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cgnao

The Us Dollar Disaster

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US dollar on the slide, higher interest rates, stagflation, oil crisis, gold to the sky. Is this what is in store?

http://www.marketwatch.com/news/story.asp?...F2C8EF9FFC12%7D

By Peter Brimelow, MarketWatch

Last Update: 6:53 AM ET Aug. 1, 2005 

NEW YORK (MarketWatch) -- The dollar finished out last week weak -- and, despite this year's bounce, at least one respected service is still predicting a dollar disaster.

I've been thinking about this because of China's revaluation of the yuan. Things seem to have quieted down, just as John Dessauer predicted in his Dessauer's Investor's World. (See my July 25 column.)

In his most recent comments, Dessauer doesn't comment at all about exchange rates -- not unusual for him, despite his letter's international orientation -- and, in his blithely bullish way, has gone back celebrating earnings results and deriding worries about a U.S. housing bubble.

A be-on-alert view on the greenback comes from the respected Bridgewater Daily Observations, an institutional service put out by Connecticut-based money managers Bridgewater Associates.

Bridgewater emphasizes that "this is a regime change, not just an exchange-rate change."

It argues that "due to the Chinese peg, Asian monetary policy has basically been locked into a dollar system. No Asian country wants to lose competitiveness to China."

China's official removal of the dollar-peg system in favor of a basket of currencies "means that the Asian dollar-based monetary system is about to collapse," Bridgewater warns.

Bridgewater makes a powerful analogy to the international economic situation in the late 1960s and the early 1970s -- fascinating to me because the resulting disruption, and the discrediting of a conventional wisdom that was at least as entrenched as today's free-market triumphalism, spelled a spectacular boost to the investment-letter industry.

Japan, Bridgewater says, played the role back then that China fills today:

"The circumstances were similar -- i.e. a) real per-capita incomes in Japan were very low relative to the U.S. (60%); B) the trade balance/ current account growth rates and investment/ savings were huge, and © the Japanese were trying to hold the exchange rate the same via huge bond purchases.

"The flip side of this is that the U.S. is moving toward a balance-of-payment crisis that is quite similar in its dynamic (although the imbalances are now greater in degree) to the dollar/debt crisis of the early '70s. ... While this process has been, so far, playing out in slow motion, the dollar crisis is unfolding entirely according to the classic script of a pegged currency falling apart."

One consequence, according to Bridgewater: "substantial adjustments" in U.S. bond yields that "have been held artificially low by the direct influence of central-bank bond purchases and the indirect effect of the China peg on U.S. economic conditions."

Bridgewater also points out that in the 1970s, U.S. debtors tended to retreat to gold.

Bottom line: "Even a moderation in [foreign] demand for U.S. assets would lead to a major second wave of weakness in the dollar. Outright selling of U.S. assets (which would force the U.S. to massively cut consumption) could be devastating.

"We believe the odds of a dollar/U.S. debt crisis in the next 12 months are elevated (say 50%)."

It puzzles me that so few commentators seem aware of Bridgewater's type of analysis, not just on Wall Street but even among investment letters. An arguable exception: the really hard-core gold bugs who remember the 1970s, like Dow Theory Letters' Richard Russell

On Friday, Russell said: "The U.S. is losing control of its money. The control is gradually and subtly switching to our creditors, the Chinese and the Asians. The direction of the yuan in terms of dollars or dollars in terms of yuan may be the 'next big thing.' "

Because the downside is huge, any risk of the dollar becoming undermined is worth noting.

Indeed, Growth Stock Outlook's Charles Allmon said again last week that he thinks price of gold and the Dow Industrials ($DJ: news, chart, profile) could cross again -- say, in the 2,500 range.

I know, I know -- but it looked improbable before the 1970s currency crisis, too.

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Good post cgnao.

As usual most think all's well in the US but look beneath the surface and the opposite is true.

This morning the dollar is down -0.67 to 88.65 and crude oil is back up at $61.10.

Gold has added another +$1.50 to $431.

Those huge deficits just won't go away and the secular bear market remains firmly intact.

The US stock market is a major high risk.

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Good post cgnao.

As usual most think all's well in the US but look beneath the surface and the opposite is true.

This morning the dollar is down -0.67 to 88.65 and crude oil is back up at $61.10.

Gold has added another +$1.50 to $431.

Those huge deficits just won't go away and the secular bear market remains firmly intact.

The US stock market is a major high risk.

Look on the bright side, at least Obombya got the Nobend Peace Prize.

I wonder who he will bomb first.

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Well its hard to understand just how happy the bloke who is talking about the crash of his countries economy is.

Is this crazy talk?

I gess all things are possible how ever are they probable?

Is it possible for the Fed to up interest rates to 2% in one day? That would stop the carry trade dead, and gold would come crashing down.

Can you imagine a time when no one wants to hold paper money as it is a sure way to finantual loss and as a result countries competing with each other to up interest rates to save there sad sad dollar. This to is possable.

I think the USA is on a path to inflate its way out of debt, its like being in a group of people in a small room and letting out a quiet fart, it is foolish to admitt it, people are reluctant to be the first to complain as "he who smelled it dealt it". America has farted and people are trying to get away from the smell.

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I think the USA is on a path to inflate its way out of debt, its like being in a group of people in a small room and letting out a quiet fart, it is foolish to admit it, people are reluctant to be the first to complain as "he who smelled it dealt it". America has farted and people are trying to get away from the smell.

Sounds about right, but what country is going to be the first to 'draw mud'?

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  • 302 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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