Americans have missed one serious correction since the manic stock market took off in March. Since that time the value of the U.S. dollar, the bedrock of our economic system has fallen a stunning 12.5 percent. Currencies should not fluctuate this much especially the world’s reserve currency. Back in December, I talked about how the U.S. Treasury and Federal Reserve were determined to destroy the dollar for the sake of bailing out our massive debt. The plan in the short run has created a stunning stock market rally that has set the S&P 500 on fire to a 50 percent rally. In a recession this profound, you don’t typically turn things around in two years (the recession started officially in December of 2007). Yet this appears to be more of a bear market rally since the unemployment picture will remain bleak for months to come.

It is interesting how little coverage the tanking dollar is receiving. Maybe people are just happy that their stocks are running back up even though P/E ratios are extremely expensive. Yet the correlation between the dollar going under and stocks rallying is undeniable:

Now you might ask, why at the peak of the panic did the U.S. dollar reach a 3-year high? You have to remember that for almost a year, the notion of decoupling was making the rounds across investment communities. This idea was based on the premise that the U.S. was going to have a silo like decline while nations around the world somehow prospered with the biggest economy going under. This had as much merit as believing subprime loans would be a contained issue. So in late 2008, the idea was put to rest and people started rushing to safety especially with the implosion of banks like Lehman Brothers and the virtual nationalization of Fannie Mae and Freddie Mac. In March, investors had enough and the U.S. dollar still reigned supreme as a safe haven.

Since that time, the U.S. Treasury and Federal Reserve have done everything possible to crush the dollar rally including committing to buy $1.25 trillion in various forms of debt much of it in the form of mortgages and going with quantitative easing. What happened after this?

The stock market took off while the U.S. dollar continued a steady decline. And of course this would only be logical because why would foreigners want to purchase debt that is inherently following a policy of inflation by its issuer? U.S. items have become cheaper on a global stage. For those setting this policy, it makes a lot of sense because they are trying to inject inflation and slowly grow ourselves out of trillions in debt. U.S. households are still mired in massive amounts of debt:

Now one thing is certain and that is American households are cutting back on debt. Much of this is happening because of a forced austerity but many are simply choosing to spend less by choice. And given that most of our borrowing comes from foreigners who hold enormous amounts of our debt, a declining dollar makes the amount we have to pay back that much cheaper. Now rightfully so, foreigners really do not like this kind of arrangement so the U.S. Treasury and Federal Reserve have to walk this trillion dollar debt tightrope. Their solution? Juice the stock market and make saving your money as unattractive as possible for domestic consumers. Cash for clunkers. Massive tax rebates for buying homes. All these are steroids for consumption and over consumption ironically is what led us into this financial crisis.

So should you worry? You may be thinking that it would be great if you can simply inflate all your debts away. That is assuming that the U.S. Treasury and Federal Reserve actually succeed in their objective. Keep in mind, never in the history of our country has the Fed loaded up their books with so much questionable debt:

Source: Zero Hedge

This is unprecedented but the gist of all this is that we can somehow engineer ourselves out of this mess with targeted inflation. Given the size of the housing and credit bubble it is hard to see how this is even possible. The average American household is not able to balance this out given the number of rising bankruptcies and record high foreclosures.

The more troubling sign is how our currency is being sacrificed for easy finance for the banking industry. Many banks are now staying solvent even with bad loans on their books because they are now able to raise money in the open casino (stock market) by suspending belief with massaged mark to surreal accounting methods.

The S&P 500 is not up because of earnings. It is up because of the systematic destruction of the U.S. dollar and massive subsidies to failed banking institutions. We still have major issues including $3 trillion in commercial real estate yet this rally has the wind blowing on its back. Yet this is a stock bubble engineered by the juice of the U.S. Treasury and Federal Reserve. Those who use steroids usually have it catch up on them.

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