U.S. Dollar: The Best of Times, The Worst of Times

When President Obama took over the reins of government just six weeks ago, he stood at a historic crossroads. His decision on which route to take will make a profound impact on the future of the American economy and its currency. He could have persuaded a frightened Congress to initiate a structural change that would transform the U.S. economy from its dependence on debt-fueled personal consumption back to a path of productive growth. Instead, he took the easy route: attempting to delay the pain with stimulus and inflation, rewarding his benefactors without truly addressing our structural deficits. Disappointing for a man who campaigned on ‘hope' and ‘change.'

Obama could have remained true to his electoral promises to halt taxpayer abuse and to focus spending on infrastructure. This would have created some 35,000 new, wealth-creating jobs for each $1 billion spent. It also would have left the private sector to deleverage, allowing the desperately needed economic restructuring to take place in a productive, free-market manner. Instead, he bowed to a socialist Congress by boosting entitlements, the very programs which, over the past four decades, have depleted America's wealth and encumbered future generations with some $60,000,000,000,000 of debt.

Rather than ‘hope' and ‘change,' Obama has chosen to expand existing programs, casting a cloud over our children and grandchildren. His program is as old as Marx: ramp up government spending on and control over health and education to increase the federal government's share of GDP, in this case by two-thirds to some 34 percent. This will continue the serious erosion of American wealth, and with it the U.S. dollar.

In his budget last week, President Obama chose to raise taxes on individuals and businesses. In the face of a worldwide recession that is fast sliding into a depression and even towards an economic catastrophe, it was a surprising decision. It will likely serve only to deepen and prolong the economic decline. Despite the destructive tax hikes, the budget still forecast the largest deficit in world history.

For the foreseeable future, deficits will be measured in trillions, not billions. To put these vast sums into perspective, consider just one billion, or one thousandth of a trillion. A billion minutes ago, Jesus was alive. A billion hours ago, humankind was in the Stone Age. But in just the past eight hours and twenty minutes, even before Obama's budget clicks in, the Government has spent $1 billion!

Investors will understandably conclude that Obama's budget will put a near-mortal wound in the U.S. dollar and be tempted to sell or even short the greenback. Beware, as things are not that simple! While Obama's budget has halted healthy economic restructuring and placed the U.S. dollar under long-term threat, several important short-term factors will postpone the inevitable.

First, it is vitally important to realize that the present recession is not restricted to the United States. It is worldwide. Asset prices are dropping around the globe and cash is already a king. As fear spreads, investors are running for safety in the world's most widely held currency, the U.S. dollar. As a result, the dollar is rallying.

Second, the vast asset boom, from which the world is deleveraging, was based on a vast oversupply of cheap U.S. dollars. Investors borrowed low interest-cost dollars, converted them into their domestic currencies (driving down the dollar), and invested in local assets. Deleveraging is causing the dollar ‘carry trade' to unwind, driving the dollar upwards.

Third, many investors, including major corporations and central banks, have diversified their currency holdings into the Euro. The world recession is hitting Europe extremely hard, particularly the large international exporters such as Germany, and the newly capitalist countries of the former Soviet Union. The plight of Eastern Europe has widened political cracks within the European Union to the point where there is now a serious risk that the euro and even the European Union could fail. David Charter of The Times writes, “...The lack of EU leadership and direction...threatens to wrench apart both the euro and the EU itself.”

If the Euro appears under serious threat, there could be a massive financial panic and a stampede into U.S. dollars, driving it to unexpected highs. This is likely to add temporarily to a recessionary fall in the dollar price of gold. In light of this unfolding evidence, it is becoming increasingly risky to sell short the U.S. dollar. In the long-term however, President Obama appears to have set the seal on a dollar collapse.

Trying to time this changeover from dollar strength to depletion will be extremely difficult in these confusing times.

Comments

[peterthepai...:]

good article...

see jim rogers interview with channel 4...peter j coopers weblog or youtube...

Mar 05 05:01 AM

[Roger Knights:]

"If the Euro appears under serious threat, there could be a massive financial panic and a stampede into U.S. dollars, driving it to unexpected highs. This is likely to add temporarily to a recessionary fall in the dollar price of gold."

Unless x% of the stampede goes into gold.

Mar 05 06:29 AM

[B. Ray:]

Why not stampede into gold if USD is bound to collapse?

Mar 05 07:34 AM

[plumstupid:]

Obama and the congresscritters have their marching orders. Their Bankster masters have ordered the dollar collapse.

Mar 05 07:55 AM

[wavelength:]

An excellent and in some ways unusual contribution to SA. Thank you Mr Browne. I have been irritated at glib throw-away lines from others on how "a trilion is the new billion". Your way of trying to put these inhumanly large numbers into perspective is helpful. I also appreciated your overall tone - pointing out the wasted opportunity and overall lunacy of the President's actions, without any shrill political ranting. It would be personally convenient for me if some of the flight from the Euro went to gold instead of USD, but you have written such an erudite piece that I am more inclined to reflect than sulk.

Mar 05 09:06 AM

[American in...:]

John,

Right wingers like you never learn. Recessions reflect a lack of demand, not a surfeit. The problem is now is a dramatic fall in spending on goods and services and a financial system that is seriously ill (it almost collapsed last fall after Lehman Brothers went under).

You sound like the conservatives who in 1929 were worrying about the inflationary impact of the Federal deficits when the US was in the middle of a severe deflation.

Talk about being out of touch with reality ...

By the way, the Euro is here to stay. To think otherwise is to engage in wishfull thinking based on right wing resentment that Europe chose social democracy as opposed to America's discredited brand of capitalism.

Get over your demons ....

Mar 05 09:36 AM

[kelm:]

A very good article and one I completely agree with. I had been short the dollar but exited as the strength just kept coming. Ultimately, the debt overhang will sink it and some other currency or foreign exchange strategy will become dominant. If any sizable, stable nation went to a gold standard or other physical asset based currency today it would radically alter the international trade equation. We are some years from that happening though.

Mar 05 09:36 AM

[Think-About-It:]

To: American in Paris,

This is an investment website. Please take your ratical political views elsewhere.

Mar 05 11:07 AM

[plumstupid:]

Does one presume that geopolitical events don't influence finance at this juncture? Oh, its radical, not radical.

Mar 05 11:16 AM

[goldhammer:]

John, would it be possible that china a) converts its $ to gold, b) converted the Yuan to a gold-backed currency, c) positioned itself as the most stable currency in the world, and d) the $/Euros make the 'stampede' into the Yuan?

Mar 05 11:37 AM

[If U Say So:]

Good article. I sense problems in Europe will be catastrophic for one or more of the Eastern European states, Unfortunately, a failure there will have some pronounced effects among some Western European banks. What makes this especially bad is the large banks of Western Europe are such large share of the overall market in some countries. The dominoes might really start falling if Western Europe doesn't get a handle on this situation fast.

Mar 05 12:07 PM

[plumstupid:]

Oh man! When you say that I get a tingle! What a perfect solution. I've said for years that China will be the worlds superpower in my lifetime. Excellent point!


On Mar 05 11:37 AM Goldhammer wrote:

> John, would it be possible that china a) converts its $ to gold,
> b) converted the Yuan to a gold-backed currency, c) positioned itself
> as the most stable currency in the world, and d) the $/Euros make
> the 'stampede' into the Yuan?

Mar 05 12:11 PM

[Mad Hedge F...:]

I think we have more to go on the downside. Q4 European GDP came in at -1.5%. Consumer spending registered the sharpest fall on record, while exports fell off a cliff, the victim of a relentless shrinking of globalization. The euro ($XEU), down to $1.2450, is flirting with a new four year low. The continent continues to pay the price for the disastrous decisions and lack of experience of the EC central bank president, Jean-Claude Trichet, who raised interest rates last summer.

Mar 05 12:57 PM

[plumstupid:]

Not to mention the original disastrous decision of believing Wall St and buying their toxic crap.


On Mar 05 12:57 PM The Mad Hedge Fund Trader wrote:

>The euro ($XEU), down to $1.2450, is flirting with
> a new four year low. The continent continues to pay the price for
> the disastrous decisions and lack of experience of the EC central
> bank president, Jean-Claude Trichet, who raised interest rates last
> summer.

Mar 05 01:16 PM

[Jason Rines...:]

Very nice article Mr. Browne. I really enjoy your consistent writing.

Mar 05 05:37 PM

[FLG1159:]

China is evidently going to start a huge new infrastructure program. It would make sense at some point for them to dump Treasuries and start buying hard assets-miners, steel & cement companies, etc. Bad news for the dollar if that happens.

Mar 05 11:00 PM

[plumstupid:]

Oops! Already have and are increasing that activity.


On Mar 05 11:00 PM FLG1159 wrote:

> China is evidently going to start a huge new infrastructure program.
> It would make sense at some point for them to dump Treasuries and
> start buying hard assets-miners, steel & cement companies, etc.
> Bad news for the dollar if that happens.

Mar 06 12:43 AM

[Hmm?!:]

American in Paris,

No country in the history of the world has borrowed, taxed or government spent their way to prosperity. And I do not see that changing now. However I have seen many countries achieve bankruptcy by behaving like the current US administration.

Directly from the source:
en.wikipedia.org/wiki/...

"It is true that there were government deficits that were large by previous peacetime standards and that they made everyone (including President Roosevelt) deeply uneasy, but these stemmed far more from greatly reduced revenues resulting from falling incomes than from any great jumps in government spending.[33]"

and your source..........?

Stopping critical banking oversight in 2003 and CAUSING the entire mess!

www.taxfoundation.org/...

"The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disastrous scenarios."

"Some of the critics of Fannie Mae and Freddie Mac say that the problem is that the Federal Government is obligated to bail out people who might lose money in connection with them. I do not believe that we have any such obligation"

"So let me make it clear, I am a strong supporter of the role that Fannie Mae and Freddie Mac play in housing, but nobody who invests in them should come looking to me for a nickel--nor anybody else in the Federal Government. And if investors take some comfort and want to lend them a little money and less interest rates, because they like this set of affiliations, good, because housing will benefit. But there is no guarantee, there is no explicit guarantee, there is no implicit guarantee, there is no wink-and-nod guarantee. Invest, and you are on your own.

and your source?

On Mar 05 09:36 AM American in Paris wrote:

> John,
>
> Right wingers like you never learn. Recessions reflect a lack of
> demand, not a surfeit. The problem is now is a dramatic fall in spending
> on goods and services and a financial system that is seriously ill
> (it almost collapsed last fall after Lehman Brothers went under).
>
>
> You sound like the conservatives who in 1929 were worrying about
> the inflationary impact of the Federal deficits when the US was in
> the middle of a severe deflation.
>
> Talk about being out of touch with reality ...
>
> By the way, the Euro is here to stay. To think otherwise is to engage
> in wishfull thinking based on right wing resentment that Europe chose
> social democracy as opposed to America's discredited brand of capitalism.
>
>
> Get over your demons ....
>
>
>

Mar 06 01:27 AM