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Wednesday, December 21, 2011

The rise of the US Dollar

Everybody is flummoxed by the strength of the US Dollar. Look at the facts.
Oct 2008 Monetary base for US was: 1.129 Trillion Dollars.
August 2011 Monetary base for US was: 2.658 Trillion Dollars

So ideally speaking with the excess dollars floating around in the market ..the value of dollar should fall. but we are seeing the rise of the dollar.. what's the reason?

The reason is simple. the excess dollars is not in circulation in the market. The excess dollars are parked with the federal reserve as excess reserves.

how much of excess dollars are held in Federal Reserve:
Oct 2008: -ve 381 Billion Dollars
August 2011: 1.57 Trillion Dollars.
As of Dec 14,2011: 1.52 Trillion Dollars.

How much dollars are in circulaton in the market:
Oct 2008: 1.46Trillion
Aug 2011: 1.00Trillion
Dec 14,2011: 1.1Trillion

So actually the dollars in circulation in the market right now is 350Billion Dollars less than what it was on Oct 2008 and hence we are seeing this rise in Dollar strength.

from Jan1975 the banks have always held "minimum required" reserves with the fed

The question in our mind is why this sudden rise in "Excess" dollar deposits with the federal reserve?
Well the Federal Reserve bank changed the policy on Oct 6, 2008. That starting Oct 6,2008 the Federal reserve will start paying interest on reserves and excess reserves to the big banks.. (link) [Read carefully the original implementation date was somewhere in Oct 2011]

Surprisingly I just found that the stock market decline also started from Oct 2008.. (Link) coincidence??

Conclusion: The current strength of the dollar is cooked.. Cooked by the world famous chef "Fed". The stock market crash 2008 and subsequent market volatility is also driven by the withdrawl of "Credit" from the system. keep a close watch on FED action.. live within your means.. banks are going to feel the brunt of credit squeeze ..

Historical data of FED Reserves(Total, Required & Monetary Base)
Old blog article which started it all Bill Gross's interview in bloomberg
Old blog article where I misinterpreted the FED Data and suggested fall in dollar

PN: these are my personal views about publicly available information. I could be wrong in understanding the information.. Please do your own deep dive before making any investment decision.


ramurthy said...

please tell me what is monetary base.i have googled it (looks complex).please in layman terms.
one more thing dont worry about ur predictions going wrong.just publish your views.People like me r enjoying also learning from ur views.thanks

What'sUp Prahalad said...


Monetary base is the minimum amount of money. Monetary base x 10 is size of the economy (approximately.. ideally)

US with 2.65 Trillion monetary base is a 26.5 Trillion dollar economy. (Ideally)
US Banks have kept 1.5Trillion excess funds with FED which means the actual monetary base is 2.65-1.5 =1.15 Trillion..
So Actual Economy size of US is at present 11.5 Trillion. This is 15 Trillion less than the ideal size of US economy.. Hence the feel of a recession..

Now All Economies of the world have increased their monetary base.. assuming the FED has also increased the monetary base..

But with the excess reserves held with FED..actual US dollars in circulation is less than other currencies.. hence we see a rise in the dollar strength.. (A Temporary phenomenon)

=happy investing

aditya kumar gautam said...

sir do you track tera software, it crashed 20% today. what may be reason

What'sUp Prahalad said...

Aditya Kumar Gautam:

I am sorry but I have no idea about Tera Software. If you are looking for IT related stocks..

The only stock worth buying is "Tata Communications"

Tata Commuications has the largest submarine cable network in the world... which is used for global communications..

It also is the largest player in Voice calls Worldwide.

Right now tata communications is growing rapidly and hence due to high depreciation is reporting losses. But fundamentally company is making tonnes of money..

I would advice Buy Tata Communications for long term... we can easily expect a double in 2yrs or more..

=happy investing

ramurthy said...

thanks a lot ji,one more thing how can i know our countrys current monetary base and in advance when they r going to increase monetary base that is going to print more money

ramurthy said...

ji,one more thing, as per ur article FED is artificially reducing liquidity by keeping 1.15 trillion out of circulation to increase value of dollar.Then why it is keeping its interest rates very low as 0.25%.its contradicting.please explain whatever u know whether its right or wrong immaterial.just share

ramurthy said...

one more question,our GDP is roughly $1 trillion .so if we take 10% of it,our monetary base should be $100 billion,roughly it comes to 5 lakh crore.so if u divide that by 120 crore people each head gets only less than 5000 rupees.Is that ok

What'sUp Prahalad said...

Rammurthy ji:

lots of questions.. I have added a permanent link "Indian Economy: Stats" in my blog and from there you can go to Ministry of finance website to get the latest stats..
(solving most of your queries I hope..)

Well the US FED is paying the banks 0.25% when the money is parked with the FED(and out of circulation).
If the US FED Increases the interest rates (On US Govt bonds..) the Banks will be encouraged to divert the funds from the FED Reserve's into the US Govt Bond market.. and through the Govt bond market the dollars will enter into circulation..

So the low Interest rates are encouraging the US Dollar to remain outside of the monetary cycle..

Infact if the FED Raises interest rates.. then the big US Banks will be forced to enter their cash into the banking circulation..

So here is the prediction.. "As the short term (FED/US bonds) interest rates rise.. in US the US dollar will weaken as more dollars will enter into circulation and we might see inflation also.."

Mr Bill Gross in the interview clearly states.. Right now the FED is forcing the short term interest rates to be Close to Zero..

So for eg. if someone (a Bank) is looking for 2yrs fed bond yield.. he can invest 60% of money in 10 yrs FED bond and keep 40% in cash (under the mattress.. out of circulation) and get the same 2Yrs yield with 40% less money.. and 40% less risk..

This 40% money is outside of circulation which is reducing the availability of funds.. (So mr Bill Gross is in a "subtle" way pointing out to the same FED game plan!!)

So even though the interest rates are low .. you will find a lot of small businesses in US are not getting lines of credit.. (as banks are not wiling to take risk.. and more than happy getting 0.25% from the fed..)

I hope it makes sense

=happy investing

ramurthy said...

thanks ji,please post more often if possible

Amitabh Agrawal said...


Wishing You and all your readers a Very Happy, Healthy, Wealthy 2012.Wish all your castles in air be bricked up in in new year !!

Amitabh Agrawal said...

Dear Sir,

Please suggest your expected time line for USD to retrace and extent of depreciation/crash ?

What should happen when USD depreciates/crashes ? Its effect on Indian economy, stock market and Gold/silver ?

Thanks a lot...

What'sUp Prahalad said...

Amitabh Agrawal:

Season's Greetings to you,your family and all other readers of the blog.

With regards to the strength of the dollar and when the dollar will weaken..

1. you need to keep a tab on the "Excess Dollars held" by the FED Reserve..
the link is here:
(updated every alternate Wednesday ..(15 days))

The data (column) to watch is "Excess NSA" if the "Excess NSA" is decreasing then the dollars are entering into the banking system.. Excess Dollar Reserves with FED are entering into the market(financial market)

This excess Reserve dollars entering into the market will create inflation.. rising stock market.. dollar devaluation..

- Increase in Federal Reserve interest rates can also trigger the outflow of dollars into the Bond market and into the world financial system.. (instead of strengthening the dollar the dollar value will fall as short term FED interest rates rise..)

Timing of dollar devaluation:
These decisions are taken at extremely high levels.. so when "they" will do it is when they want.. watch the FED data that's our signal..

if you look at this chart

you will see that Feb 2010 to Dec 2010 is the time period when FED Excess reserves were stagnant/decreasing slightly and the stock market was rising..

From 2011 onwards the reserves have been rising while the market world wide is falling as all the cash is moving into the FED Reserves..

Become energy efficient... buy Tata Communications.. is my new year advice.

=happy investing

Amitabh Agrawal said...

Dear Prahalad,

Thanks a lot! You are always very prompt in response and straightforward, honest to accept your errors. That always bring me back to your blog.

Your outlook for INR..?
Since INR is at all time low, this should be the best time for FII to invest and worst time to exit. But probably this is not happening. What do you think..?
Best Regards,

What'sUp Prahalad said...

Amitabh Agrawal:

The reason is purely external.. the fact is that the middle east crisis might explode..

US is trying to take the Iran issue to the next level..

Iran did the impossible.. it captured a US Drone plane.. generally the planes are built to self destruct if they loose contact with the US air defense system..

So this is a very big thing.. and now Iran also has access to the technology and the files with regard to all the target area's within iran..
(the drone was fed with..)

So all said and done .. the news on the ground is the middle east crisis.. and something is said to be possible before 15 Jan 2012.. (so is the story..)

Happy New Year!!

=happy investing