and economics are not clear at all.  


One can understand why those worrying about a surplus of USDs got it wrong: the real problem going forward for exporting nations will be the scarcity of dollars.

This explains the dynamics that will continue pushing the dollar higher for years to come. This is not an intuitively easy set of forces to grasp, and so many will reject it out of habit. That could prove to be a costly error.

The dollar rises for the same reason gold and grain rise: scarcity and demand.

In spite of a lot of the central control that is inherent in the management of the USD, its long term and short term fate are unclear.

Yet, the classical signs of the functional collapse of the USD are evident.

The USD may become scarce, but will it be worth anything?




Currencies used in this analysis


Australian Dollar

The Australian economy is very much like the Canadian economy, with respect to its mix of industrial inputs and outputs and stability. Except for being a dry and hot (but mainly arid) nation it is otherwise highly identical to Canada economically.
Canadian Dollar

The Canadian and Australian economy have a lot in common, but the Canadian economy and finance system are shackled to the failing and unhealthy US finance system. In times of economic crisis, the Canadian Dollar simply cannot be as strong as the Australian Dollar with all other factors being equal. In spite of recent attempts by the Canadian government and the Bank of Canada to keep the CAD below parity with the USD, these attempts have yet to be fully successful. This is in spite of the Canadian finance system has some of the same structural flaws as the US finance system, but without the direct influence of "Derivative"finance instruments.

New Zealand Dollar

NZ is the English speaking world's 'dog' currency. Unlike the AUD and CAD that are heavily traded in the FOREX market globally, the NZ Dollar is only traded in the Australasian region. Some FOREX trading entities in North America and the European Union do trade in the currency, but this has only been since the 2000s.
The Swiss Franc

The Swiss economy has some analogues to NZ or Australia or Canada with respect to industrial inputs and outputs and stability, but the banking sector has made Switzerland's currency a gauge (or proxy) for measuring 'global money flight' since the 1930s. Money flight into the CHF happens for good reasons




Unusual post-2007 Global Finance Crisis FOREX market signals





In the entire history of the AUD and CAD versus the USD since 1901
  • The Australian Dollar has never exceeded the value of the Canadian Dollar in the global currency markets (versus the USD) since 1901.Yet, since 2007 this has happened. This is an interesting signal.
  • The current extraordinary trading value of the AUD cannot historically be viewed as normal or nominal, and its causes are unclear.
  • This new Australian Dollar strength may indicate a new state condition for the USD in some parts of the global FOREX market.
  • Is the AUD's exchange rate a signal of wealth fleeing the (US and USD) and heading to Asia? This may be true and ongoing. 
  • Is the NZD's relative strength -- in spite of -- 'expensive to repair' earthquakes, many banks needing government bailout money AND possible confiscation of some of people's bank account funds to save said banks ... normal?
  • Is the CAD's new parity relationship with the USD part of this money flight to Asia?
More questions are raised than answers, and one is only left to follow the money.
  • In late 2013 into 2014 the NZD, AUD and CAD collapsed in value against the USD.
  • All of the Gilt Dragon currencies fell away from parity against the USD except for the CHF.
  • The CHF has remained above parity for perhaps no other explainable reason than 'money flight'. This is an unusual parity unlatching signal that defies clear interpretation.



References
Notable currencies
General topics Omens and Indexes
ETC


Placque commerating the VOC shipwreck in
          Western Australia



Notices


Created by
Initial Idea
Last Revised
Current Version
Last Change
Revision State

Max Power
07 April 2009
15 March 2011
07 March 2014
Triffin Paradox arguments, preface

Provisional