Deleveraging Pushes the Dollar Up 18 comments
John Browne
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In view of the economic crisis facing the American and global markets, the recent strength of the U.S. dollar has confounded analysts. After all, the global economic problems essentially emanate from the United States and one would assume that the collapse of our economy would drag our currency down. That has not, as yet, transpired. The explanation can be found in a financial concept known as deleveraging.
In recessions, cash is short and businesses and individuals seek to raise cash by any means practical in order to prepare themselves for the tough times ahead. In a world in which U.S. currency is held as the global reserve, cash means U.S. dollars. In short, institutions and individuals are selling any asset that is not nailed down (stocks, corporate bonds, etc.) and buying U.S. dollars. This has resulted in plummeting asset prices and a rising dollar. However, this dynamic cannot exist in perpetuity.
It is completely rational for global financial players to be cautious. The roots of the present economic and financial crisis can be traced to the sort of wild speculation typical of all asset booms throughout history. However, unlike the great speculative asset booms which preceded the Great Crash of 1929/34 or the bursting of the South Sea Bubble in 1720, the boom just recently ended was also characterized by wildly excessive leverage and outright fraud.
Among the financial community, the wild speculation was so reckless that a web of opaque and misleading accounting standards were developed in order to hide the insanity from view. The powerful Wall Street lobby was successful in persuading President Bush to allow it a free hand to push aside the anti-predatory lending rules of some 50 States. This led to an unfortunate marriage of deceptive lending and fraudulent borrowing. Brought to a fever pitch by unbridled speculation, this unholy union gave birth to the sub-prime problem debacle.
Based on the notion that property values would continue to rise while the Fed continued to pump-in U.S. dollar liquidity, even so-called 'prudent' institutions such as banks invested heavily. The high returns led to massive executive bonuses. Many of the loans and investments in real estate were hidden further through the use of derivatives and off-balance sheet accounting. This 'camouflage' was tantamount to fraud. When these loans began to default a credit crisis was unleashed, as the financial 'players' could not trust one another. This led to a credit crisis.
It is wholly rational and necessary that the end of this madness has led to a great deleveraging or economic recession. It is unavoidable that institutions are withdrawing from the market, circling their wagons, and holding tightly to their remaining assets.
Investors, who borrowed cheap and plentiful U.S. dollars to invest abroad, have been forced to sell foreign assets for local currency and buy dollars to repay their debts. Even major corporations are repatriating funds from abroad to meet the domestic dollar cash demands. But the basic cause of the recent asset boom was an excess of U.S. dollars. These opposing forces of dollar demand and oversupply are currently battling for supremacy. At present, demand is in the driver's seat.
However, when the deleveraging subsides the inflationary effects of massive U.S. Government stimuli take effect and show through as rampant inflation. The dollar is then likely to stall and even plummet. Indeed, it is possible that facing depression, newly elected President Obama may devalue the U.S. dollar drastically against gold, just as his 'mentor' President Roosevelt did in 1934, but only after confiscating all privately held gold from American citizens.
In the short-term therefore, the U.S. dollar looks strong, but only in the short-term. Investors should think ahead and not get trapped in U.S. dollars or have their gold holding open to confiscation.
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This article has 18 comments:
FDR didn't end the depression his policies caused. Hitler's invasion of Poland did regardless of what the history re-writers say. We who were there know the FDR, like the JFK with his politically motivated Bay of Pigs, Berlin Wall, Cuban Missile Crisis and War in Vietnam, hype is myth and is perpetuated by clueless academics who learned the myth from other clueless academics.
Fortunately some of us who were alive at the times can challenge the media-sanitized myths. Unfortunately, most won't.
Does anyone believe a Hawaiian prep school, Columbia, Harvard Law elitist (middle class not), advised by privileged statists, knows anything about Free Enterprise? Evidently the voters who thought they were voting for Prom King do.
As a lover of American Culture, who put his life on his line to protect it, I wish Obama well. I assume that he will follow the Clinton Model and sweep the major decisions under the rug and his compliant media will, like they did during the election, keep quiet. He won't have to worry about the dysfunctional Republicans but he better watch those Clintonites, who gave us Enron, WorldCom, Tyco, 50X leverage, et al.
Royal Bank of Scotland was effectively nationalized this morning, a growing trend: Black Rock, HBOS, etc.
"When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done." - Keynes
Say you have built a stash of gold and wisely avoided a safe deposit box for its storage. If the government decides to confiscate gold, your supply may be safe, but you will not be able to spend it, either.
On Nov 28 09:35 AM User 30121 wrote:
> SUPERB article! Spot on! Thank you for writing it! I only hope readers
> will take heed and RUN not walk to their nearest gold (and silver)
> source and stock up! After our government elitist greedy bastards
> DESTROY the almighty dollar, they will come after your gold and silver.
> If you haven't accumulated an appreciable amount, there will be nothing
> left to sustain oneself on, save for the gold and silver that has
> previoulsy been PHYSICALLY accumulated and stored in a safe (place).
> It should not have to be said, but just in case there may be a cave
> dweller who has recently emerged...don't put any gold, silver, or
> ANY VALUABLE items in a safety deposit box. That will be the FIRST
> place your government looks for booty! May God have mercy on us!
God help us if we get to that point, because like one astute friend said to me the other day, we will REQUIRE THREE THINGS: gold/silver, gun, and seeds!
As the subprime issues destabilized financial equilibrium (U.S)and destabilized the U.S economy, most speculators/ investors did not realize the implications of the American turmoil on the global economies and finacial system.Untill September of 2007 some mega short dollars posittons were driving force behind the dollar weakness reinforced by the universal perception that the U.S is no longer the economic/military/fina... force that it once was -ie statement from the German leader.ship. As U.S problems emerged -but were and are effectively addressed ,two things had happened .
a) Europe ,Asia and the Emerging Market zone have sequentially imploded (that is not over yet ),while the U.S economic /financial system is exhibiting the signs of stability on the way to a mega market/economic non-inflationary rebound(disposable income has been decimated suficiently enough to make consumers more averse to excessive debt).
b) unprecedented global flight to quality driven by the realization of the "masses" that only U.S can restore global stability in the economic/financial/mar... had driven the dollar to the current levels assisted by the record dollar shorts.
The dollar momentum is not over as the U.S economy is heading for the record rebound in the period ahead -not reflected in the dollar levels yet .
It is conceivable that the dollar is heading for historical highs.
The FED ,the Treasury ,the Congress and the Administration had created unprecedented catalyst for the most dynamic and noninflationary record economic rebound .
The incredible recovery ahead will make bears wince with a pain.
It will be interesting (to say the least) to see what happens in February/March 2009.
the notion of a noninflationary rebound being just around the corner is simply absurd...utterly unsupported by the facts or by historical precedent. and your belief that u.s. economic health is more robust than other patients (asia, europe) in the critical ward is laughable. .
quit watching CNBC.
Excellent article - right up until the end.
The author gets so many things right that most people ignore, but then goes back to the old saws about gold and the inevitable hyperinflation when in fact the trends are moving in the other direction.
The unfortunate truth is that there is no indication the deleveraging will end in anything like the near future. Clearly investors are not only selling foreign assets to raise dollars, they are selling dollar assets to raise dollars. And, more importantly, banks are refusing to create more dollars. Hence the deflation.
On July 3 ,2005 in an interview with Mark Gilbert (Bloomberg -London) ,I have predicted the current events -you can Google my name.
On September 18,2007 during TV interview with Brian Sullivan (Bloomberg -FED time),I have reiterated my position that the financial uprecedented Armageddon is about to hit the U.S economy.
Other than my clients I do not recall any strategist agreeing with me.
I will put my strategic/analytical track record against anybody's.
On the major trends I am always right -period.
I will restate my position again; all of the structural weaknesses in the U.S financial/economic system have been addressed.
The implemented record stimulus =s record economic catalyst ,will contribute to the net expansion in the first half of 2009 and a record rebound in the second half of 2009..
No, I do not watch CNBC but they may be reading my comments.
The next stock market mega rally lies ahead and the synonym for that rally will be "Gabe"
On Nov 29 01:37 PM icandoitdon wrote:
> gabe, this isn't your father's country anymore. in case you haven't
> noticed, our financial system has crashed, with the u.s. government,
> in the words of noriel roubini, becoming the lender not just of last
> resort, but of the first and only resort. the fallout from that has
> infected the world economy.
>
> the notion of a noninflationary rebound being just around the corner
> is simply absurd...utterly unsupported by the facts or by historical
> precedent. and your belief that u.s. economic health is more robust
> than other patients (asia, europe) in the critical ward is laughable.
> .
>
> quit watching CNBC.
>
>
>
>
>
>
>
>
>
there is also a legitimate question as to whether the foreign sources of capital we so desperately need to finance our country will continue to flow. world economic problems and/or risk aversion might well impede it...or extract a higher cost. (would you be willing to own 10 year treasury securities at 3%?) if they don't finance our country for us, who will? american savers? i don't think so....
we are a risk-averse country now living in a risk-averse world in which the price of risk has increased dramatically. that's what's changed, and it isn't going to reverse any time soon. if you understand how and when that single, overwhelming, macroeconomic factor can be overcome in the short run, i'd like to hear it.
if we all live long enough we might see brighter days. but that isn't the issue for investors. the issue is knowing what's in store for the next 1-3 years and i see lots of pain unless the credit problems that took years to build recede soon. i see no catalyst to make this happen....certainly not the federal reserve/treasury dysfunctional policies of making the cost of credit cheaper, guaranteeing debt and buying up bad assets to foist on the taxpayer. that's a prescription for a declining currency and a declining economic power.
Couldn't have put it better myself.