And There Goes the Dollar 34 comments
an article to
-
Font Size:
-
Print
- TweetThis
The flood of US dollars seems to be coming, as well as inflation. The Federal Reserve started buying massive amounts of Treasuries and is gearing up its purchases of mortgage debt. The Fed will buy as much as $300 billion in long-term Treasurys in the next six months. It will increase its purchases of mortgage-backed securities guaranteed by Fannie Mae (FNM) and Freddie Mac (FRE) to $1.25 trillion, up from $500 billion. The printing presses got an injection of high octane Wednesday. The Fed will buy or lend against everything from corporate debt, mortgages and consumer loans to government bonds.
Well, as that was thought too good for the stock market, the US dollar suffered a 2.7 percent drop to 84.595, its biggest one-day drop since 1971. The US dollar index is an index which tracks the currency’s performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona. The US dollar fell Wednesday by the most in nine years versus the euro, to $1.3474, and traded at $1.3433. The Dollar Index started to decline from 2005 on worries about the widening current account deficit and reached a record low in the first quarter of 2008 as credit market losses mounted following the crash of the subprime mortgage market.
There is widespread concern that if Obama and the Fed push through another stimulus package, the dollar is done. Obama is seeking Congressional approval for a $3.55 trillion budget for the year starting in October that would increase spending by 32 percent to kick start the economy. All the while bonuses are being paid out to incompentents at companies such as AIG, Freddie Mac and Fannie Mae (and countless others).
The US is not alone …and it will be very interesting to see which other countries' central banks hold out longer against the temptation to print money. All the major central banks may end up in the same position as the US. All central banks are struggling with how to steer their economies when interest rates are already close to zero. Lets face it, virtually every country is having problems. Possibly the EU could be facing greater hardships, yet they have not taken the steps the US has. The Bank of Japan is purchasing government notes and making subordinated loans to banks, and the Swiss National Bank is selling francs to prevent gains against the euro. Basically no one is immune. In the EU it is very difficult to fire employees among numerous other regulations. This will hit their economies very hard as well.
Will monetary policy like this get us out of the economic abyss we are in? Things do not seem to change. In the Great Depression the US dollar devalued. Why can it not happen again?
More and more it seems the Chinese have good reason to worry.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
2) Where was all this consternation about imminent currency collapse and Weimer hyperinflation when we started the $3 trillion Iraq and Afghanistan social engineering projects? Political bias?
3) "Obama is seeking Congressional approval for a $3.55 trillion budget for the year starting in October that would increase spending by 32 percent to kick start the economy."
First of all, a budget increase from $3.1T (2008) to $3.6T (2009) is a 16% increase, not 32%. (Ouch on the basic math!)
Second, much of that "spending" is actually "purchasing" of bonds, preferred stocks, assets, etc. that can be sold at a later date for at least a partial recovery and perhaps a profit. This is hard to compare to typical government spending on salaries, fuel, bombs, equipment where costs are unrecoverable. Similarly, the national debt should be debited by the residual value of these salable assets.
Third, a "fair and balanced" article might have had some complaints about the Bush administration, which inherited a $1.9T budget and left with a $3.1T budget (a 63% increase in just 8 yrs) en.wikipedia.org/wiki/... with little to show for it in terms of living standards, economic stabilization, or international acheivement.
The national debt, meanwhile, increased from $5.6T to $11T during that time (a 96% increase). Who's the big government type? en.wikipedia.org/wiki/...
If you want some free credibility, just mention who was in charge while things got this bad.
On Mar 19 09:31 AM User 379154 wrote:
" I'm not so bright so the only way the administration's actions make
sense to me is either they are deliberately ending the dollar to
make room for a new (hemispheric-world) currenty, or they are breathtakingly
incompentent. But like I said, I'm not so bright."
Mr. Abraham,
It is my understanding that during the Great Depression the US was a strong net CREDITOR nation. Why would devaluing the dollar be of benefit to a creditor? All of a sudden the people who owed us money could pay less of their currency to discharge the same debt.
Now of course we're a huge net DEBTOR, fortunately in our own currency. It makes (short-term) sense for use to devalue, because we pay the same nominal amount to our foreign creditors, but it costs us less of their money to deliver it.
Of course this is only beneficial in the short term because we have to pay more of our devalued dollars for any new products we want to buy from them. And, they are less likely to extend us new loans in our own currency. Either they'll demand higher interest to cover the "default" risk or they'll say, "Sorry, Charlie; you want money from me, you borrow it in my currency."
Welcome to the United States of Argentina.
On Mar 19 12:26 PM Andy Abraham wrote:
> How about they are devaluing the debt that they owe....it is not
> all that complicated.. this was done during the Great Depression..
>
I said the second paragraph incorrectly. It doesn't "cost us less of their money to deliver it", rather it's when they receive the dollars and convert it to their currency, they get less for the dollars.
It costs us the same, it just yields them less.
Apologies for the confusion.
Plus, it was "us" not "use" in the first paragraph.
On Mar 19 03:26 PM Anandakos wrote:
>
> Mr. Abraham,
>
> It is my understanding that during the Great Depression the US was
> a strong net CREDITOR nation. Why would devaluing the dollar be
> of benefit to a creditor? All of a sudden the people who owed us
> money could pay less of their currency to discharge the same debt.
>
>
> Now of course we're a huge net DEBTOR, fortunately in our own currency.
> It makes (short-term) sense for use to devalue, because we pay the
> same nominal amount to our foreign creditors, but it costs us less
> of their money to deliver it.
>
> Of course this is only beneficial in the short term because we have
> to pay more of our devalued dollars for any new products we want
> to buy from them. And, they are less likely to extend us new loans
> in our own currency. Either they'll demand higher interest to cover
> the "default" risk or they'll say, "Sorry, Charlie; you want money
> from me, you borrow it in my currency."
>
> Welcome to the United States of Argentina.
>
On Mar 19 10:09 AM MGA_1 wrote:
> Well.. there are two courses of action out of the current crisis
> - deflation or inflation. Looks like they are picking the latter.
>
> 2) Where was all this consternation about imminent currency collapse
> and Weimer hyperinflation when we started the $3 trillion Iraq and
> Afghanistan social engineering projects? Political bias?
www.mises.org/
www.lewrockwell.com/
The only safe place for wealth in an inflationary environment is to be globally diversified in real non consumable assets.
There was plenty of complaining about the high cost of Bush's wars. Not enough, though, to stop Democratic in Congress from handing Bush carte blanche to invade Iraq or rubber-stamping his Iraq War funding requests. Whether you measure our failed economy by costly wars or costly bailouts, whether you blame Bush or Obama, it doesn't matter. The same policies are still in place, our national debts are still skyrocketing. And you still can't print prosperity, regardless of politicial party.
And if your complaint is that there wasn't enough public opposition to irresponsible spending 8 years ago, shouldn't you be glad there is now?
On Mar 19 01:25 PM Chris B wrote:
> 1) This snippet is more of the generic politicized budget/inflation
> hawking here on SeekingAlpha. Yet, has this simplistic "more spending
> = lower dollar" model predicted any of the currency fluctuations
> of the last year? The last 3 years? Might currency valuation, money
> supply, and inflation rates be more complicated than what simple
> bitching can explain? Why did the dollar not collapse after WW2,
> when the national debt was 120% of GDP vs. about 70% now. en.wikipedia.org/wiki/...
>
>
> 2) Where was all this consternation about imminent currency collapse
> and Weimer hyperinflation when we started the $3 trillion Iraq and
> Afghanistan social engineering projects? Political bias?
>
> 3) "Obama is seeking Congressional approval for a $3.55 trillion
> budget for the year starting in October that would increase spending
> by 32 percent to kick start the economy."
>
> First of all, a budget increase from $3.1T (2008) to $3.6T (2009)
> is a 16% increase, not 32%. (Ouch on the basic math!)
>
> Second, much of that "spending" is actually "purchasing" of bonds,
> preferred stocks, assets, etc. that can be sold at a later date for
> at least a partial recovery and perhaps a profit. This is hard to
> compare to typical government spending on salaries, fuel, bombs,
> equipment where costs are unrecoverable. Similarly, the national
> debt should be debited by the residual value of these salable assets.
>
>
> Third, a "fair and balanced" article might have had some complaints
> about the Bush administration, which inherited a $1.9T budget and
> left with a $3.1T budget (a 63% increase in just 8 yrs) en.wikipedia.org/wiki/...
> with little to show for it in terms of living standards, economic
> stabilization, or international acheivement.
>
> The national debt, meanwhile, increased from $5.6T to $11T during
> that time (a 96% increase). Who's the big government type? en.wikipedia.org/wiki/...
>
>
> If you want some free credibility, just mention who was in charge
> while things got this bad.
On Mar 19 05:32 PM Shonkypom wrote:
> Increased money supply will devalue the USD, inflation will ensue.
> US institutions have been the largest borrowers in the world, their
> share of debt is proportionately higher, so more monetary easing
> will be required proportionately in the US than elsewhere, so yes,
> the USD will devalue relative to the rest, although they have similar
> problems. Did the US really think a bunch of deadbeat Homer Simpsons
> could carry on living the most extravagant lifestyle in the world
> with such low domestic productivity growth, without an eventual reckoning?
>
> The only safe place for wealth in an inflationary environment is
> to be globally diversified in real non consumable assets.
Bush can be more rightly faulted for lowering taxes while prosecuting a war---and then crowning the issue with Medicare D which will end up costing much more than Iraq ever will.
But that doesn't exonerate Obama----he is Bush on crack. The whole idea of "jump starting" the economy shows a lack of understanding of what is going on. Private sector debt has expanded to the highest level (as percent of GDP) that we've ever experienced, even in 1929; likewise household debt sevice payments as a percent of income are the highest wev'e seen as well. The private sector needs to deleverage and liqudate debt and reduce debt payments. That process is just starting, but debts need to get liqudated and this mess expunged from our collective balance sheet. This will happen through savings, reduced spending, and bankruptcy. The government can't stimulate our way out of this, this is a balance sheet problem. That is why the first stimulus didn't do anything---people saved the money. That is why the New Deal programs didn't end the depression either.
If the government is to intervene it would be more helpful to act as a receiver in our nationwide chapter 11, and not just buy toxic assets but in fact help unwind them and settling them for some cents on the dollar, and try to control the fall as much as possible. This will mean monetizing debt and devaluing the currencey, but again that just shfits the burden of pain---this time to the poor bastards who stayed out of debt and saved.
The wrong thing to do, though, is to pursue the social agenda of expanding medicaid and other transfer payments, along with gauzy dreams of green energy, medical EMR, more widely available high speed internet, etc. We have much bigger fish to fry and we don't have the financial resources to do even what is minimally necessary. Obama, IMO, needs to stick to the critical pathway, understand what went wrong with the economy , and deal with just that. These utopian plans can only be carried out with further monetization and devaluation.
They will inevitably have to allow their currency to float, instead of taking all USD inflows to buy Treasuries and keep their currency weak. This devaluation is just one of many events that will happen to shock the world currencies closer to equilibrium... a zero sum game.
Hold on to your hats folks.
On Mar 19 07:31 AM robert99 wrote:
> Indeed, you are correct - the Chinese have a valid reason to worry
> about their holdings. As time goes on, I become increasingly concerned
> about the cat-and-mouse game that is ostensibly being played out
> behind closed doors with regard to the dollar, treasuries, and China.
> Only time will tell what the long-term outcome will be, but it seems
> to me that gold's outlook is seeming brighter by the day. I already
> have a substantial allocation in gold and silver miners, and if the
> PM's drop another 25% from here (which is unlikely unless we see
> a massive bear market rally), I will buy some physical metals and,
> if the miners present another buying opportunity as they did late
> last year, I will happily buy them from weak hands.
On Mar 19 09:31 AM User 379154 wrote:
> I'm not so bright so the only way the administration's actions make
> sense to me is either they are deliberately ending the dollar to
> make room for a new (hemispheric-world) currenty, or they are breathtakingly
> incompentent. But like I said, I'm not so bright.
On Mar 20 07:23 AM Allan Frain wrote:
> People do not rise to the highest positions of power through incompetence--even
> in a compromized system. Their agenda is simply not what it is purported
> to be.
www.reuters.com/articl...
That does not indicate they have an appetite for buying additional US Treasuries...and they can rely on mutual feelings from the OPEC exporters.
On Mar 20 07:33 AM Andy Abraham wrote:
> It is called the Peters Principle... People rise to their highest
> level of incompetence...
www.telegraph.co.uk/fi...
On Mar 20 07:54 AM Kraut wrote:
> China and Russia conduct open talks about an alternate currency:
>
> www.reuters.com/articl...;br/>
>
> That does not indicate they have an appetite for buying additional
> US Treasuries...and they can rely on mutual feelings from the OPEC
> exporters.
On Mar 20 07:54 AM Kraut wrote:
> China and Russia conduct open talks about an alternate currency:
>
> www.reuters.com/articl...;br/>
>
> That does not indicate they have an appetite for buying additional
> US Treasuries...and they can rely on mutual feelings from the OPEC
> exporters.