Dollar Dilemma: Deleveraging Driving Deglobalization

Deglobalization (def):

The process of reversing international financial interdependence.

I want to postulate that a kind of defacto suite of trade barriers is being erected. There are several pressures at work right now, pressures set loose by global deleveraging, that will have a long lasting and negative effect on "globalization." Let's call the new trend "de-Globalization." The pressures include: a) trust, b) currency values, c) capital flows and capital flight.

Trade and commerce are built on trust. Destroy trust, and you destroy commerce and trade. Building trust is a lot harder than destroying it. Banks in the United States have sold hundreds of billions of dollars' worth of toxic real estate and other securities all across the globe. This certainly will effect our foreign trading partners' willingness to trust us going forward and will impact cross-border capital flows. China, for example, has complained frequently and publicly.

International trade has the added trust component of currency valuation. When currency values are stable, currency risks are minimized and trade can flourish. When currency values fluctuate wildly, companies will hesitate to enter into international trade contracts, for obvious reasons. This also will impact cross-border capital flows. Look at the USDX over the past 18 months and you will see what I mean.

The United States government has sold several trillion dollars of Treasury debt all across the globe. This doesn't matter if the United States can pay off the debt. Bernanke's QE announcement, along with a rush out of stocks, drove Treasury prices into the stratosphere with corresponding yields unsustainably low. But the markets have become skeptical. What good, after all, are 3% returns when you're being paid by a madman with a printing press?

Is Bernanke sensitive to the inflationary pressures coincident with expansionary monetary policy? More importantly for this article, does he care about dollar devaluation? Let's revisit Bernanke's comments made before Congress on 8 November 2007 (see the video here). Skip forward to the 5:00 mark and run. Ron Paul asks Bernanke about the impact of the rapid growth in the money supply on the buying power of American consumers. Bernanke replies:

If somebody has their wealth in dollars, and they're going to buy consumer goods in dollars, as a typical American, then the decline in the dollar, the only effect it has on their buying power is it makes imported goods more expensive.

When initially publicized, Bernanke's comments brought him much criticism as revealing he didn't understand inflation. I think that interpretation is wrong; I think he knew exactly what he was saying. And if I was a foreign dollar-holder, or an exporter of consumer goods to the United States, I'd be scared out of my wits.

Disclosure: Short the dollar.

Comments

[MinAkkar20]

"as a typical American, then the decline in the dollar, the only effect it has on their buying power is it makes imported goods more expensive"

Likewise it makes exports cheaper, and as you point out, the US spending plans are critically dependent on being able to export treasuries and dollars. A 10yr treasury at 3%, combined with 10% inflation over that same period (as if only) doesn't seem very attractive. Interest rates must go up. And that will affect the American consumer and small businesses who rely on credit, whether they buy imported goods or domestic goods.

I enjoyed seeing treasuries drop even after the Fed began monetizing offerings. Seems that everyone has recognized that even the Fed is subject to the laws of supply and demand.

2009 May 12 08:26 AM

[socrateazz]

Interesting. also confusing to me. Two things influence any decision. Beliefs and facts. Beliefs do not need to be actuality. What is needed is some kind of evidence (no matter how rediculous) that seems to support the belief. People act on beliefs until reality forces change in beliefs. Everybody favors their belief over reality until proof of reality becomes overwhelming, then they brag about how right they were or that somebody was covering up crucial evidence or some other excuse. Some people just will not give up their beliefs no matter how much proof is out there. The dollar is where it is at because of belief in the value of it. Where will belief go? Slowly belief will move toward reality.

2009 May 12 08:55 AM

[Bull Run]

Dollars Dilemma? The Chinese currency swaps is probably the biggest. China has be doing currency swaps with it's trading partners, the most recent is Argentina. To date Argentina, had to pay its trade accounts with China in US dollars, that would mean using it's currency reserves or sell it's gold reserves, now it can simply pay China directly in Yuan.(no need for dollars).. The most obvious next move for China.. a currecny swap with the Euro Zone. it's coming.. At present the Euro does not play an important role in the pacific Rim region.. even CDN has to pay Korea in US dollars to pay it's trade account. This will mean that the Euro Zone can pay directly in Yuans, NO longer needing US dollars for trade and the need to store US dollars in US tresuries. (short term) . This will have dramatic effects on the US treasury trying to sell US treasurues, especially long tern notes..meaning long bond yield are going higher, and the yield curve will utimately steepen, and the US Feds will have more difficulty printing endless US dollars, with out the lose of US dollar exchange values. I think the US dollar is stuck on the tracks,and a train is coming. Wether the Yuan will be floated on international capital accounts, or when?? Who knows, but it will eventually happen. I don't see the Yuan becoming the world currency, but it will take on a more important role, and the US dollar will take on a diminshed role..

2009 May 12 10:34 AM

[Jimbo]

Bull Run's scenario is ominous.

2009 May 12 10:59 AM

[SW Richmond]

The phrase "Dollar's Dilemma" was added to the title by SA editors, I do not know why.

2009 May 12 01:38 PM

[Bad Dog]

Yeah. Dollars are never faced with a dilemma; people often are. But dollars seem to have no strong opinions about how they are used. Maybe it should be edited to read: "dollar holders' dilemma".


On May 12 01:38 PM SW Richmond wrote:

> The phrase "Dollar's Dilemma" was added to the title by SA editors,
> I do not know why.

2009 May 12 03:45 PM

[BigBulldung]

I am studying the yuan/dollar market and find two choices cny(MorganStanley) and cyb( Dreyfus) both are very illiquid. Why the lack of volume and are there other choices for this market. BD( Bulldung not to be confused with Bad Dog)

2009 May 13 03:06 PM