How the Federal Reserve Manages the Dollar and Avoids Collapse

Will the Fed Sacrifice the Dollar To Save the Markets?

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The Dollar Index* is higher today than it was before the Federal Reserve launched a series of quantitative easing programs that involved printing over $4 trillion out of thin air in order to buy U.S. Treasury Bonds and mortgage backed securities from the too big too fail banks.

How did the Fed pull this off without causing a collapse in the dollar?

In the podcast below we show how Fed open mouth operations, yack attacks and coordination with other central banks keeps confidence in the dollar and demand for U.S. Treasuries elevated.

Dollar confidence and demand for U.S. Treasury bonds are two of the most important assets that the United States has and the Federal Reserve is entrusted with protecting both of them. Without foreign central bank demand for U.S. Treasuries, the United States could not conduct its welfare/warfare state deficit spending.

In this podcast we show why protecting or keeping the dollar in an acceptable range and demand for U.S. Treasuries high is more important than the Fed’s stated dual mandate of “maximizing employment, stabilizing prices and moderating long term interest rates.”

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A Dollar Not Too Strong, Not Too Weak

A dollar that is too strong makes exported U.S. military hardware too expensive for foreign purchases and dollar that is too weak can cause a lack of confidence in the dollar and can cause domestic inflation because the U.S. relies heavily on imports.

A point not made explicitly in the podcast – If an interest rate hike causes the equity markets to crash, demand for U.S. Treasuries will spike, thus furthering the Fed’s objectives of keeping demand high for U.S. Treasury bonds. (the plunge protection team/ESF can clean up the stock market mess if necessary)

Please have a listen and check out the charts and links below:

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Further Reading

Re the Petro Dollar Agreements – Why Saudi Arabia Matters in Helping to Keep the U.S. Dollar the World’s Reserve Currency

Why the Fed Raised Rates

Why The Fed Raised Rates and Will Do It Again If It Has To

Yellen speech Monday June 6, 2016

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The Dollar Index 2006 -2016

dollar index ten year chart

The Dollar Index hit a ten year high in early 2016.

The Dollar Index 1971-2016

Dollar index 1971-2016 chart

The Dollar Index peaked in the mid 1980’s after the Fed raised interest rates and the economy recovered.

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*The US Dollar Index currently tracks the US dollar vs. the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona and the Swiss Franc. The Euro comprises nearly 58% of the index.

Dollar Index charts courtesy of Nick Laird at Sharelynx.

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  • Randy

    A circus juggler can keep things up in the air for only so long, then they must be brought down under control, or they will crash to the floor when the juggler gets too tired to keep them going. Either way, the act will end at some point. If the objects are fragile, there will be a big mess to clean up, and there’s hardly anything that is more fragile than a fiat paper currency!!

    • Smaulgld

      Yes they have been juggling since 1971
      They get away with it by a combination of skill and luck
      By definition it cant last

      • Randy

        Depending upon which aspect you may care to look at it from, they have been doing this juggling act since at least 1964, or 1933 or 1913! Fiat paper currencies ALWAYS fail because they are all based upon lies, some bigger than others.
        Over the last several hundred years, you can count up more than 600 fiat paper currencies that have failed before you even get out of the letter B of the alphabet. That is not any kind of a track record to be proud of!

        • Smaulgld

          Yes 33 (gold confiscation/nationalization) and 64 (silver demonitization started and completed in 68) provided juggling act opportunities
          71 (off gold standard) and 2008-14 (qe) provided entirely new sets of balls to juggle
          Fiat only works now because they are ALL fiat

          • Randy

            Yes, that’s what I was saying back in 1996, when I wrote my break out paper What is Money?, in an effort to explain to people why we have inflation and other financial system problems. Few heeded my words back then. I’ll paste it in here now for you to read.

            is Money?

            of the most esoteric, confused, convoluted and obfuscated subjects
            that has ever been debated in the history of mankind, is the subject
            of money. And from money, we go into other subjects such as banking,
            inflation and finance. But let’s start with money first and get it
            properly defined, so that we can make some sense out of the whole
            mess, OK? And after we get money properly defined, we can then use
            that concept to think with and come up with good answers to some very
            perplexing questions. When you start to think about a problem with
            the components of that problem properly identified and named, it will
            be much easier to see the real causes and effects going on. So here
            we go now.

            that money is, is “an idea backed by confidence”. That’s
            all, nothing more or less than that. And in that word confidence is
            buried the fact that certain people have agreed upon something to
            function as a medium of exchange. That medium of exchange is money,
            regardless of whether it is wampum, diamonds or precious metals. The
            confidence factor then comes into strong play here and is the whole
            basis of that medium of exchange. Money acts as a sort of
            “lubricant” in the dry mechanics of an economy. It’s just
            not always feasible for a person to haul around his crops, goods or
            livestock in search of someone who is willing to trade with him
            somewhere for what HE needs. So what do people do to get around
            that? Well, they use an intermediary which we call money.

            people agree that some quantity of the money represents a certain
            amount of labor, it can then be exchanged with someone else for a
            similar amount of represented labor. And that’s the main thing that
            money does. It represents the fact that a person had to do some kind
            of work to come into possession of that amount of money. Usually.
            Now when someone either steals goods or money, or creates some
            “money” through some bogus means, then the confidence
            factor suffers and it becomes worth less and less over time. When
            governments print up fiat currency which has no real value behind it,
            it’s not worth as much as actual money, something which DOES have
            real value behind it.

            you have two people, and one of them has to sweat out in the hot sun
            or work in freezing cold to earn a living while the other one does
            little or nothing, then there is a disparity and animosity between
            them. Why should one toil away while the other one is able to loaf
            and still eat? Welfare programs, and this includes government jobs
            which produce no real products (almost all government jobs fall into
            this category by the way!) run by governments with unlimited access
            to fiat currencies ALWAYS cause at first an “inflation” of
            the fiat currency, and then a total collapse of it. Now I’m not
            saying that we shouldn’t look after and care for those who cannot
            work due to some kind of disability, but it should be done with real
            compassion, and NOT with the viewpoint of making someone dependent
            upon the government so that they then agree with all kinds of insane
            laws just to keep the bread and butter coming in. These economic
            collapses are always the result of a socialist/communist/fascist type
            of government. And they never last more than several decades at
            most. The saddest part of the whole thing is that through the
            manipulation of the history books, people do not know the true causes
            of these engineered monetary debacles, and so repeat them with great

            look at gold as money. It takes a certain amount of labor and
            equipment to locate and then collect this metal. Now back in 1925,
            an ounce of gold would buy a man a pretty nice suit, and today, an
            ounce of gold will still buy a man a pretty nice suit. Why is that?
            It’s because back in 1925, the ounce of gold required a certain
            amount of time and labor to locate and collect it. Today, it still
            takes about the same amount of time and labor to locate and collect
            an ounce of gold. Please don’t get confused now over the fact that
            “dollars” today don’t equate with dollars in 1925. If we
            were still on the gold standard, the number of dollars that were
            equal to one ounce of gold in 1925 would still be the same today.

            of the fact that our “money” is no longer backed by
            anything of real value, it takes more “dollars” to equal
            the one ounce of gold. Why is that? There are several reasons why,
            so let’s take a look at a few of them now. First off, when these
            “dollars” are printed up willy-nilly, they lose most of
            their value right there. A big reason is that the “dollars”
            are all printed up with the exact same amount of ink and paper to
            them, regardless of their denomination. There isn’t twenty times
            more ink and paper in a twenty “dollar” bill than there is
            in a one “dollar” bill, is there? So with each bill having
            the exact same value, they all become worth the same as the lowest
            one. And not just according to what’s printed on it, but what it’s
            actual intrinsic worth is. As it costs less than 5 cents to print up
            a fiat currency “dollar” bill of any denomination, that’s
            about what it’s really worth. And in actuality, these pieces of
            inked paper are Federal Reserve Notes with no value to them, other
            than the fact that someone down the street or around the corner may
            be willing to trade something of real value for them. They are also
            known as debt bearing corporate notes, because the corporation known
            as the U.S. Government has been bankrupt since 1933, but not formally
            acknowledged as such until 1939 with the court case of Erie R.R. v.
            Tompkins case.

            reason that these fiat currency, debt bearing corporate notes lose
            value is because of computerized electronic bookkeeping entries being
            used instead of actual money changing hands. Every time that some
            government agency buys some goods or services with nothing but a
            change in bookkeeping entries, a bit more confidence is knocked out
            of the “money” and thus we have “inflation”. All
            that inflation is, is “a decrease in the perceived purchasing
            power of a fiat currency”. That’s all it is, folks!! Forget
            all of these stupid proclamations that inflation is due to an “over
            supply of money” or some such clap trap. If that were really
            true, then just by taking money out of circulation we would be able
            to solve inflation. But it doesn’t. What it DOES do is make it even
            harder to purchase goods and services, and then the economy really
            tanks, big time.

            John and Jane Doe perceive that they will need a greater amount of
            fiat currency tomorrow in order to maintain their lifestyle of today,
            they then have two choices. One, they can work more hours in the
            day, or two, they can charge more for the goods or services that they
            provide to the society in general. And since they can work only so
            many hours per week, they must then increase the rates which they
            charge. And so begins a vicious circle of everyone down the line
            doing the exact same thing until it comes back around to John and
            Jane Doe and then it starts all over again. And when thinking of
            inflation, think of it not in terms of things becoming more
            expensive, but rather in terms of the fiat currency becoming worth
            less and less, which is the truth of the matter. The instability of
            fiat currencies and economies becomes much easier to understand once
            you can do this.

            fiat currency is given to people for no reason, or loans are
            defaulted on, there too, more and more confidence is knocked out of
            the fiat currency and it becomes worth less and less. This idea that
            there are “money multipliers” in an economy is just so much
            hogwash. There is absolutely NOTHING which can multiply human labor,
            and since money is supposed to be based upon human labor, there
            cannot be any money multipliers. See how simple this is? Granted,
            there may be more efficient methods found to do certain things, but
            they always come with some kind of a cost attached to them. There’s
            no such thing as a free lunch. Someone, somewhere, somehow is paying
            for it.

            go back to gold mining for a moment and look at a few things in more
            detail. When a person goes out into the wilderness to look for some
            gold, he must take with him food, clothing and equipment to survive
            with and make the discovery and collection of the gold possible. And
            while he is collecting that gold, he cannot possibly be planting and
            growing food or weaving cloth for his clothes or making a shovel
            either for that matter. So the prospector come miner must EXCHANGE
            some of his labor for these items in order to start his new pursuit
            and continue in it once he has found a place that has some gold in

            is not like farming or ranching where the product grows and
            multiplies itself. It costs pretty much the same to obtain an ounce
            of gold no matter where it’s found or the process used. The result
            of a man panning a few nuggets and flakes out of a riverbed by
            himself, or a huge mine employing thousands of workers which makes
            several ingots per day equates to about the same overall cost.
            People must be paid a wage unless they are slaves, and machinery must
            be bought, powered and maintained in order to get the gold out of the
            dirt each day. This is why there’s no economy of scale (cheaper due
            to more volume) in mining and consequently the value of the gold
            stays on par.

            Mr. Tailor sells his fine suit for an ounce of gold, it’s because of
            several reasons, but the most important one is that the sum of the
            labor involved in the making of the suit from raising the cotton or
            wool to the weaving of the cloth and then the sewing of the pieces
            together requires the amount of labor that the ounce of gold
            represents. With some allowance for a profit of course! If there’s
            no profit in a venture, it will fail of course. And when governments
            step in to prop up a failing venture or support one which never had a
            chance of succeeding in the first place, we again get a lessening of
            the confidence in the monetary system and that’s our old “friend”
            inflation coming to pay us another visit. And with friends like
            that, who needs enemies?

            actual gold and silver specie are used, there’s NEVER any inflation,
            if a free market enterprise economy is used. The reason for that is
            very simple. If someone gets out of line and tries to get rich
            quick, someone else will come along and pick up the business that the
            first person loses due to the price increases. And if the quality
            level between the two providers is about the same, the first one will
            drive himself out of business rather quickly!

          • Smaulgld

            Thanks for that. Very nicely done. I’ve always struggled with the concept that gold has some of its value due to the labor/cost imput.

            Let’s say gold mining stops today-outlawed across the world. The price of gold would go higher- which to me indicates it is gold’s rarety not the labor involvled that gives it value.

            In the example where gold mining stops, ZERO labor is involved in getting your gold. You just have to pay more to get it because the supply is no strictly limited to above ground stocks

          • Randy

            But in terms of WHAT, would the price of gold go up?? Without worth, fiat paper currency?
            OK, look at it this way for a moment or two. The price of an ounce of silver in 1964 was one USD, right? That means that you could go into any bank or store, and exchange one for one a one ounce silver dollar coin for a one Dollar denominated federal reserve note, correct? Or ten dimes or four quarters. But then starting in 1965, the one Dollar coins were no longer 100% silver, they were a sandwich of copper with silver on both sides, because the perceived purchasing power of the federal reserve notes was DECREASING! Same way with the dimes and quarters.
            Today, you need about 15 or so FRN to buy an ounce of pure silver! Why is that? It’s because the PPP of the FRN is only 1/15th of what it was back in 1964!! The silver has not gained any value, the change is on the OTHER side of the equation, so you need more FRN to balance it out again! That’s called an exchange rate or a ratio. But, these prices are just conjured up out of thin air by computer programs anyway, so they are not a true reflection of the PPP of the fiat paper currency! It’s all a bunch of lies and phony numbers set up to confuse us. The thing to take away from all of this is the FACT that you need to buy silver and gold now, at any price you can afford to pay, because when the hyperinflation hits the US like it just did in Venezuela, the fiat paper will not buy you anything!

          • Smaulgld

            All true but doesnt answer my question
            The price of gold is in fiat whether the price is based on labor or rarety.
            My question was if gold mining was outlawed it would that take the labor value out of the price? My guess is the price would rise which means that labor is not a valid input into the price of gold

          • Randy

            OK, the price of gold is not ONLY in terms of a fiat currency (which is actually an impossibility, btw, which I can explore further later on), but in terms of food, clothing, water, etc. One thing buys the other, each one is on its own side of the equal sign! The PM buys something and the something buys the PM! Do you see this? That is why when the PPP of the fiat paper currency AKA U.S. Dollar was declining in earnest in 1964, the PM had to be diluted with copper to balance the equation again. Is there 15 times more value, labor or anything else in an ounce of silver today, over what it was 52 years ago? If not, then what explains the rise in cost in terms of fiat paper currency, other than the PPP is declining?
            There is no real reason that I have been able to find, for putting the value of gold higher than zinc! Zinc may be more plentiful than gold, but you have to refine it to get something that you can use. That means human labor is involved along with machinery, etc. Silver is actually way more rare than gold is, from what I have read, but yet gold is valued more! Why is that? So the idea of the scarcity factor doesn’t hold much water. In short, there are many angles to look at this from.
            There is rarely just one factor in why prices of goods and services rise or fall, you have to keep ALL of them in mind in order to see and understand the big picture.
            If the mining of gold was outlawed, would people want to trade large amounts of fiat paper currency for it? I don’t see that that would ever happen, the banning of gold mining, so I think that we can just set the notion off to the side. Someone would always be picking up gold where they find it, and get it into the markets by any means available.
            Zinc is used to alloy with copper to make brass, which is better suited for many uses than copper or zinc alone. What is the medium of exchange that you are thinking of as being the “money” you would have to pay for the labor of pulling the zinc out of the ground? Fiat paper currency, or gold?
            Ever hear the saying “Worth its weight in gold” before? Where did that come from? Before refrigeration, meats had to be preserved by salting or spices. Spices are very labor intensive when it comes to gathering them up. So the amount of labor to procure an ounce of ginger, pepper and such was about equal to the amount of labor needed to collect an ounce of gold!

          • Smaulgld

            Focusing just on the value of gold or any item, there are characteristics and inputs that give the item value.


            coca cola-there is commodity cost, labor but mostly the price is based on advertising cost

            clothing is based on commodity cost and labor

            gold’s labor cost is relevant today only because there is a mining industry that has costs per ounce roughly equivalent to the price of gold. But that doesn’t give gold its value. The value is already there! Because the value is there the miners deem it worthwhile to try and get at the gold at a price that costs them less than they can sell it.

            If there was no more supply of gold and we had to use just what has already been mined, the price of gold would go higher-without one bit of additional labor. So the labor cost today doesn’t give gold its value. The value is already there based on gold’s rarity and properties. That built in value gives prospectors and miners the incentive to try and retrieve it.

          • Smaulgld

            Agree that rarety doesnt necessarily drive price. Platinum is also 10X rarer than gold and its price is less. It is the desirability/demand of an item that drives its price relative to the supply. So rarety comes into play when there is high demand and there is limited supply.

            My artwork is very rare- almost non existent BUT that rarety doesnt make it worth anything because there is no demand for it. AND it doesnt matter how much time I spent creating it, that won’t make any one pay one dime for it!

          • Randy

            Yes, you are right there, there are various factors that give goods and services their value. Ever see a whale bone corset for sale at Wally World, as opposed to video games and CDs?
            But WHAT is the cost of gold priced in? Without worth fiat paper currency? It’s not backed up by anything at all besides Uncle Sam’s guns, bombs and cages coercing you into using it as your medium of exchange! This is why Saudi Arabia and other nations that are backing away from using the USD as their reserve currency give the clowns up in the District of Criminals such a bad case of the Willies on top of the vapors and makes them clutch their pearls! Those nations are taking their power of choice back, and the criminal banksters don’t want to give it up!
            Yes, the price of gold in terms of fiat paper currency and electronic bookkeeping entries WILL go higher over time, but it’s not due to just one factor alone. MANY market forces are in play there and all of them must be taken into account.
            What gives gold its PPP is the high amount of confidence that someone down the street or around the corner is willing to take it in trade for what you and others want and need.
            One idiot, I think it was Greenspan, once said that silver and gold were much too valuable to be used as money!! Can you believe that?!?! What’s next, guns are too deadly to be used as weapons?

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