Ka-Poom

iTulip.com "Ka-Poom Theory" Chart as originally posted February 1999

iTulip.com Ka-Poom Prediction
  • National currencies are primarily valued by the relative economic strength among trading partners with floating currencies, except for the U.S. dollar.
  • A major component of dollar strength is the unique demand for dollars due to the dollar's reserve currency status.
  • Dollar demand and thus price is supported by all nations trading with the U.S. and among each other as all need dollars for international exchange, especially for oil.
  • If dollar reserve currency status declines, either gradually via euro diversification or suddenly due to an event that causes a loss in confidence in the future purchasing power of the dollar, dollar demand and value declines in kind.
  • U.S. interest rates are low mostly due to demand for U.S. debt, denominated in dollars, from foreign central banks of nations, especially Asian, that seek to keep U.S. consumers borrowing at low interest rates to purchase their exports using strong dollars; Asian "vendor financing".
  • Ka: A random exogenous event (e.g., a stock market crash predicted in 1999 for year 2000 and recession predicted for 2001) intensifies disinflation created by Asian vendor financing, causing the Fed to shift from bubble fighting to anti-deflation polices.
  • Fed responds with an excessive cheap money policy, targeting short term rates below the inflation rate.
  • The Fed keeps interest rates too low for too long, creating a new asset bubble.  But in what?  We did not know in 1999.  The answer: real estate.
  • Poom: A random or not so random exogenous event that has not yet happened (the stock market crash we predicted for 2000 did not have the impact we expected) exposes the true level of risk to lenders that is inherent in this unbalanced system, causing lenders to lose confidence in the future purchasing power of the dollar and seek alternative reserve assets.
  • Interest rates and inflation rise rapidly as dollar demand and value falls, import prices rise, and the Fed moves to raise rates to stem the tide or dollar repatriation.
  • The first foreign central banks to move will be those with the least exposure to losses in national income from sales of exports to the U.S. or depreciation in the value of the dollars they are holding as reserve assets (e.g., France).
  • Not surprisingly, the Fed disagrees: "To sum up, this analysis suggests that there is more to solving the conundrum of the recent low long-term interest rates than pointing to the behavior of official foreign purchases of U.S. Treasury securities. Indeed, there is little solid evidence suggesting a persistent relationship between the two. Furthermore, the structure of the Treasury market does not support the projection of a rapid rate hike in the event that foreign central banks retreat from the U.S. Treasury market." The Long-term Interest Rate Conundrum: Not Unraveled Yet?
  • The assertion of no persistent relationship exists between low interest rates and foreign purchases of U.S. Treasury securities contradicts the fact that Central Bank reserve diversification spooks currency traders, and will drive the dollar down, which is in fact finally causing U.S. inflation and interest rates to rise. 
  • The Fed continues to raise rates, but not to fight inflation caused by economic overheating.  The Fed needs to demonstrate anti-inflation vigilance to foreign lenders so they will continue to fuel the foreign capital addicted U.S. speculative financial system, but raises rates at the risk of throwing the real economy into recession.  Unfortunately, it’s a lose-lose proposition.  Eventually the hikes, either too many or too few -- the Fed never gets it right -- will produce either a enough recession or inflation to spook foreign investors and start the Poom ball rolling. 
  • The mechanism of Ka-Poom Theory proposed in 1999 appears happening, albeit later than we predicted, and slowly versus suddenly. At least so far. 
  • The resulting inflation is an event 25 years in the making, and will be historic in its extent.

Update March 9, 2006 to account for the Housing Bubble

Ka-POOM

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