THEY ARE SHRNKING THE DOLLAR ON PURPOSE!

Cue The Helicopters, Dollar Devaluation Is HereFrank Beck, 03.24.09, 06:45 PM EST
The world's financial powers seem to understand that the U.S. needs to print its way out of this mess.
Maybe the government consider an overnight devaluation of the dollar as a fix to sagging asset prices. The response was about equally weighted by those who wanted to know more about how it might work or be accomplished, those who thought it was brilliant and the "I am 100% cash" group, who suggested I might be the most ignorant, if not stupidest, person on earth. At this time, I'd like to offer a little more in the way of explanation, or perhaps aggravation.
I still contend that we are headed for a massive dollar devaluation, regardless of the means--whether it is planned and accomplished by central banks, or by the markets reacting to huge government money printing that force the devaluation. Unlike during the Great Depression, we are no longer on the gold standard. Currencies are free to float and can be manipulated by central banks or politicians and moved by markets. In fact, I believe that one or both has already begun.
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In early December, Treasury Secretary Henry Paulson traveled to Beijing to encourage the Chinese to strengthen their currency (devalue the dollar versus the Chinese renminbi). Our Federal Reserve chairman, Ben Bernanke, then surprised most everyone by effectively moving the Fed funds rate to 0%, another move to devalue the dollar. Coming next, a new Bretton Woods?
The G-20 met in November, scheduled another meeting for April and in the weeks following the November meeting, physical gold all but disappeared. Are central banks buying gold in preparation?
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In normal times, you might expect a global financial meltdown to cause a tidal wave of foreign currency exchanged for dollars. But this time, the dollar has rallied less than 20% against the highs of the euro and has actually lost more than 20% against the yen while staying flat against the Chinese renminbi. If that is the best the dollar can do at the height of panic, I expect that you will see it gradually lose its luster until either the central bankers, or the markets, push it off the cliff.
Perhaps you've already given me the benefit of doubt that the markets might react this way, but are you wondering why central bankers would want the dollar to devalue? Wouldn't that be bad for export countries like China or Japan? In a way it would. Certainly it makes their products more expensive for U.S. consumers (so you might want to stay away from foreign exporter stocks).

On the other hand, if you want to sell some of your exports, it might be reasonable to keep your best customers alive, even if it means selling to them at somewhat thinner margins. China is still building its domestic market, but it is growing quickly, so they can take a small lump or two on exports. A stronger renminbi will allow China to buy oil and other necessary commodities at a relatively cheaper price, offsetting some of the price reduction. And with another billion people to incorporate, they will still be the cheapest manufacturer of many products for many years to come.
If that were not enough, consider China's good fortune. For years, China has invested heavily in U.S. Treasury bonds while its currency and global inflation have grown at a much higher pace than the interest rate they received. It was simply a cost of doing business while growing an economy. In the last couple of months, that "cost of doing business" has turned into a huge profit opportunity, at the handiest of times. As worldwide panic set in, the money that flowed into the dollar was concentrated in Treasuries. By mid-November, the 30-year was priced at more than 40% over par value--a $1,000 bond was selling for over $1,400! If you wanted some money for your own stimulus plan, and you wanted to keep your customer on life support by devaluing the dollar, you simply could not ask for a more fortunate event.