The Vicious Cycle of a Falling Dollar 41 comments
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When it comes to the direction of the US dollar over the long run, all I can shout is "Watch out below!"
There's no doubt of the general direction and the powerful trend of the US dollar. It begs a very important, very relevant question:
"If foreign investors are moving away from the dollar and into commodities, they will give the U.S. economy one additional obstacle in its struggle towards recovery. Not only must we contend with deleveraging from the consumer side, in the form of banks still refusing to lend, but now we face higher interest rates, which will affect mortgages, and higher energy prices, which restrain economic activity.
"Speaking of interest rates and mortgages, the Fed has one more tool it can use to encourage home buying. It can directly buy up long-term bonds. This would push bond prices higher, and restrain yields and interest rates, making it easier for people to service a mortgage. In fact, the Fed has been doing just that.
"However, there is a risk. If the Fed finds it must ramp up its bond purchases, it will lead to more dollars being pumped into the financial system. That, in turn, will give investors even more reason to sell them. The result would be a vicious circle [cycle].
"We hope we are wrong about this, and that the markets are actually discounting a surge in consumer demand. If so, we will be pleasantly surprised. But that's not how it looks.
"Turning to energy, we feel obliged to make some comment on the current administration's policies. So far, the government has directed a piddling amount of money towards alternative energy development, with the bulk of funding going to energy conservation.
"Now, in one sense, there's nothing wrong with saving energy. However, in the context of a worldwide economy, it carries a few problems.
"America today still considers itself to be the world, which is a fatal error. Instead, one must recognize that the U.S. is part of an integrated worldwide economy.
"If Americans buy fewer gas guzzlers, that may make U.S. cities healthier. However, conserving resources which we will need to build an alternative energy system – one that is absolutely vital for the future – is a mistake. Here's why...
"If Americans conserve oil, that will keep worldwide oil prices low. Low oil prices make it easier for developing nations like China and India to grow their economies – and raise their oil consumption. That will drive prices higher in the long run anyway, but in the short run it is a zero-sum game in which we lose and they win.
"Instead, what we need is a positive game in which everyone wins. Our nation needs to get on its horse and begin building alternative energy. Otherwise, we will soon be faced with higher taxes, in the form of higher energy and commodity prices that will make it more difficult to build the alternative energy infrastructure that we will need down the road. The development of alternative energy infrastructure and technology now (which can also be exported) will deliver far greater benefit to the entire world."
“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”
Faber added that, “I don’t think that gold will run up right away. I never sold gold and I’m still buying gold … [because it] has been an adequate hedge against inflation … If you bought it in 1980 at the price of $850, then it hasn’t been a good hedge against inflation, but if you bought it in 1999 at $251, then it has done very well.”
Inflation? No way, Nadler says. He might as well have been responding to Faber when he said: “Where is inflation? A speck on the horizon.”
Nevertheless, the funds continue to pile into metal. Hedge funds and other large speculators increased their net-long position in New York gold futures last week, by 7.7% over the previous week, according to CFTC data.
Disclosure: I own some ASA and IAG
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This article has 41 comments:
Unless people heed the early warning system , inflation will seem to emerge from nowhere with terryfing force and speed. People who lack perspective or ignore signs can confuse a dust devil with a distant but approaching tornado.......if something can already be seen on the far horizon, is it not obvious it must be very big?
2. The dollar is unique in that it is the very symbol of the unique status of the US(for a very brief period in the life of the global economy) as a planetary hyperpower. The US is not a hyperpower because the dollar is the reserve currency but the other way around. The full faith and credit of a hyperpower is an irreplaceable asset; it is in its own league. By its various policies, the US Government is debasing and dishonoring the full faith and credit of the US, which means it is swiftly degrading the hyperpower status of the US in its moral, economic, financial, and soon technological and military dimensions. The slow now(rapid later) devaluation of the dollar by the world's investors is, in effect, the marking down of the full faith and credit of the US which in turn means that the world is repricing lower the status of the US as a hyperpower. Once this status is lost, it cannot be recovered and when or IF that happens, the dollar will cease to be the world's reserve currency.
Dollar devaluation is just the market quantifying the very grave and unavoidable harm the governing elites are doing to America.
When you think back the the internet back in the late 80s, early 90s, it seemed like a pipe dream. The technology/infrastructure just wasn't impressive, and I'm sure a lot of investors avoided that area as a result. Things changed, though, and by the time most investors realized that the internet was for real, it was too late to get in on the best part of the gains. I'm just saying that solar is risky, but the potential is there. There IS a way to efficiently convert solar energy to electricity - the question is, how long will it take us to find it? That is the gamble there.
There are other areas that are moving much more quickly and have more promise, but would probably need big changes in the infrastructure such as algae produced biofuels.
On May 29 09:57 AM The Geoffster wrote:
> "Alternative energy" is leftist mantra for "cap and trade." There
> are no politically corrrect alternatives to carbon based fuels at
> present. Wind and solar are marginal players. Cold fusion? Maybe,
> but no time soon.. Meanwhie, instead of buiding new refineries and
> nuclear plants and allowing more offshore drilling to bridge the
> gap until new technologies can replace the old, the green coalition
> would rather hold the economy hotage to their political agenda. When
> gasoline prices hit $4.00 a gallon again, the ruling class will slap
> a windfall profit tax on Big Oil, throw the money away on pork and
> promise us the same old pipe dream.
On May 29 09:57 AM The Geoffster wrote:
> "Alternative energy" is leftist mantra for "cap and trade." There
> are no politically corrrect alternatives to carbon based fuels at
> present. Wind and solar are marginal players. Cold fusion? Maybe,
> but no time soon.. Meanwhie, instead of buiding new refineries and
> nuclear plants and allowing more offshore drilling to bridge the
> gap until new technologies can replace the old, the green coalition
> would rather hold the economy hotage to their political agenda. When
> gasoline prices hit $4.00 a gallon again, the ruling class will slap
> a windfall profit tax on Big Oil, throw the money away on pork and
> promise us the same old pipe dream.
On top of this inflation is the weed wacker of the green shoot of personal savings. When the consumer realizes (and he will, he's not that stupid) that his savings have a negative real interest rate, we will see personal savings reverse and consumer consumption jump back to the bad old ways. The good news now is that amassing large credit balances will be a lot harder. The piggy bank of home equity is broken, and banks are being very retentive about other loans, and are about to get even tighter because of the recent credit card legislation.
Most of all you have to fear the negative feed back loop....
You have to fear the ol' trade of last year. Bet the dollar down and oil up. Then, because input costs climb, short the stock market predicated on the idea that the margin for companies producing products will shrink. Ultimately then the consumer will get hit on the back side (because of rising goods prices) increasing the likely hood of a prolonged recession whereby a consumer (now hit with wage issues- decreased hours and earning potential) will have to retreat further into their hole. It has the set up of a continued recession into the another depression.
Bricki, you bring up a great point about the Alt-A shocker. We are just working through the bust. Now we have classic recessionary issues hitting the mortgage/housing market (i.e. unemployment). If you couple that with interest rates increasing on John Q. Public who is still in an option arm things will get worse not better on the housing front (in terms of sales/build etc/ move-up market).
These are the unintended consequences...
The one thing that is definitely BEARISH about the cap-and-tax is YOU and ME paying HIGHER electricity costs, using up more of our disposable income for the SAME good, and watching as the rest of the world LAUGHS at us for doing it.
On May 29 11:01 AM user396040 wrote:
> If cap and trade is enacted, in the first 5 to 10 years, natural
> gas will be a big beneficiary. Natural gas fired powerplants generate
> about half the carbon dioxide per kwh in comparison with coal fired
> powerplants. In the short term, the electric utilities will shift
> their dispatch programs to use the natural gas plants more and use
> the coal plants less. In the intermediate term, they will have to
> build more natural gas plants. Of course, when we get 25 or 30 years
> out, most models suggest we will have to reduce natural gas consumption
> as well. But in the short to intermediate term, the enactment of
> cap and trade would be bullish for natural gas - including exploration
> and production companies that focus on natural gas prospects. <br/>
>
> On May 29 09:57 AM The Geoffster wrote:
Nonsense.
The monetary base is currency in circulation outside the Fed and Treasury plus banks' reserve deposits at the Fed.
Between the end of July and the end of April, the adjusted monetary base has increased by 104%, or about $910 billion. Of that, currency makes up just $71 billion (or an 8.6% increase). The rest, some $812 billion, came from increased bank reserves at the Fed -- up from about $10 billion in August. Holy crap - what happened?
Two things. Banks started massively building reserves (look up excess reserves in the FRED database to see the numbers), and the Fed started paying interest to attract bank reserves so that it could then lend this money (think commercial paper facility). Essentially, the Fed stepped into the lending markets as the banks stepped out.
Please look at the data before accepting the conventional wisdom in this area. There simply has not been a massive expansion of the money supply.
1. The dollar fell 30+% during the 2001-2006 timeframe and the economy was growing with relatively low unemployment;
2. The ability of the Chinese economy to provide items of real value instead of just cheap labor has grown substantially;
3. The demand for improved living standards and supply of cheap labor can meet in many areas where raw materials/commodities are not limiting factors;
4. CPV solar has been demonstrated at 50% efficiency and is capable of generating all of the US needs in a 100 mile x 100 mile patch;
5. The US still has items of value to trade- agriculture, technology, culture, tourism;
6. The US money supply has not kept pace with supply capacity.
The serious questions are these:
1. Will we require our workers and investors to also support a significant portion of a non-productive population? If so, they won't be competitive;
2. How will we treat foreign tourists? Will it be safe here? If not, tourism will suffer;
3. What kind of culture will we try to be exporting? Death and debauchery or life and joy? If the former, we're competing with too large a piece of the world for that prize...
4. What kind of opportunities to start new companies and compete globally will there be? If limited only to the politically-connected, we will suffer.
5. Will the Fed invert the yield curve again, artificially raising interest rates, to burst the bubble of the day, or will they finally just allow the market to take care of it?
As China and India adopt greater capitalist features in their economy, we will find, ultimately, that you can't escape the market- it will catch up with us. I hope we don't find it out the hard way, like the Soviets, though.
We have tens of millions unemployed- the more they are involved in making cleaner storefronts, safer roads, cheaper energy, healthier food- and the less taking care of welfare babies and surfing the net for garbage- the better off we'll be.
The solution to our energy problems is to free the energy markets -- in particular to allow unhampered oil exploration and drilling, attempts at oil shale exploitation, and streamlined nuclear power plant construction (without all the enviromental impact statements, lawsuits, and everything else that makes building a plant take 5 times longer than it should).
On May 29 01:01 PM MarkitWacha wrote:
> The cap-and-tax system would also be bullish for solar for the same
> reason, since it relies on expensive electricity to be financially
> feasible.
>
> The one thing that is definitely BEARISH about the cap-and-tax is
> YOU and ME paying HIGHER electricity costs, using up more of our
> disposable income for the SAME good, and watching as the rest of
> the world LAUGHS at us for doing it.
Solar has the ability to achieve $.07/kWh now based on last year's prices and latest technology. But imagine- what would happen if tens of thousands of people moved into California and Pheonix and Las Vegas homes that are now significantly lower in price and were willing to work for lower pay, being bussed to the installation sites like Chinese workers?
The answer is that with significant economy of scale the cost could go even lower, perhaps as low as $.03/kwh. And solar corresponds to peak usage (sunnier=more AC) and lots of cars could be plugged in and charging at that time of day as well.
It's a bad idea to artificially raising energy prices and subsidize nonsustainable sources such as wind, as that only increases our costs and risks implementing solar. But we are not as far from being able to utilize vast amounts of renewable energy as you think, especially if we took away the artificial manipulation out of energy prices and let an alternative energy bubble emerge- you'd be amazed how much solar we can build- unless you paid attention to just how many houses we've built.
At $4/gallon, the world did not stop spinning- people just carpooled more and cut back on food (in a country where we eat multiple times too much already). But if you want to have domestic energy that we don't have to worry about running out of, we have to be prepared to allow oil prices to rise if that's what the market requires. And if it doesn't, then we can wait a few more decades while technology continues to improve.
I'm much more worried about nonproductive elements of society being priced out of global labor markets than I am energy.
Brazil seems the best place to invest at present: (1) resources, (2) a young population (3) decreasing government debt as a percentage of GDP, and (4) relative stability politically. With an election coming up, look for "Lula" to prime the pump for Brazilian consumers so that his favored successor can take over. BRF, the recent ETF which is made up of consumer-based Brazilian stocks, looks like a better candidate for investment dollars than what I see in the US.
Bom Dia !
Off-shore wind might be a solution, but a) its MUCH more expensive (consider the difference in cost between onshore oil/gas drilling vs. offshore), and b) there's the problem of "limosine liberals" like Kennedy, who killed such projects in the Martha's Vineyard area because of "aesthetics" (the farms would spoil the view from their beachfront mansions).
On May 29 01:29 PM Vox Rationalis wrote:
> "...the unprecedented increase in the U.S. monetary base – the sheer
> ocean of liquidity being poured into the financial system... Which
> would you choose to own – a currency that is being printed faster
> than any other in history..."
>
> Nonsense.
>
> The monetary base is currency in circulation outside the Fed and
> Treasury plus banks' reserve deposits at the Fed.
>
> Between the end of July and the end of April, the adjusted monetary
> base has increased by 104%, or about $910 billion. Of that, currency
> makes up just $71 billion (or an 8.6% increase). The rest, some $812
> billion, came from increased bank reserves at the Fed -- up from
> about $10 billion in August. Holy crap - what happened?
>
> Two things. Banks started massively building reserves (look up excess
> reserves in the FRED database to see the numbers), and the Fed started
> paying interest to attract bank reserves so that it could then lend
> this money (think commercial paper facility). Essentially, the Fed
> stepped into the lending markets as the banks stepped out.
>
> Please look at the data before accepting the conventional wisdom
> in this area. There simply has not been a massive expansion of the
> money supply.
And make sure you use any pullback in gold and silver to add to your position. Gold remains our number one inflation hedge, and silver, which may in the long-run outperform gold, is every bit as important.
I totally agree - but as dividendmachine has said - that has always been true. I specialize in solid, dividend-paying stocks with a record of raising dividends because, as Willie Sutton pointed out about banks, that is where the money is. I am looking outside of the US to places like China, India, Brazil, Chile and even places like Norway, Canada and Australia for new investments that will pay those dividends in another currency so I may benefit that way also. I love these markets! Keep in mind what Peter Lynch said about the time spent trying to figure out what economies are going to do next. He said "If you spend 13 minutes a year trying to predict the economy, you have wasted 10 minutes!"
So many things can make unpredictable changes in any economy, you will lose money and waste time trying to figure out what comes next. I have made a LOT of money in the markets over more than 5 decades because I have always focused on where the money is - dividend-paying stocks with a 5+ year record of raising dividends - and treated them as a portion of a balanced portfolio while re-investing the dividends in the stock that paid them as a core portfolio. Even my speculation portfolio usually focuses on
dividend paying stocks that I expect to pay me well in the future. For instance, I have held PG for 51 years and MCD since early in 1969. They started out as a speculation and were moved to the core portfolio as they proved themselves. I have always been a stock picker - that is how you make money.
According to Senior Chinese officials, China is committed to maintaining the dollar peg, for now, and continue to support the dollar by sterilizing trade surpluses. Due to the global recession and reduced demand for chinese exports, China has had to do a lot less sterilizing lately.
China is rightly worried about inflation in the U.S. and the impact that inflation would have on China's holdings of long-term U.S. bonds. While China still seems committed to the dollar peg, China is diversifying its foreign exchange reserves by using it's surplus dollars to purchase short-term US bills, as well as real assets that are inflation resistant such as commodities and capital investments.
On May 30 12:20 PM EUARTE wrote:
> What we fail to realize that is the present government of the United
> States is not interested a strong dollar. It is interested in delusions
> of green. This is what will doom the dollar far into the future.
> This is dishonesty and self delusion. This is not a bright future
> for dollar economies and American workers and retiree's living abroad.
On May 29 12:10 PM bricki wrote:
>
> On top of this inflation is the weed wacker of the green shoot of
> personal savings. When the consumer realizes (and he will, he's not
> that stupid) that his savings have a negative real interest rate,
> we will see personal savings reverse and consumer consumption jump
> back to the bad old ways.
Bricki - isn't that what the government wants? Spend, spend, spend ! This will stimulate the economy, more people will have jobs. This is the heart of keynesism.
On May 29 12:35 PM HardwoodFlooring wrote:
> <snip>
> Bricki, you bring up a great point about the Alt-A shocker. We are
> just working through the bust. Now we have classic recessionary
> issues hitting the mortgage/housing market (i.e. unemployment).
> If you couple that with interest rates increasing on John Q. Public
> who is still in an option arm things will get worse not better on
> the housing front (in terms of sales/build etc/ move-up market).
And this last week it was reported that the defaults on conforming non-subprime mortgages has begun to spike up. This trend, I believe, is just starting and will add to the woes.
As some *perceived* "bottom" in housing prices and foreclosures was being touted on the comedy/financial channel(s), another shoe is falling.
> <snip>
HardToLove
"4. CPV solar has been demonstrated at 50% efficiency and is capable of generating all of the US needs in a 100 mile x 100 mile patch;"
I think solar has a place. But I've not seen this question puzzling me addressed by anyone.
What are the unintended consequences of solar farms? Increased shading of land should produce environmental effects from both the change in thermal effects directly from the land and also from the heat removed directly in the conversion from sunlight to electricity.
Do you have any references to discussions on that?
If it were me, I would prefer a distributed generation system taking advantage of rooftops. More expensive, but a comparatively smaller direct impact since the land is already shaded.
Thoughts?
HardToLove
I agree with you that the Dollar has many fundamental headwinds.
There is another motivation to devalue the dollar: Making the U.S. Dollar cheaper makes American exports more competitive and helps raise employment in export industries.
Our creditors are no dummies. The first step is to cut off new credit. This is already happening: Treasury Department data shows that investors in China have sharply curtailed their net purchases of bonds in January and February. The next step is that
creditors start demanding higher interest rates. The interest on the debt becomes unmanageable and the government has no choice but to monetize the debt by printing money. This devalues the currency and inflation/hyperinflation erodes the real debt. This hurts savers.
Savers are being punished to redeem the sins of debtors and speculators.
On May 30 05:13 PM Living4Dividends wrote:
> China isn't dumping the dollar or dollar assets (seekingalpha.com/symbo...),
> instead it is recycling the money from the sale of long-term bonds
> and parking it into short-term U.S. Treasury notes. This is a concern,
> because these notes are easier for China to "dump" should inflation
> pick up in the U.S., this highlights China’s concerns that inflation
> will erode the dollar’s value in the long run as America amasses
> record debt.
>
> According to Senior Chinese officials, China is committed to maintaining
> the dollar peg, for now, and continue to support the dollar by sterilizing
> trade surpluses. Due to the global recession and reduced demand for
> chinese exports, China has had to do a lot less sterilizing lately.
>
>
> China is rightly worried about inflation in the U.S. and the impact
> that inflation would have on China's holdings of long-term U.S. bonds.
> While China still seems committed to the dollar peg, China is diversifying
> its foreign exchange reserves by using it's surplus dollars to purchase
> short-term US bills, as well as real assets that are inflation resistant
> such as commodities and capital investments.
On May 30 06:02 PM HardToLove wrote:
> Dirk,
>
> "4. CPV solar has been demonstrated at 50% efficiency and is capable
> of generating all of the US needs in a 100 mile x 100 mile patch;"
>
>
> I think solar has a place. But I've not seen this question puzzling
> me addressed by anyone.
>
> What are the unintended consequences of solar farms? Increased shading
> of land should produce environmental effects from both the change
> in thermal effects directly from the land and also from the heat
> removed directly in the conversion from sunlight to electricity.
>
>
> Do you have any references to discussions on that?
>
> If it were me, I would prefer a distributed generation system taking
> advantage of rooftops. More expensive, but a comparatively smaller
> direct impact since the land is already shaded.
>
> Thoughts?
>
> HardToLove
Lastly, a vicious cycle requires more than one component to make it a cycle. There is no cycle. The cause is the effect. If you make too much funny money its worth less. Plain and simple. No foreign conspiracies, etc. Those are all effects of the Fed and Treasuries fatally maligned policies for the past decade that are only getting worse.
I agree with the author that commodities should benefit. Also currencies that can't devaluate more like the Yen (The Japanese are scratching their heads saying, "Zirp been there... done that and now were stuck there. So why is the US copying quantitative easing? Especially when they don't have a surplus to afford it.")
When the dust settled,
everybody will jump back to the US Dollar.
Besides, who would they trust anyway ?
> LOL so what about M1-M3? Anyone have the current M3 info right now?
Aside from the currency component of M1, the Fed has no direct impact on any of these. More about each money measure here: seekingalpha.com/insta....
Now, here's the data you ask for, from the FRED database.
M1: August 4: 1411.8 billion; May 18: 1590.2 billion
Increase: 12.7%
M2: August 4: 7687.1 billion; May 18: 8327.5
Increase: 8.3%
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