Thursday, Aug 20, 2009
No longer "if", but "when"
REUTERS: Getting ready for the dollar’s fall
It just won’t go away, this needling worry about the U.S. dollar losing its coveted top-dog status.
Posted by alan @ 02:00 PM (1257 views) Add Comment
24 Comments
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1. uncle tom said...
I don't see people moving away from the Greenback for a long time, even though it may devalue.
America's financial capital may be a little more worried about this right now:
http://www.nhc.noaa.gov/graphics_at3.shtml?5-daynl#contents
- That flip to the right is not guaranteed..
2. mander said...
While the greenback is likely to stay on top for some years, persistent concerns about its reserve status and moves to diversify away from it could usher in a new era for U.S. borrowers, public and private alike — a more painful one where debt costs can no longer be offset by the kindness of foreign investment.
In case of limited foreign investment will debt cost be offset by hardwork or inflation? They will probably flirt with inflation as too much sweat is not needed.
3. Ndg said...
In the words of good 'ol Al Johnson: "Toot-toot-tootsie-goodbye! Toot-toot-tootsie-goodbye!". Anyone who disagrees with Al vis-a-vis dollar value/validity/credibility is, I would prosper, lost in the trees.
Anyone who fails or refuses to comprehend that the $ (and the £ et al) are already sunk (no more bubbles) and consequently left aspiring to the illuminated and exhorted, sometimes somewhat revered, popular status of the metabille-gumbo-bead, is living in cloud cuckoo land.
Get real; paper money is paper money. Green, blue, pink, violet - or whatever colour. Colour and associated 'hip phraseology' are for ardent fools only. Look at the facts. Study currency. Study value. Instead of asking simply "Why"? ask " How can so many people be so stupid at the same time as each other". If you find the answer, then you will know.
Wish I could tell you but it doesn't work like that. Good luck.
4. mrflibble said...
The Dollar is the keystone to all fiat money, if the Dollar fails then all fiat money will fail. The Dollar is just about the only currency I would say is too big to fail, or rather too big to be allowed to fail. If it does fail then it's Game Over, for us all...
5. mander said...
Would a world currency help combat poverty and climate change? Poverty in the way that third world countries will get a share of the world currency and will not be in the position to print worthless paper and climate change in the way that if as a country you are not cutting your CO2 emissions we will not give you money. Examples can continue with Iran nuclear program where the world will not give money unless they abandon their nuclear ambitions. And they will not be able to say no because the world is too much interconnected?
6. mountain goat said...
Worth a read...
The Greenback Effect
...An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination....
Our immediate problem is to get our country back on its feet and flourishing — “whatever it takes” still makes sense. Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.
WARREN BUFFETT, Opinion, New York Times, 18 August
7. 51ck-6-51x said...
mander
- No I do not think it would necessarily since people would, no doubt, still agree to trade for things other than this 'Worldro' so enforcing it's sole usage would become the replacement burden - that is non-Worldro-trade may be considered a black market, but policing black markets is notoriously difficult.
8. 51ck-6-51x said...
mander
- cont...
Much better in my opinion would be free-banking, since it should evolve to the optimal number of currencies and their boundaries are no longer necessarily so crisp.
A world currency would necessitate a world central bank and therefore a world state with which to back it - not great.
9. quiet guy said...
I'm genuinely surprised that so many commentators think that the dollar will not lose a lot of value. I also find that there is often something on Karl Denninger's blog that explains the danger that the dollar is in. Today is no exception.
http://market-ticker.denninger.net/archives/1356-Treasury-Insanity-In-Support-Of-Grift.html
What I'd really like to hear more about is the prospect for the pound. Regarding the current government spending deficits, is the pound more or less vulnerable than the dollar?
10. mountain goat said...
QG - I am one of those who think the dollar will not fall for some time. The reason is the deflation arguement. Thanks to falling house prices there is more debt than matching assets. So effectively there is a shortage of dollars to pay back the debt. Where there is a shortage of an essential item it is worth more. Since the level of debt is about $50 trillion, if asset prices fall 10% that is another $5 trillion dollars required. QE will probably eventually over-shoot, but not while asset prices are falling.
11. debtfree said...
I agree with 9. quiet guy and also ....
Pacific Investment Management Co., the world’s biggest manager of bond funds, said the dollar will weaken as the U.S. pumps “massive” amounts of money into the economy.
The dollar will drop the most against emerging-market counterparts, Curtis A. Mewbourne, a Pimco portfolio manager, wrote in a report on the company’s Web site. The greenback is losing its status as the world’s reserve currency, he said
http://www.bloomberg.com/apps/news?pid=20601087&sid=aCM5WaqsP.98
12. bellwether said...
Debtfree to focus on the dollars demise is to fail to see the interconnections - comment at 4.
It is a simple question of arithmetic is money being printed faster than credit is being destroyed. If the answer is no we have deflation.
Talking about "massive" amounts of money is meaningless unless you speak about specific quantities. There has been issuance and underwriting of appx $2 trillion against a debt mountain of approximately $50trillion which has already lost some 30 - 40% of value with loss of value growing.
It is worse than that issuance is non inflationary unless if finds its way into the system and this can only really happen through debt issuance, which isn't happening and isn't going to happen on any scale because banks still have trillions in overvalued assets as an apparent capital base.
The critical point is that the past 10 years were hugely inflationary, it is just that we stripped house prices out of the calculation. THIS IS THE AFTERMATH OF THAT
Unless rents, wages and credit increase we are in deflation. Do you see any of these increasing anytime soon?
13. down wave said...
In my ignorance, It seems to me that many things are priced in US$'s, oil, gold, diamonds, etc. I cannot see anyone wanting to hold Chinese Brass Razoo's or any other currencies, except Euro's perhaps. I would rather hold $'s and Euros than any other currencies.
14. a saver said...
Anyone have any thoughts on the NZ dollar? It's very strong against the pound at present but seems like there could be some increased risk aversion coming up and that always seems to hit the kiwi. And the interest rate is less than half of what it used to be. But then it is a commodity currency so might retain some strength in the long term. I have a stash of kiwi dollars that is earmarked for (UK) house purchase and am going to start bringing it over in tranches (ie pound cost averaging).
15. stillthinking said...
mg, why do you make a comparison between -asset values- and debt? debt balances out against savings, not asset values which are just a matter of opinion. so there isn't a shortage of money, its just not moving to the debtors.
16. debtfree said...
Bellwether,
Extract from: http://www.marketskeptics.com/2008/12/how-deflation-creates-hyperinflation.html
'Yes, there is debt deflation, and the overall money supply is shrinking as a result. However, those calling for "multi-year bull market" for the US dollar are insane. These individuals need to review basic monetary theory. The money supply is only one of three factors that determine whether prices rise or fall. The other two are the changes in the velocity of money and the real output of the economy. The danger of hyperinflation lies in a dramatic increase in the velocity of money due to a loss of confidence, not in changes in the money supply.'
17. debtfree said...
There seems to be some confusion about Hyperinflation. Do you know that in 95% of all historic cases of hyperinflation it begins during either a deflationary depression or deep deflationary recession? The other 5% is brought about by political stupidity as in Zimbabwe.
Hyperinflation operates in a very different way than regular inflation.
THE MOST DANGEROUS PERIOD FOR HYPERINFLATION IS DURING A DEFLATIONARY RECESSION OR DEPRESSION...NOT DURING AN INFLATIONARY RECOVERY
Regular inflation does not lead to hyperinflation, deflation leads to hyperinflation, primarily because the people are beat down by the deflation depression or recession and they being to lose confidence in the government and the money and because the central banks will always over respond to the deflationary slump...as we are now seeing with perhaps the most dangerous move the FED can make and that is quantitative easing, or direct fiat liquidity injections.
It seems counterintuitive, and perhaps that is the problem some people are having in trying to understand just how hyperinflation occurs.
Now, I fully realize that some are under the impression that hyperinflation can only occur when the money supply is rapidly moving through the economy, that is definitely true of plain inflation, but not of hyperinflation since it is a horse of a very different color.
The fact is that the normal velocity of money has very little to do with hyperinflation as it does with regular inflation where the velocity of money is converts the expanded money supply into inflation.
As I said, hyperinflation is primarily a psychological event and happens when masses of people lose confidence in both their government and the monetary system. Yes, it does have to do with the money supply also, but it is primarily the effect of people simply losing faith in the system. Such a loss of faith can happen and usually does happen during deflationary periods, not in periods of economic booms or even economic recoveries. So, hyperinflation is both a monetary event and a socio-political event. Every single example in history, all the way back to Rome, will show that hyperinflation always begins during a deflationary period and is a combination of a rapid increase in the money supply with a rather rapid loss of confidence in the system. Check it out for yourself.
So, hyperinflation, as I have said a hundred times on the DP never happens during an upturn in the economy.
Some seem to think that the money supply has to be filtering through the economy for it to happen, but history proves that is not the case with hyperinflation, only inflation. It is a mistake to believe that the normal deflationary/inflationary forces are at work when hyperinflation takes hold of an economy, they are not the primary force behind hyperinflation.
At the moment, there are absolutely huge amounts of fiat funds being infused into the economic system, which, if we were in a recovery would automatically translate into high inflation, but the danger is that hyperinflation could very easily take charge as the public continues to lose a great deal of confidence in the government and the monetary system. Another interesting fact about hyperinflation is that it always seems to involve some type of quantitative easing by the governing powers, now, for the first time the FED is using the policy of quantitative easing in this country.
The reason that hyperinflation and quantitative easing are so linked together is because with quantitative easing there is a direct infusion of money into the economic system by the central banks instead of using the fractional reserve system and the monetizing of debt. Many are screaming about debt monetization, well guess what…they are skipping that process now in favor of quantitative easing and there in is the danger for hyperinflation. Quantitative easing also skips the market process normally associated with the creation and velocity of money.
There are several other companies, or sectors of the economy that are lining up at the quantitative easing trough, GE, along with the Big Three are all sticking out their hands for this direct lending bailouts, many are trying to figure out just how to ask for the money now, they are working the system. Even the banks have now consolidated themselves into institutions with the tagline:"TOO BIG TO FAIL". The type of credit that is involved with quantitative easing always, without exception, carries a major consequence with it, especially when the FED is basically “printing” this money without going through the usual monetization process. The dollar will suffer, at the moment it is only slightly rallying because of the actions taken by the FED with TARP and other handout programs but that will stop as we continue on this destructive path. The fact is that there will be nothing to help the dollar from drastic depreciation, the carry trade won’t help, nor will any attempts to draw in more credit from overseas.
18. mountain goat said...
Stillthinking - asset values are important because it means the debt cannot be paid by selling the asset. In my example if there is $50 Trillion in debt and the underlying asset falls 10%. How will the debt be paid, when there are no savings, GDP is 0% and unemployment is high? We need to come up with $50 trillion but if we sell our assets we only have $40 trillion. This means a shortage of dollars in the system. Hence the attempt to print dollars to make up the shortfall created by a collapse in house prices and other assets bought in the credit leverage boom. Some of the toxic debt will have to be written off, banks take the hit and the Fed props these banks up money printing. But if we get a widespread culture of strategic default by customers this is very dangerous to the financial system and means banks will stop lending at all.
People see that $2 trillion has been printed and think OMG we will get hyperinflation. Well that was printed to fill a hole of $10 trillion! This $10 trillion is gone because house prices wont get back to those levels till....
19. mountain goat said...
Bellwether - "The critical point is that the past 10 years were hugely inflationary, it is just that we stripped house prices out of the calculation. THIS IS THE AFTERMATH OF THAT"
Agreed, we have already had the hyperinflation that everyone now fears, it's just that the dodgy inflation statistics missed it. House prices were only a part of the wild leveraged credit boom that drove up prices in all sorts of markets, $150 oil etc.
20. bellwether said...
MG we need to stop agreeing!!
DF interesting post my problem. I actually agree with the first aspect that hyperinflation will normally be preceeded by depression and indeed comes as the mad solution to the problem where you print so much that it loses any sense of value.
I don't see that happening here not even with QE at the levels currently operating. It is alss not as the post suggests the first time countries (including the US) have embarked on QE. Japan increased government debt from 50% of GDP to about 200% of GDP in various forms of QE.
I think a critical element is degree, you need to print without any sense of accounting standards and without accountabilty.
21. mountain goat said...
BW - ok will try be more critical !
More bulls and bears comments today FT - Another day, another dollar debate. Opinion on there recons GBP/USD going down some. Obviously the markets not reading this article today.
22. debtfree said...
mountain goat said
"People see that $2 trillion has been printed and think OMG we will get hyperinflation. Well that was printed to fill a hole of $10 trillion! This $10 trillion is gone because house prices wont get back to those levels till...."
That's because they don't understand hyperinflation, it's a currency event, not the way you are describing it.
23. mountain goat said...
DF - I don't disagree with your post on hyperinflation. I should have written high inflation, rather than hyper-inflation, which as you point out is more like a bank run.
24. jack c said...
From today's fundstrategy publication
Sovereign wealth funds (SWFs) could give substance to calls to replace the dollar as the global reserve currency, says George Hoguet, a global investment strategist at State Street Global Investors.
Hoguet says the enormous strain put on the financial system by the crisis bred increasingly loud appeals for a reform of the international monetary system. It also highlighted the debate over the introduction of “a new global financial architecture”.
SWFs are uniquely positioned to take advantage of the International Monetary Fund's special drawing rights (SDRs), a basket of currencies used as an internal accounting unit by the Fund, Hoguet says. The portfolio managers of these sovereign vehicles could promote the use of SDRs as a reserve currency through the “purchase of SDR-denominated bonds and securities”.
Concerns have been growing over the dollar’s stranglehold on financial markets. In particular, the policy of quantitative easing, in which money supply is increased through the purchase of government debt by its central bank, gave greater significance to the risk of using the dollar as a reserve currency. The inflationary threat posed by such extraordinary policy action could threaten the vast holdings of American debt held by countries such as China and Japan.
Hoguet says a key moment in the recent debate was the publication by Zhou Xiaochuan, the governor of the People’s Bank of China, of his essay entitled “Reform of the International Monetary System” in March this year.
In it, Xiaochuan calls for the adoption of a “super-sovereign” reserve currency and suggests increasing the scope and usage of SDRs to negate the inherent risks posed by credit-based sovereign currencies.
“As entities whose objectives include the diversification of national wealth and return enhancement, [SWFs] are well positioned to both shape and react to the dialogue on the international financial architecture and the role of SDRs,” says Hoguet.