Robert Prechter discusses what’s backing your dollars

In this video clip, taken from Robert Prechter’s interview with The Mind of Money, Prechter and host Douglass Lodmell discuss “real” money vs the FIAT money system, and what is backing your dollars under our current system. Enjoy this 4-minute clip and then watch Prechter’s full 45-minute interview here >>

---

Watch the full 45-minute interview FREE Get even more valuable insights as Mind of Money host Douglass Lodmell interviews Elliott Wave International’s President, Robert Prechter, about how to keep your money safe, the deflation versus inflation debate, and many more topics that are critical to your financial future. Start watching the free 45-minute interview now >>

An eye-opening interview with renowned speculator Doug Casey, conducted by Karen Roche and JT Long of The Gold Report. Doug explains why fiat currencies around the world are destined for collapse… and what investors can, and should, do to protect themselves.

If dollar-dumping turns from a trickle into a flood, look out. Exploding prices (aka exorbitant inflation) resulting from the devaluation of the dollar will compound the problems we saw in 2007–2009. Catastrophe will come when everybody realizes that the dollar is an “IOU nothing.” That’s the downside in the decade(s) ahead, according to Casey Research Chairman Doug Casey. But an optimist at heart, in this exclusive interview with The Gold Report, Doug also identifies some reasons to be hopeful.

The Gold Report: You’ve been talking about two ticking time bombs. One is the trillions of dollars owned outside the U.S. that investors could dump if they lose confidence. And the other is the trillions of dollars within the U.S. that were created to paper over the crisis that started in 2007. Are these really explosive circumstances that will bring catastrophic results? Or will it just result in a huge, but manageable, hangover?

Doug Casey: Both, but in sequence. One thing that’s for sure is that although the epicenter of this crisis will be the U.S., it’s going to have truly worldwide effects. The U.S. dollar is the de jure national currency of at least three other countries, and the de facto national currency of about 50 others. The main U.S. export for many years has been paper dollars; in exchange, the nice foreigners send us Mercedes cars, Sony electronics, cocaine, coffee—and about everything you see on Walmart shelves. It has been a one-way street for several decades, a free ride—but the party’s over.

Nobody knows the numbers for sure, but foreign central banks, and individuals outside the U.S., own U.S. dollars to the tune of something like $6 or $7 trillion. Especially during the recent crisis, the Fed created trillions more dollars to bail out the big financial institutions. At some point, foreign dollar holders will start dumping them; they are starting to realize this is like a game of Old Maid, with the dollar being the Old Maid card. I don’t know what will set it off, but the markets are already very nervous about it. This nervousness is demonstrated in gold having hit $1,900 an ounce, copper at all-time highs, oil at $100 a barrel—the boom in commodity prices.

Some countries are already trying to get out of dollars, but it could become a panic if the selling goes from a trickle to a flood. So, yes, it’s a time bomb waiting to go off, or maybe a landmine waiting to be stepped on. If a theatre catches fire and one person runs out, soon everybody rushes toward the door and they all get trampled. It’s a very serious situation.

TGR: If panic erupts on the U.S. dollar, would products manufactured in the U.S. become super-cheap or super-expensive?

DC: They would become super-cheap. Everybody says that devaluing the dollar will stimulate U.S. industry because the products will become cheaper and foreigners will buy them. This is a huge canard everybody repeats and nobody thinks about. Yes, it is true for a while, but if devaluation were the key to prosperity, Zimbabwe should be the most prosperous country in the world as it has already collapsed its currency.

A strong currency is essential for a strong economy. Sure, a strong currency can hurt exporters for a while. But, a strong currency encourages manufacturers to invest in technology, and become more efficient. It rewards savings and results in the growth of capital that’s critical for prosperity. A strong currency allows businessmen to buy foreign companies and technologies at bargain prices. It results in a high standard of living for the country, and yields social stability as a bonus. The idea that decreasing the value of currency to stimulate exports is a short-lived, stupid and counterproductive solution to the problem. People seem to forget that while the German currency was rising about sixfold from its level of 1971, and the Japanese yen about fourfold, those countries became the world’s greatest export economies. It didn’t happen despite a strong currency, but in large measure because of it.

TGR: Given that the U.S. is the world’s biggest consuming nation, wouldn’t fleeing the dollar create a big consumer vacuum in the international community? Doesn’t the rest of the world want to keep up the high level of exports to these U.S. consumers?

DC: That’s exactly why the U.S. is in such trouble; it’s idiotically focused on consumption, while only production can create prosperity. The world doesn’t need to stimulate consumption. This is another canard, because everybody has an infinite desire for goods and services. I know for myself, I’d like not just a car, but 10 Ferraris, a couple of Gulfstreams and 10 houses around the world. So, by myself, I have an infinite desire for goods and services. Multiply that by 7 billion other people. The only way to gratify those desires is by producing enough to trade with other people to give you what you want. When so-called “economists” think the problem is that we don’t have enough consumption, that shows that the profession itself is bankrupt. It’s actually quite embarrassing.

TGR: But other countries currently produce enough of what the U.S. wants. With U.S. dollars, that trade won’t look good on their side eventually.

DC: The problem is the U.S. doesn’t produce enough in return. The U.S. has been lucky to have a currency that has, so far, been accepted by everybody. But when everybody realizes that the dollar is an “IOU nothing” on the part of a bankrupt government and a society that doesn’t really produce anything anymore, it’s going to create a worldwide catastrophe. Those $7 trillion held by foreigners are going to become instant hot potatoes.

TGR: Considering what you said a moment ago, that the world doesn’t need to stimulate consumption, you must find some irony in the Obama administration’s plan to stimulate consumption again in the U.S. as a way to spur some economic growth.

DC: I’m afraid that after being counseled by the fools that surround him, Obama talking about economics is like the blind leading the doubly dismembered. They want to spend $450 billion trying to create new jobs—but these are government jobs, where you have people digging holes during the day and filling them up at night to create the appearance of employment. No government has any idea what the market really wants and needs. There should be zero government involvement in this. The government cannot and should not even try to create jobs. If Obama wants to stimulate the economy, he can decrease the size of the government. I would say a 90% reduction would be a good starting figure.

TGR: But that will create even more unemployment. That’s one of the big concerns. States laying off employees could increase unemployment even more.

DC: It is wonderful that states are starting to lay off employees. Once they lose their state jobs, which suck wealth from taxpayers, maybe those people can find real, productive jobs providing goods and services that people actually want and will pay for voluntarily. So I’d argue that getting rid of state employees is essential to a sound recovery plan.

TGR: You warned early on in the 2008–2009 economic crisis that it would really be more of a hurricane. In the last year or so, we’ve been in the eye of the hurricane and there’s more turmoil to come. Will the other side of the storm be worse than the first? And given the recent economic news, do you think we have moved out of that eye?

DC: Yes, I think we are moving out of the eye and going into the other side of the storm. This storm will be much more severe because we haven’t solved any of the problems that caused the hurricane in the first place. The fact that governments all over the world have created trillions of currency units has only aggravated those problems. Now, I expect exploding prices to compound the problems that we saw back in 2007, 2008 and 2009. That will devastate the prudent people in society who saved money. They saved it in the form of currency, and wiping out their savings will be catastrophic.

TGR: Will this affect only North America and Europe?

DC: Mostly North America and Europe, but it’s going to be very serious in Japan, too. It could be even more disastrous in China. The Chinese real estate market bubble is very inflated, driven by the lending of Chinese banks that won’t be able to recover their loans. They will all go bankrupt, taking out the Chinese populace’s savings with them. At the same time, those who own real estate will find it worth vastly less than what they paid for it. Those problems will create social disruptions in China, leading to riots, perhaps even revolution, and who-knows-what. The fallout is going to be terrible.

TGR: Many pundits and economists still project growth in China, albeit at a lower rate, and anticipate further expansion of the middle class.

DC: The 21st century will be the Chinese century, but the distortions and misallocations of capital that have occurred over the last 30 years—notwithstanding the truly phenomenal progress the country has made—are serious and have to be washed out. I am a huge bull on China for lots of reasons, but I am bullish for the long run. I think it is going to go through the meat grinder over the next 10 years. I don’t know how it will come out; maybe China will break up into five or six different countries. Actually, that would be a good thing. Most of the world’s nation-states are artificially constructed and too big to be manageable as political entities.

TGR: Your outlook on China fits right in with something you’ve been saying for years—about this being the “Greater Depression,” which is also the topic of your upcoming presentation at the sold-out Casey Research/Sprott Inc. “When Money Dies” summit next month in Phoenix. Your opening general session talk is entitled, “The Greater Depression Is Now.” We are now four years into it, based on your 2007 start date.

DC: Actually, depending on how long a historical scale you look at, you could say that, for the working class in the U.S. anyway, the depression started in the early 1970s. After inflation, after taxes, their take-home pay hasn’t risen in real terms for 40 years. But the definition of a depression that I use is “a period of time during which most people’s standard of living drops significantly.”

Net savings shows that you’re living within your means and putting aside capital for the future. In the U.S., people have been living above their means for many years—that is what debt is all about. Debt means that you are borrowing against future production, which is exactly what the U.S. has been doing.

TGR: So, how long will this Greater Depression last?

DC: It doesn’t have to last long at all. It could be quite brief if the U.S. government, which is basically the root cause, retrenches vastly in size and defaults on the national debt, which is essentially an enormous mortgage, an albatross around the neck of the next several generations of Americans. The debt will be defaulted on one way or another, almost certainly through inflation. I simply advocate an honest, overt default; that would serve to punish those who, by lending to the government, have financed its depredations. Distortions and misallocations of capital that have been cranked into the economy for many years need to be liquidated. It could be unpleasant but brief. The government is likely to do just the opposite, however. It will try to prop it up further and make it worse—compounding the problem by expanding the wars. So, it could last a very long time. In that sense, I’m not optimistic at all. I think there is little cause for optimism.

On the other hand, I’m generally optimistic for the future. There are only two causes for optimism. First, smart individuals all over the world continue, as individuals, to produce more than they consume and try to save the difference. That will build capital, which is of critical importance. They should not just save by holding paper currency. Second, expanding and compounding technology will increase the standard of living. Remember that there are more scientists and engineers alive today than have lived in all previous history combined. Those two factors countervail the government stupidity around us. Whether they will be overwhelmed and washed away by a tsunami of statism and collectivism, I don’t know.

TGR: You say that the U.S. government is the root cause of this problem. Isn’t that putting too much blame for a worldwide problem on one nation?

DC: The institution of government itself is the problem, and the problem is metastasizing like a cancer all over the world. But, sad to say, the U.S. is the most serious offender because it is currently both the most powerful and the most aggressive nation-state. It has been greatly abetted by the fact that the U.S. currency has been accepted globally. The U.S. dollar is, in effect, the reserve that backs all the other currencies in the world. That is why the U.S. government has been the most destructive from an economic point of view. Furthermore, military spending—which in the U.S. equals that of all the other militaries in the world combined—is purely destructive. It serves no useful economic purpose at all. The military is no longer “defending” anything—least of all liberty. It’s actively creating enemies and provoking conflict. So, yes, I think the U.S. government is actually the most dangerous force roaming the world today.

TGR: Do you see that changing after the next election?

DC: No. I think the chances of Obama being reelected are high, simply because more than half of Americans are big net recipients of state largesse. The U.S. has turned into a larger version of Argentina politically, where the electorate is effectively bribed to vote for the biggest thief. It is likely to turn out much worse than Argentina, however. Unlike the Argentines, the U.S. government is fairly efficient. And, unlike Argentina, the U.S. is rapidly turning into a police state.

Electing a Republican might be even worse, though. With the exception of Ron Paul and Gary Johnson, the potential Republican candidates absolutely make my skin crawl. So, no, there is no help on the horizon. The U.S. government is spending about $1.5 trillion more this year than it takes in, and it is not going to cut that. In fact, foolish spending to bail things out will increase. And, worse than that, the Fed has artificially suppressed interest rates for three years. Interest accounts for roughly 2% of $15 trillion official national debt, or $300 billion per year. As interest rates inevitably rise, that interest amount will grow. At 12%—and I’m afraid they’ll have to go even higher than that—it would add another $1.5 trillion just in interest payments.

I absolutely see no way out without a collapse of the U.S. currency and a total reordering of the U.S. economy.

TGR: When Money Dies, the title of your summit, implies some return to a gold standard. How do you see that playing out?

DC: Nothing is certain, but when the dollar disappears—and it’s going to reach its intrinsic value soon—what are people going to use as money? Will we gin up another fiat currency like the euro? The euro is likely to fail before the dollar. My suspicion is that people will want to go back to gold. It’s not because gold is anything magical, but simply the one of the 92 naturally occurring elements that—for the same reasons that make aluminum good for planes and iron good for steel girders—is most useful as money. In fact, the reason that gold has risen as high as it has is that the central banks of third-world countries—places that don’t have large gold reserves, such as China, India, Korea, Russia, even Mexico—have been buying the stuff in size.

TGR: The concept of going to a gold standard seems impossible in the sense that there is only so much gold above ground—6 billion ounces? Maybe $11 trillion worth? But it’s only a fraction of the U.S. GDP. Even with gold at $2,000 an ounce, that leaves an immense gap. In that scenario, how do you convert to a gold standard?

DC: In terms of today’s dollars, gold should probably be a lot higher than it is. I don’t know what the number will be, because a lot of those dollars will disappear in bankruptcies; they will dry up and blow away. It’s like a real estate development that was worth $1 billion on somebody’s books; when it fails, that’s $1 billion destroyed. It’s a question of the battle of inflation (with the government creating dollars to prop things up) against deflation (where businesses fail and wipe out dollars). But put it this way: the U.S. Government reports it owns about 265 million ounces. Its liabilities to foreigners alone are at least $6 trillion. If they were to be redeemed for a fixed amount, that would require roughly $22,000/oz. gold. And that doesn’t count dollars in the U.S. itself.

I’m a bargain hunter and a bottom fisher, and bought most of my gold at vastly lower prices. But I think gold is going much higher because most people still barely even know that the stuff exists. As inflation picks up, they are going to want to get rid of these dollars—but what other monetary commodity can they turn to? So, gold is going higher. I’m still accumulating gold.

TGR: You said that the storm as we emerge from the eye of the hurricane will be worse than it was on the other side. If they don’t own gold, how do investors protect themselves?

DC: It’s very hard to be an investor in today’s world because an investor is someone who allocates capital in a way to create new wealth. That is not easy in today’s highly taxed and regulated economy. It’s late in the day, but not too late, to buy gold, silver and other commodities. Productive assets are good to own. Of course, the easiest way to buy most productive assets is through the shares of publicly traded companies, but the stock market is quite overvalued in my opinion, so that’s not the best option right now.

In addition to trying to build personal holdings of gold and, to a lesser degree, silver, I think people should learn to be speculators. This is not to be confused with gamblers, who rely on random chances. Speculators position themselves to take advantage of politically caused distortions in the marketplace. In a true free market society, you would see very few speculators because there would be few such distortions. But regulations, taxes and currency inflations are likely to keep markets very volatile. Good speculators will position themselves to take advantage of bubbles, and identify bubbles that have been blown to their maximum and are about to deflate.

Government actions are going to force people to become speculators, whether they like it or not. Most won’t like it, and very few will be good at it.

TGR: What bubbles might speculators look to exploit?

DC: I’d say the world’s biggest bubble is real estate in China, but real estate bubbles are just starting to deflate elsewhere, too—in Australia and Canada, for example. It’s relatively hard to short real estate, of course. Shorting bank stocks is an indirect way to play it. I’d say bonds are the short sale of the century. They’re going to be destroyed. Bonds pose a triple threat to capital because:

1. Interest rates are artificially low, and as interest rates rise—which they must—bonds will fall.
2. Bonds are denominated in currencies, and most currencies, let’s say dollars, are going to lose a lot of value.
3. The credit risk of most bonds, certainly those issued by governments, is high.

On the long side, mining stocks are very cheap relative to the price of gold right now. I’d say there’s an excellent chance of a bubble being ignited in gold mining stocks, especially the small ones; in fact, I’d put my finger on that as likely being the easiest way to make a killing.

TGR: Technology was one of the two areas of optimism you mentioned earlier. Do you see a bubble forming there?

DC: You have a point, but I’m not sure you can talk about technology stocks as a whole; technology is too variegated, too vast a field. Although, I’ve long been a huge believer in nanotech, which is likely to change the world as we know it. With gold stocks, however, you can jump into a discrete universe, that’s likely to become a mania.

TGR: Thank you for the tips, Doug, and as always, for your thoughtful insights.

At the sold-out Casey/Sprott Summit When Money Dies, more than 20 seasoned investment pros, economists and freethinkers provided their insights and advice on the coming currency collapse… and what investors can do to protect their assets. Listen to the timely investment advice and specific stock recommendations of North America’s top financial experts from the comfort of your home—in 20+ hours of power-packed audio recordings on CD (or MP3). More details.

Want to read more exclusive Gold Report interviews like this? Sign up for their free e-newsletter today.

This essay from the July 2006 International Speculator captures the essence of Bud Conrad’s forward-looking, contrarian analysis… almost eerily so as we appear to be on the brink of the economic precipice described herein.

By Bud Conrad, Casey Research

Poor Ben Bernanke. The greatest financial train wreck in history is going to happen on his watch, and it will be mostly his predecessor’s doing. But not the work of Alan Greenspan alone. The Washington elite and their compulsively clever counterparts around the world have set the US (and global) economy up for a currency crisis of gargantuan proportions.

When?

Soon.

To explain why this seems inevitable and unavoidable, let’s look at the data. First, there are the deficits. They’re big, and they’re three.

Deficit 1 – The Government’s

The lamest deficit excuse, a story left over from the 20^th century, is that government can use borrowed money to stimulate the economy. It can’t. While it’s true that government can spend borrowed money to encourage particular favored activities (the ones with the right political connections), the borrowing dampens the rest of the economy by depriving it of capital.

What’s worse is that the favored activities are usually of the wasteful, rat-hole variety: wars; regulatory agencies; fatter subsidies for uneconomic farming; more complex Medicare programs; and bigger budgets for public schools that don’t teach and for colleges that teach whining. Meanwhile, commercial projects that add real wealth get cut off from the capital they need or have to bear the added costs that come from the government competing for investor funds. And so the government is left with more debt to pay and a smaller economy for its tax collectors to feed on.

It’s not rocket science. Arithmetic is the same for a government as for the guy driving a Mercedes on a Volkswagen budget: Spending more than you make, let alone more than you will likely ever make, leads to ruin. The only difference is that it takes governments longer to get there.

And if we’re not there yet, we are getting very close. The US government has run up a truly horrific debt of $8.2 trillion. That’s $28,000 for every man, woman, and child in America. By itself, the debt would be a serious but not catastrophic problem for the economy. But unfortunately, it is not a stand-alone problem. It feeds other problems, including – among others – inflation.

Debt and Inflation

Just how is the government’s budget deficit inflationary? The answer is partly political and partly economic.

The political part is simple. Government debt makes inflation attractive for politicians. Inflation is a slow-motion default – a default on the installment plan – that reduces the real burden of servicing the debt and leaves more resources for the politicians to play with. Inflation is especially attractive for them when the debt is owed to foreigners, who don’t get a vote. Politicians bemoaning inflation, those responsible at any rate, cry on the outside while laughing on the inside.

The economic part is more complex. Because the deficit handicaps all the industries that aren’t being bottle-fed by government spending, much of the economy will tend to languish – which is a signal for the Federal Reserve to expand the money supply. It is the increase in the money supply that directly causes inflation.

And there’s a second chapter. The government finances its budget deficit by selling IOUs. In the case of the US, the IOUs are primarily short term, especially US Treasury bills. From an investor’s point of view, the T-bills are an interest-earning substitute for cash. So a government deficit decreases the demand for dollars themselves – and that reduction becomes a second, independent source of price inflation.

If the US were alone in the world, that would be the end of the story. All the T-bills (and T-bonds) would be sold to people in the US, so that the government deficit would be offset by private saving. The deficit would give the economy nothing worse than a low-grade fever – chronic but unspectacular inflation accompanied by a stunted growth rate.

But the US isn’t alone in the world, and it isn’t just another country, so there is more to the story. It is the US’s singular role in the world economy that will turn US deficits into global economic disaster.

The world functions on a dollar standard and has done so since the end of World War II. The USD is accepted as cash in most countries. Many millions of foreigners rely on it as a second currency and use it as a store of value. And the US dollar is the world’s de facto reserve currency: It is used by central banks to back their local currencies. The volume of dollars and dollar-denominated assets accumulated by foreigners during the reign of the dollar standard is staggering and without historical precedent. Any move away from the dollar would be… well, problematic.

Deficit 2 – The Public’s

Americans used to be savers. Not any more. Chart 1 shows a stark picture. As recently as 1990, Americans on average saved about 7% of their income (which allowed them to buy up much of the debt the government was issuing). But the savings rate fell over the 15 years that followed, hitting zero in 2005. Unlike in China, where the average savings rate is said to be 20% (some unofficial reports have it as high as 40%), or even in some European countries where it is reported at 10%, the savings rate in America is now negative.

(Click on image to enlarge)

The debt Americans have been building up isn’t just a number that sits on a balance sheet. And it isn’t spread evenly through the population and through the economy. It is concentrated in one area, residential real estate. And it is concentrated in an unstable fashion – thanks to the government’s efforts to stimulate the economy.

After the equities boom faltered and the US economy showed signs of weakening in 2000-2001, the Fed started cutting interest rates and worked its way almost to zero. Americans borrowed and spent as never before. Anyone who didn’t own a house borrowed to buy, increasingly with no money down or with interest-only loans. Those who already owned a house borrowed against it to buy furniture, cars, boats, yard-wide televisions, and trips to Hawaii. And the process didn’t stop with just one round. Empowered by ultralow mortgage rates, people bid up the prices of existing houses, allowing their owners to draw even more spendable cash at the refinancing window – or to use their equity to bid on an even more expensive house, or even second and third homes, in the process taking on even bigger mortgage commitments and pushing home prices ever higher.

So it’s not just the US government that is in debt, but also individual Americans who have racked up $8.7 trillion in home mortgages (many with adjustable rates that are now rising) and $2.2 trillion in consumer credit ($36,333 per person).

Bub-Bub-Bubbling Along

We all know there’s been a housing bubble. But with interest rates now rising – the Fed has hiked rates without a break in the last 16 FOMC meetings – what comes next?

The housing boom is over. Prices have softened in many areas and in others prices are beginning to decline. The reason? Interest rates have risen to a point where mortgages no longer look like free money. The refinancing market, which is a good barometer of how high or how low rates “feel” to the public, shows this in emphatic fashion in Chart 2. Borrowers have gone on strike, and without borrowing, the best the US real estate market can do is to tread water.

(Click on image to enlarge)

Yes, the housing boom is over, but the story of the housing boom isn’t. The mortgage debt is still there, saying “FEED ME” every month. If interest rates keep going up…

1. Home buyers will cut back on what they are willing to pay, so prices will decline.

2. Homeowners will see their equity shrink and then disappear. Mortgage lenders will swallow huge losses as many home owners default.

3. Homeowners with adjustable-rate mortgages will be squeezed; and

3a. Many will be forced to sell, so prices will decline; and

3b. The rest will cut back on consumer spending in order to keep their houses and so will push the economy toward recession.

The Federal Reserve has been letting interest rates rise because it is concerned about the prospect of inflation. But the unraveling of the real estate market, if interest rates keep rising from here, is so automatic, so ugly, and so obvious that the Federal Reserve must know what the consequences will be if they push rates much higher. The Fed might choose to tolerate a little more inflation rather than risk a deep recession. Too bad that’s not the only decision they face.

Editor’s Note:
The following article is based on analysis from Robert Prechter’s Elliott Wave Theorist. For more detailed analysis  from Robert Prechter, you can download the Free 75-page “Independent Investor” eBook from Elliott Wave International.

Death of the Dollar, Again:
Before You Mourn, See This Chart

By Nico Isaac

If you want the latest news on the U.S. Dollar Index, try a search under its new ticker symbol, RIP. — as in, “rest in peace.” Let the record show: In the early morning hours of Tuesday, October 6, the mainstream financial community officially declared “The Demise of the Dollar” (The Independent).

The “coroner’s report” cites these details as the causes of death:

An alleged (and later denied) secret meeting among leaders of certain Arab States, China, Russia, and France which aimed for the immediate discontinuation of oil trading in U.S. dollars.
And, an open statement from one senior United Nations official that proposed the dollar be replaced as the world’s reserve currency.
In the words of a recent Washington Post story: “The growing international chorus wants the dollar replaced… a move that would end the greenback’s six-decades of global dominance.”

And with that, the line between negative sentiment — AND — “EXTREME” negative sentiment was crossed. It occurs when the beliefs about a market lean so far over in one direction, that the boat investors are sitting in is about to tip over… Just like the last time.

Case in point: Spring 2008. The U.S. dollar stood at an all-time record low against the euro after plunging more than 40% in value. And, according to the usual experts, the greenback was “dead”-set to meet its maker. On this, these news items from early 2008 say plenty:

“The dollar is a terribly flawed currency and its days are numbered.” (Wall Street Journal quote)
“It’s basically the end of a 60-year period of continuing credit expansion based on the dollar as the world’s reserve currency.” (George Soros at the World Economic Forum)
“Greenback is losing Global Appeal… the ‘Almighty’ Dollar is Gone.” (Associated Press)
YET — from its March 2008 bottom, the U.S. dollar came back to life with a vengeance, soaring in a one-year long winning streak to multi-year highs. In the most current Elliott Wave Theorist (published September 15, 2009), Bob Prechter presents the following close-up of the Dollar Index since that trend-turning bottom. (some Elliott wave labels have been removed for this publication)

At a measly 6% bulls, the bearish dollar boat tipped over. The situation today is even more remarkable: The percentage of bulls is lower, at 3-4%, while the dollar’s value is higher than the March 2008 level.

It’s crucial to understand that markets don’t necessarily respond to sentiment extremes immediately. But, such extremes do indicate exhaustion of the trend — which is usually the opposite of what the mainstream expects.

For more information, download Robert Prechter’s free Independent Investor eBook. The 75-page resource teaches investors to think independently by challenging conventional financial market assumptions.

From Elliottwave International’s Forex Focus:

U.S. Dollar: Kiss Goodbye or Reversal at Hand?

It may seem extreme, but the October 12 headline on DrudgeReport.com (one of the world’s most popular news websites) “Kiss the Dollar Goodbye,” complete with a picture of a smooching President Obama, is a fair reflection of the sentiment toward the buck.

Based on a recent poll, bullishness towards the U.S. dollar is still low (17%) and has been as low as 3% on previous occasions. This reminds me of the sentiment towards crude oil in December 1998, when it traded just above $10/barrel. At that time prices had already fallen by half, and the almost universal opinion was that oil would go below $10/barrel. Price had to drop only 36 cents to get there — but it never happened.

The headline above plainly states what many business articles are saying. There are also rumors that the dollar will be replaced as the pricing currency — another example of extreme bearish sentiment. We’ve seen similar rumors in the past when negative sentiment towards the dollar would reach an extreme: in late 2004, for example.

All this bearishness continues to fit the Elliott wave pattern we see in the U.S. Dollar Index charts: Potentially completed five waves down since March 2009.

The dollar reversal could be a RARE opportunity. EWI’s Currency Specialty Service can help you catch it.  9 Currency Pairs, 24 Hours a Day. Get the latest forex forecasts now with Currency Specialty Service. Click here for details

Robert Prechter, Chartered Market Technician, is the world’s foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.