The dollar's collapse will accelerate the deflationary sell-off already underway in US assets. To understand exactly how a dollar sell-off will kick deflation into high gear, it is necessary to understand the immediate effects of a dollar collapse and the structurally unbalance state of our economy.


The immediate effects of a dollar collapse

When nations around the world de-peg their currencies and the dollar is sent tumbling, two things will happen:

1) inflation and interest rates will spike up.
2) Commodity prices will more than double as the dollar loses its purchasing power.

These Higher commodity costs and interest rates will deal the death blow to our unsound economy


The structurally unbalance state of our economy

Over the two last decade, the unnaturally strong dollar and easy credit have warped the US economy, making it structurally unbalance. Here are some examples of what has gone wrong with our economy:


a) Oversized financial sector. In the last two decades, the financial sector became oversized relative to our economy (over 28%) by selling all manner of exotic financial products to investors around the world and building the biggest credit bubble in history. The growth of financials came at the expense of industrial sector, which has been decimated by the dollar's strength these last two decades.

b) Automakers dependent on cheap gas. The entire US Automaker sector is founded on the assumption of eternally cheap gas. With gas headed over 5 dollar and vanishing consumer spending, the entire US auto sector is gone.

c) Wanna-be-financials. Hundreds of companies took advantage of easy credit to develop their own in-house financial subsidiaries to help consumers finance purchases. GE, the automakers, and retailers like home depot used 0% financing and credit cards licensed to them by VISA and MasterCard to boost sales and fuel growth. With the economy entering the worst downturn in generations, these wanna-be-financials companies that dabbled in consumer finance are going to be struck by record defaults.

d) Debt funded stock buybacks—Hundreds of companies also took advantage of easy credit to finance stock buy backs. They are now having to roll over that debt at MUCH higher interest rates (GE is getting killed by this). If you own a stock which has done a lot buy backs in recent years, be VERY careful.

e) Outsourced manufacturing. In order to cut costs, companies have outsourced large parts of their manufacturing operations to lower cost labor markets overseas.