Dollar's retreat raises fear of collapse
By Carter Dougherty
Published: September 13, 2007
IHTFRANKFURT: Finance ministers and central bankers have long fretted that at some point, the rest of the world would lose its willingness to finance the United States' proclivity to consume far more than it produces - and that a potentially disastrous free-fall in the dollar's value would result.
But for longer than most economists would have been willing to predict a decade ago, the world has been a willing partner in American excess - until a new and home-grown financial crisis this summer rattled confidence in the country, the world's largest economy.
On Thursday, the dollar briefly fell to another low against the euro of $1.3927, as a slow decline that has been under way for months picked up steam this past week.
"This is all pointing to a greatly increased risk of a fast unwinding of the U.S. current account deficit and a serious decline of the dollar," said Kenneth Rogoff, a former chief economist at the International Monetary Fund and an expert on exchange rates. "We could finally see the big kahuna hit."
In addition to increased nervousness about the pace of the dollar's decline, many currency analysts now also are willing to make an argument they would have avoided as recently as a few years ago: that the euro should bear the brunt of the dollar's decline.
The euro, shared by 13 countries, once looked like a daring experiment. But it has gained credibility and euro-denominated financial assets are as good as their U.S. counterparts. With a slow economic overhaul under way in European capitals, and a fundamentally sound corporate structure, a weaker dollar justifiably means a stronger euro.
"The euro has earned what it has gotten," said Stephen Jen, global head of currency research at Morgan Stanley in London. "It is not simply rallying by default."
So long as Americans buy more than they earn from exports - and they did, creating a current account deficit of $850 billion last year - the rest of the world financed the binge by bringing dollars into the United States for investment in stocks, bonds, real estate or other assets, thereby preserving demand for the dollar.
The continued appe e for U.S. investments stemmed from a track record of strong economic growth and a financial system that has been remarkably resistant to shocks.
But the latest turmoil in mortgage markets has, in a single stroke, shaken faith in the resilience of American finance to a greater degree than even the bursting of the technology bubble in 2000 or the terror attacks of Sept. 11, 2001, analysts said. It has also raised prospect of a recession in the wider economy.
While most economists just a few months ago would have dismissed the prospect of a dollar collapse outright, they now are debating the possibility that something on par with the dollar debacle of the 1970s might just happen again.
When a currency collapses, the central bank can push up interest rates to attract needed investment, but strangle the economy in the process. Alternatively, it can let the currency fall and watch prices of imports - and eventually competing domestic goods - rise sharply.
Double-digit inflation resulted in the 1970s and only a global recession brought it to an end.
Today, the dollar's current weakness is being driven by uncertainty over how central banks will react to the turmoil in financial markets, unleashed by the collapse of the U.S. market for subprime mortgages given to borrowers with shaky credit histories.
The European Central Bank put off an interest rate increase it had planned for September, but is still inclined to tighten credit at least one more time by the end of this year. By contrast, the U.S. Federal Reserve has hinted at a rate cut at its meeting next Tuesday - a step that would diminish the appeal of dollar-denominated assets, almost certainly sending the dollar lower.
But across a horizon of 18 months to two years, investors are pondering how quickly the dollar will fall, a question to which there are no easy answers.
After a run of strong growth, the U.S. economy has lurched into a phase of slower expansion, and last Friday the most serious warning sign appeared - an outright deterioration in employment growth.
The data has coincided with profit warnings from major U.S. retailers like Wal-Mart Stores and Home Depot, suggesting that consumer spending, the backbone of the American economy for years, was ebbing. This step would logically follow the rapidly cooling housing market, since Americans have spent heavily with money borrowed against rising home values.
A drop in consumer spending by Americans means fewer imports. The current account deficit peaked at 6.8 percent of gross domestic product in late 2005 and is now running at about 5.5 percent, with figures for the second quarter of 2007 due out on Friday.
A lower deficit means less capital needs to flow into the United States, and is consistent with a steady decline in the dollar. Since the middle of last year, the dollar, weighted for trade flows, has fallen steadily against a broad range of currencies, according to data collected by the Fed.
All this suggests that, in spite of headline-grabbing news about the latest low, the dollar could be adjusting gradually as the U.S. economy becomes driven less by lending on the back of rising home price.
The problem, as every economist knows, is that the current account deficit - about $770 billion - is still colossal in absolute terms.
And foreigners are being asked to provide those dollars at a time when the subprime turmoil is threatening to spill over into the broader economy.
Put another way, at a time when the psychology of crisis has gripped financial markets, intangible at udes toward the dollar have become all the more important. And with growth strong elsewhere in the world, there are appealing places to go besides the dollar.
"The problem is that the deficit is still very, very large," Jen said. "And there are plenty of other investment opportunities outside the United States."
Pressed to make an educated guess, most economists opt for calm, believing the dollar is unlikely to go into a tailspin even as they mark up the odds of one.
The major holders of dollars - notably the Chinese, with their $1.3 trillion in currency reserves - have little incentive to see the dollar weaken, and their support provides the dollar with a bulwark of strength. And since investors need to stay diversified, and U.S. markets are deep and liquid, abandoning the dollar wholesale is hardly a realistic option.
"Rather than a precipitous decline, we are probably be looking at a move steadily lower," said Simon Derrick, chief currency strategist at Bank of New York in London.
Wow, the Fed cut by half a point even though the dollar is stuck below 80. Predictably, the Dow is up quite a bit and the dollar is now threatening to fall below the 79 mark. Now we all get to pay for this stock market rebound with higher consumer prices. Hooray for the Federal Reserve! Free market capitalism in its purist form.
http://biz.yahoo.com/ap/070918/fed_i...tes.html?.v=28
Inflation has been tame. Wholesale prices surprisely dropped recently. Fed is here to provide liquidity while keeping inflation in check. They have done a pretty good job of that. Sometimes they drop rates and sometimes they increase rates like they did 17 times between 2002 and 2005.Wow, the Fed cut by half a point even though the dollar is stuck below 80. Predictably, the Dow is up quite a bit and the dollar is now threatening to fall below the 79 mark. Now we all get to pay for this stock market rebound with higher consumer prices. Hooray for the Federal Reserve! Free market capitalism in its purist form.
http://biz.yahoo.com/ap/070918/fed_i...tes.html?.v=28
I do expect significant inflation in the medium term. Luckily, I have a big enough chunk of my portfolio in Euro stocks that I can ride a nice wave of Euro appreciation against the dollar.
I'm thinking it will be $1.50-$1.55 a year from now.
Smart move. The dollar has been generally declining against the Euro for years, and only now does there seem to be widespread worries about that, and the Fed isn't in a spot to do anything about it. Really bad signs for the dollar.
Is that from their website or Neil Cavuto?
Government and Fed price indices are not to be trusted. It's very hard to collect the data and it is often manipulated downward. The government and the Fed have a very strong incentive to state a lower than reality inflation rate. If the government and the Fed have the same strong incentive to lie, then they lie. I know that this is like the 3rd time that I've posted this graph, but here it is again:
http://en.wikipedia.org/wiki/Image:C...ney_supply.svg
The M3 money supply has more than doubled over the last 10 years! The Fed doesn't even report this stat anymore. They say it's because it's not worth it anymore; I, and many others, say it's because it's become too dangerous.
Has our GDP come anywhere close to doubling in the last 10 years? Of course not. So how can anyone believe that inflation is and has been in the 2-4% range over the last 10 years like the government and the Fed tells us? You have seen the price changes at stores over the last decade with your own eyes. I know what my eyes tell me.
The Left wants cradle to grave care. The Right wants low taxes and to shoot at ghosts in the desert to the tune of a half Tril a year, and hey, some of that cradle to grave isn't too bad.
So we get what we have here, which is the way they want it.
I have never seen that quote used before with any accuracy. cheers.
I've seen calculations where the actual annual inflation rate could be anywhere between 12-15%...who you gonna believe, the FEDS, or your own wallet? Not counting increases in housing and energy costs are good examples....Government and Fed price indices are not to be trusted. It's very hard to collect the data and it is often manipulated downward. The government and the Fed have a very strong incentive to state a lower than reality inflation rate. If the government and the Fed have the same strong incentive to lie, then they lie. I know that this is like the 3rd time that I've posted this graph, but here it is again:
None-the-less, dropping the FEd rate can't be good for the dollar....you should start noticing foreign products, like cars and other non-durables, noticeably higher....
Thomas Jefferson said that American democracy would survive, so long as the electorate didn't decide just to vote itself free reign to empty the Treasury.
250-300 years is about the top limit for a particular political system before it comes unraveled. So what shall we adopt next?
if we're not going to trust Government statistics of inflation and instead trust Wikepedia, then it's hopeless to argue. btw, my wallet says with a little shopping prices are very good right now.
It's already been adopted...just not announced...it's corporate rule. A new form of Oligarchy were power rests with power-full, world-wide business men....
How can you justify a two-fold increase in energy costs and annual 5-10% appreciation in homes values since 2001 with a supposed annual inflation rate of 2-3%?
"you should start noticing foreign products"
and 10s of $Bs as foreign corps buy up US corps and divisions.
and foreign indivduals buying up depressed real estate, residential and commercial
All bets were off after we saw a supposedly "conservative" GOP controlled Congress and President balloon the size and scope of the federal government to unprecedented levels. Think about it, if Clinton had somehow managed to push through that Medicare prescription drugs benefit when he was in office the right wing would still be shouting from the roof tops about "socialism" and what not. Turns out, the Clinton administration (with a little help from conservative Republican congressmen who performed like conservative GOP Congressmen) was more conservative than the current administration. Gridlock isn't a bad thing. Neither is a Demo president who is willing to abandon his 'core principles' to get his ass reelected. I can tell you it's preferable to the GOP version.
Well, it's either Southern Fried or Urbane Agnostic statism. Depends on your palate, I suppose. Seriously, that's what passes for the great debate in American politics these days. Are you more at home polishing off a 12 pack of Bud watching the little cars go around the track 500 times or are you content to dig through the NY Times while sipping your Grande Latte and perhaps listening to a little Vivaldi on any given Sunday?
Last edited by Holt's Cat; 09-18-2007 at 10:46 PM.
It's no secret that the money supply has exploded in recent years. There is just no way that the inflation rate is as low as the government tells us it is when the money supply has increased by so much. I don't know where you shop, but everything I buy is alot more expensive than it was just a few years ago.
Interesting read
http://inflationdata.com/inflation/A...ney_supply.asp
Intersting charts
http://www.shadowstats.com/cgi-bin/sgs/data
That guy's takes on inflation are alot more in line with what I see than what the government is telling me.
I could be wrong, but I think the devaluation of or money is better than outsourcing jobs and manufacturing because it is cheaper.
Either way, we are in for some hard times. At least if we return jobs here, wages can come back and meet inflation.
You're right in theory, but the problem is that these manufacturing jobs aren't being outsourced to Canada or Europe; they're being outsourced to 3rd world countries. The differences in costs (wages) between operating in the USA and operating in China, India, etc. are gigantic. Those jobs are not coming back without a major shift in our trade policy, and any president who does not support free trade/globalization is deemed an unelectable isolationist. If a company is paying a factory worker in China $5 a day, then the dollar will have to turn into toilet paper for that job to come back here, so we are screwed either way.
That is the position the trade deficit has put us in. We are only maintaining the status quo at the expense of a higher national (and personal/household) debt and a weaker dollar. The chickens are only beginning to come home to roost. Unraveling this mess would cause a long recession; the Fed is not letting it happen. The politicians don't want that to happen. So it's not happening, and the dollar is paying the price. The dollar can't pay this price forever, but the Fed and the government don't do anything to turn it around. So what happens in the end? The only thing that can happen: a huge collapse in the dollar's value.
When the dollar collapses, the result will be hyperinflation like what we've seen in lots of Third World countries as well as Weimar Germany. The result will be economic collapse, and the nation that emerges from that collapse will be quite different from the one we have now. Probably our venerable Enlightenment democratic system will be gone and replaced either with European-style corporate statism or a false-Christian Southern-style autocracy.
One thing that might be different this time is that the global economy no longer gets pneumonia whenever the U.S. sneezes, but rather just a bad head cold. So, when the U.S. re-emerges from the coming economic collapse, it never will regain the economic hegemony it had relative to the rest of the world in its 1945-2000 peak. We'll see the degree to which the new state uses military extortion to get its way.
You will also see our exports increase because of the
lower dollar. Which means the lower dollar is not all
bad.
And who the cares if they buy our real estate. They
cant take it back home with them. It stays here.
Yes, but proper valuation of the dollar is just one step. Other factors can still offset the wage difference. Think about it. A worker on an assembly line here might make $70 a day vs. $2 a day in a third world nation. Shipping eats up some of that difference, not really much though. If we assume a $65 difference for a given product line and the worker man-hours produces 100 items a day, we are looking at a 65 cent difference on maybe a $100 product. When you look at it in percentages, and what small changes in import and tax policies achieve, there is hope. Corporation count every penny for profits because after a million products, it really adds up. That less that 1% price change is easy to fix with wax policies.
Now in some things, that is an unreasonable example. It is not uncommon for USA jobs to be 20% of the price in manufacturing. Transportation and foreign labor is probably between 1% to 3% at those levels. This is where the tax structure really makes the difference. The end product USA product costs about the same under the fair tax, but would increase the import price by about 20% because it is taxed at the sale, the same as the USA made product. Now don't try to pin me down on these numbers, they are simple examples to invoke thinking. It is not something that would fix all imports, but it's a big step. It would probably fix most imbalances in prices.
I agree that free trade is a noble concept, but it has proven to be a failed policy.
Wages are just one part of the equation. What matters in the end is the retail price and quality differences. The fair tax is also a necessary part of the equation. We tax our manufactured products making them less compe ive globally. Other countries tax at the sales level. Therefore, imports effectively do not get taxed, and exports get taxed twice.
Increased oil prices will help a little in offsetting transportation costs. Hopefully, they will bring back tariff. I think the only way to avoid a future recession, when the dollar gets unmanageable, is to get the Fair Tax, or a similar tax concept enacted.
We simply need to band together some how and convince the politicians the trade imbalance is a high priority thing to fix. With a media that only cares about sensationalism, how does one get the word out? Maybe with increased problems with import products we can increase USA jobs with 100% inspections which would also drive up import prices.
That's true. All this globalization BS will be the ultimate cause of the loss of our economic hegemony. Why do we want to be more integrated with the rest of the globe? If anything, this country was founded on, and made great by, anti-globalization.
You made a good case for a fair tax, but I wouldn't count on convincing enough politicians that the trade deficit is extremely dangerous. Remember when Cheney said that deficits don't matter? I don't know what's more scary: that he's lying, or that he actually believes that.
Our dollar (Canadian) that is...is poised to eclipse the US dollar by the end of the month. It's already @ 0.99....
http://money.canoe.ca/News/2007/09/20/4511649-cp.html
Boosted by high commodity prices and a weakening U.S. dollar, the loonie reached parity with the greenback Thursday for the first time in nearly 31 years, promising to boost the energy and import sectors and give consumers cheaper vacations but spelling more trouble for Canada’s industrial heartland.
The loonie, which has been gaining on its American counterpart since bottoming out below 62 cents in early 2002, has recently been on a spectacular run, up from 95 cents at the start of September and from under 90 cents last spring.
Soaring demand for Canadian commodities, ranging from oil and wheat to coal, potash, nickel and zinc — have helped propel the currency, while a weakening American economy has dragged down the greenback, the world’s most widely held and traded currency.
At 10:58 a.m. EDT, the loonie hit $1.0004, and later traded at 99.86 cents US, up 1.36 cents US from Wednesday.
The last time the dollar was at par with the greenback was Nov. 25, 1976, when Pierre Trudea was prime minister and Rene Levesque had just become premier of Quebec. That high point for the currency signalled the beginning of a long slide for the loonie, as national unity concerns and mounting worries about Canada’s worsening government finances over the next decade or so scared away foreign buyers of the currency.
The loonie began to recover a bit after the former Liberal government began tackling the deficit, but has soared in recent years because of massive global demand for Canadian resources and the solid growth in the economy, especially in the oil-rich West.
“What the story is really saying is that Canadians are getting richer relative to the U.S. and hence Canadian assets are getting richer compared to the U.S.,” said CIBC economist Jeff Rubin.
“It really represents a very dramatic reversal of fortune from what would have happened 10 years ago when our resource economy made us look rust belt compared to the technological dynamo of the U.S. economy.”
The currency had advanced 1.38 cents Tuesday after the U.S. Federal Reserve cut short-term interest rates by half a percentage point, undercutting the attractiveness of the American currency. The loonie was also boosted as crude oil hit new highs solidly above US$80 a barrel.
“It’s been a perfect environment for the Canadian dollar to strengthen,” said Craig Alexander, deputy chief economist at TD Economics.
“You’re getting a stronger Canadian dollar on positive economic news out of Canada, rising commodity prices, improving interest rates spreads and concerns about the U.S. dollar.”
Most forecasters weren’t anticipating the loonie to hit parity with the U.S. greenback at all — much less so soon and so quickly.
The No. 1 reason behind the sudden surge, Alexander said, “is that the U.S. Federal Reserve surprised financial markets by cutting interest rates by half a point at their latest FOMC meeting.”
“That makes the Canadian dollar look more attractive to international investors because it means interest rates in Canada are less below those in the United States.”
The high dollar may make U.S.-made goods cheaper to buy in Canada and is a boon to Canadians travelling in the United States, especially cross-border shoppers and those looking to book winter vacations to Florida or Arizona. Those trips are suddenly much cheaper than they were a month ago.
But the high loonie will continue to put pressure on domestic manufacturers, who have to try to sell goods south of the border at a discount or have been priced out of U.S. markets.
Manufacturers such as lumber exporters, which have not had some insulation from commodity prices and automakers will be particularly hard-hit, as the rising Canadian dollar makes exports less compe ive at the same time that the shrinking U.S. housing market is making demand for housing weak.
Tourism in Canada could also be affected, as travel to Canada becomes more expensive to Americans — a drop that will likely ripple through the hospitality industry.
Rubin estimates that the manufacturing sector could see as many as 100,000 more jobs shed over the next 12 or 15 months, calling it the “obvious” loser of the rising loonie.
“It is getting crushed, no doubt about it, we lost a quarter million manufacturing jobs,” he said.
But, he added, “the pain and suffering in the manufacturing sector is nowhere evident when you look at the broad economic numbers.”
While the manufacturing sector has lost 289,000 jobs since late 2002, the economy has created more than one million jobs in resources, construction, services, health care, education and financial industries, leaving the national jobless rate at 30-year lows.
“Even in the province of Ontario, which is after all, the country’s manufacturing heartland, the unemployment rate is at a 20-year low ... the energy sector is basically taking over our balance of payments.”
On the other side of that, importers will win big as the costs of bringing goods into Canada gets cheaper, as will whole sellers — the “middle men” in the economy.
It could also benefit consumers, who will see the purchasing power of their money rise.
But, Alexander warns, the surging loonie hasn’t yet trickled down to consumers.
“It is showing up in some areas like gasoline prices (and) retail areas like clothing and footwear, but broadly speaking, we haven’t seen a significant pass- through yet,” he said.
“Canadians that decide to do some cross-border shopping are benefiting, the increasing popularity of the Internet makes it possible for Canadian to buy things from vendors abroad, and to that extent they can benefit 100 per cent from the appreciation of the Canadian dollar.”
American-dollar weakness was also evident across most currencies Thursday as the greenback slumped versus the euro, the British pound, the yen and Swiss franc.
It dropped to record lows Thursday against the euro, which rose above the US$1.40 level, the highest value for the European currency since its inception in 1999.
The spot gold price, meanwhile, topped US$730 an ounce, trading at US$742.60, up $13.10 on the day. Some foreign exchange analysts in the U.S. have predicted the Canadian dollar could reach as high as $1.05 US if weakness in the American economy persists.
The older Argentinians on this board should know first-hand what printing too much money does to a economy....When the dollar collapses, the result will be hyperinflation like what we've seen in lots of Third World countries as well as Weimar Germany. The result will be economic collapse, and the nation that emerges from that collapse will be quite different from the one we have now.
Fears of dollar collapse as Saudis take fright
http://www.telegraph.co.uk/money/mai...-mostviewedbox
I love that picture of Bernanke on the dollar. There's not a better person to put on a bank note than the head banker.
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