Inflating Away America's Future

Americans are suffering from a lack of adequate savings to fund a comfortable retirement. Our growing debt burdens virtually assure us that the lofty living standards of today will soon be nothing more than a long forgotten memory.

Those ideas are now becoming more promulgated.

But what is less known is that our government will likely seek a panacea that will lead to perdition, not only for our retirees, and soon-to-be retirees, but our entire economy and country as well.

Consumers – especially those who are about to retire – are currently experiencing a barrage of economic hardships. The value of their real estate holdings is back to the level it was in 2002. Stock prices are back to the same level they were at the end of the last millennium. Real incomes continue to fall, while the unemployment rate remains near double digits. Household debt as a percentage of income and gross domestic product (GDP) is near record levels. Many public pension plans are insolvent and our entitlement programs have scores of trillions of dollars in red ink.

Given all the headwinds that have plagued consumers over the course of the past decade, it is no surprise that their balance sheets are in a state of massive disrepair. In fact, household net worth fell from the 2007 peak to the 2009 valley by a total of $17.5 trillion, or 25.5%, and is still nearly $10 trillion away from its all-time high.

But unlike what occurred during the Great Depression, prices at the retail level are rising sharply instead of falling. The consumer price index (CPI) is up 3.6%, imported goods are up 12.5% and commodity prices are up 35% year-over-year. So our current and prospective retirees are forced to deal with the worst of all combinations: a negative real return on savings, rising consumer prices, and deflating asset prices.

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The "Pesofication" of the U.S. Dollar

I've dubbed this the "pesofication" of the U.S. dollar.

But we're really talking here about the dollar's long-term demise.

The pesofication of the dollar represents the end of the greenback as a major world currency and figures to be one of the major long-term challenges that we U.S. investors will face.

The dollar's demise was set in motion several years ago. But the greenback's fate was sealed in late April, when U.S. Federal Reserve policymakers had a final chance to take a stand against inflation – and failed to do so.

Let me explain …

Catalysts for the "Pesofication" of the U.S. Dollar

Four years ago, I referred to the U.S. greenback as the "Bernanke peso." I coined this term, reasoning that U.S. Federal Reserve Chairman Ben S. Bernanke's decision to cut interest rates even as inflation was accelerating was bound to cause the dollar to lose value at an ever-increasing rate.

My prediction held up for a time, but was then derailed by the little matter of the collapse of the U.S. banking system. However, after the Fed's April 27 meeting, I can report that we're right back on track, and the pesofication of the dollar is progressing with startling rapidity.

That late-April meeting of the central bank's policymaking Federal Open Market Committee (FOMC) was the Fed's best chance to set a new course before its $600 billion "quantitative easing" program is scheduled to end on June 30. (The FOMC meeting scheduled for June 20-21 falls too close to the end of the Fed's quantitative-easing/U.S. Treasury-bond-purchase program for a new policy to be established.)

Bernanke seemed to underscore this by announcing that the central bank would, indeed, stop purchasing Treasury bonds on that date. He also explained that, in his view, the "market effect" of bond purchases is determined by the "stock" of bonds outstanding – as opposed to the "flow" of bonds into and out of the market.

We shall see.

Here's my bet: When the Fed stops buying about $225 billion of the Treasury's $400 billion quarterly funding needs, all hell will break loose in the Treasury bond market. After all, the two largest T-bond buyers are not going to be particularly active this summer: The Bank of Japan (BOJ) will be too busy spending money on that country's reconstruction from the earthquake/tsunami/nuclear power plant accident to be buying much U.S. government debt, while its counterpart in Mainland China – the People's Bank of China – has made it clear that it regards the United States as a pretty dodgy credit risk.

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The Inflection Point: Why the U.S. Dollar is Ready to Rebound

For most of the past year, anything involving the U.S. dollar has been what traders like to refer to as a "one-way trade."

And with good reason: Over the past year, the U.S. currency has traded in only one direction – down.

Indeed, during the period in question the dollar is down 8.3% against the British pound, 11.65% against European euro and 14.2% against the Japanese yen. On a year-over-year basis, the biggest gains against the dollar have been notched by the Australian dollar (20%) and the Swiss franc (26.7%).
The Inflection Point

This freefall by the greenback is part of the reason that gold and silver soared to new records and commodity prices have zoomed during the past year (before their decline in the past week).

But here's the thing: This nosedive by the dollar is ending – with a U-turn that's going to send the U.S. currency into a zooming climb.

Traders refer to this abrupt reversal-of-fortune pattern as an "inflection point."

And those traders recognize this about-face in the U.S. dollar for exactly what it is: A windfall profit opportunity for investors who understand just how to play it.

To see why the dollar is poised for a rebound, please read on...

The Death of the Dollar: Will the Fed Kill the Greenback at Tomorrow's FOMC Meeting?

Months or years from now, when analysts are studying the death of the U.S. dollar, they'll look back and see that the greenback's demise began on a specific day – Wednesday, April 27, 2011.

As in … tomorrow.

At 12:15 p.m. tomorrow, at the conclusion of a two-day Federal Open Market Committee (FOMC) meeting, we'll find out whether U.S. Federal Reserve Chairman Ben S. Bernanke and his policymaking posse opted for a sharp increase in U.S. interest rates – which appears to me to be the only solution to a looming third-quarter crunch.

Unfortunately, I don't think that Bernanke & Co. will make the needed move.

And without that sharp rate increase tomorrow, investors can look forward to rampant inflation, an evisceration of the U.S. Treasury bond market and – in a worst-case scenario – the death of the dollar.

Let me show you why….

To understand why it's crunch time for the dollar, please read on …

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The Death of the "Dollar Carry Trade"

By maintaining a F ederal F unds rate below the 0.25% level – and injecting $600 billion into the banking system through a second round of quantitative easing – the U.S. Federal Reserve has orchestrated a bubble-like surge in commodity prices, an uptick in global inflation and a historic resurgence in U.S. stock prices.

The low-interest-rate strategy has enabled the U.S. central bank to achieve another important objective – a massive depreciation in the value of the U.S. dollar.

There's only one problem with all these "successes" the Fed has achieved: If the dollar ever rebounds, this elaborate financial structure the central bank has engineered will be exposed for what it really is – a shaky arrangement that will collapse like the house of cards that it is.

The fallout from such a collapse could be widespread and painful – especially for investors who've been riding the so-called "dollar carry trade" to major profits.

There's one way to profit from Gilani's newest prediction. Read on to find out all about it.

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Hidden Inflation: Food Prices Flying Under the Fed's Radar

Soaring food prices have been, perhaps, the most pressing global issue of the past two years – yet the U.S. Federal Reserve has taken a "hear no evil, see no evil, speak no evil" approach to the global crisis.

Instead, the Fed has dutifully maintained its focus on so called "core inflation" in the United States – even as Americans suffer the consequences of the "hidden inflation" the government refuses to account for.

The Federal Reserve excludes food and fuel prices from its preferred gauge of inflation because they are often influenced by erratic weather patterns and political turmoil. That at times has been the case over the past few years.

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The 2011 U.S. Dollar Forecast: Up Vs. the Euro, Down Vs. Everything Else

Will the dollar spend 2011 in the gutter? Our forecast definitively shows that it will. The U.S. economy is still stuck in the depths of a possible double-dip recession. The Federal Reserve is doing its best to devalue America's currency. And foreign economies have so little faith in U.S. "recovery" that they're bypassing the dollar […]

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2011 Investing Strategies: Readers Turn to Silver, Avoid U.S. Dollar in the New Year

After a year of rocky economic recovery and a mixed bag of U.S. data, market strategists are waxing optimistic about the profit prospects in 2011.

"There is still an awful lot of pain out there for sure, but if you get this creeping confidence to accelerate a little bit, it's surprising how fast things can turn," Sandy Lincoln, chief investment strategist at M&I Investment Management, told MarketWatch.

A year plagued by Europe's debt contagion, the May 6 market "flash crash" and constant fears of a double-dip recession caused many investors to keep money parked on the sidelines.

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Obama Tax Deal Sets the Bull Running

U.S. President Barack Obama's tax deal has yet to pass Congress, but the compromise – hatched as an appeasement to Republican opposition – already has had an effect on the currency and stock markets.

What's more is the deal looks as though it could offer a significant impetus for the U.S. economy as we move into 2011.

What has happened in the political arena over the past month has been magnificent theater. I don't believe in coincidences, so we have to try to understand what is being staged.

Consider the following:

Just weeks ago we had the stunning compromise by Irish officials with their new European overlords. Then the Standard & Poor's 500 Index reversed at the well supported 1,175-level and its 50-day average. Then came a positive reaction to a weak jobs report. Then U.S. Federal Reserve Chairman Ben Bernanke went on "60 Minutes" to explain the Fed's monetary program. And finally President Obama went on television to announce his tax compromise.

What's the play? Here's a guess.

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Buy, Sell or Hold: VAALCO Energy Inc. (NYSE: EGY) Will Capitalize on Higher Oil Prices and a Lower Dollar

A commodity bull market is happening everywhere you look lately. While the dollar is dying, you cannot say the same about the stock prices of companies with internationally based commodities production.

The reality that the U.S. Federal Reserve will be monetizing all of the government's funding needs for at least the next year has put the market on edge. The U.S. dollar's status as a reserve currency is in question.

Investors are using this opportunity to shift their holdings towards U.S. companies with strong overseas revenue streams. And there is one such company in the oil sector that has been overlooked by mainstream investors: VAALCO Energy Inc. (NYSE: EGY).

VAALCO is a great example of a U.S.-based company that – through its operations off the coast of Africa – will profit from higher oil prices and the dollar's long-term drop in value.

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