The Dollar Shall Inherit the Earth

Treasuries were snatched up more readily than expected (as usual) yesterday, likely spurred by accelerated risk aversion due to current weakness in stocks and commodities. With all the BRIC induced buck-bashing of late, signals are so mixed on the dollar that it seems arguments, counterarguments, truth, lies... are all one and the same depending on context.

Whether one argues strength or weakness, it is understood that the US dollar is THE WORLD'S reserve currency. Therefore, with the supply of dollars and dollar derivatives at all time highs outside the US while domestic jobs and wages contract, an objective outsider (obviously an alien since no such thing is known to exist) would likely ignore possibilities of inflation or deflation and merely assert a convergence in global wealth.

What this line of reasoning, assuming historically insignificant inflation, would likely require is that other countries peg their currencies to the dollar like China does, or even adopt uncle buck altogether. The fact of the matter is that dollars are internationally more available than ever before and most economies have far more flawed histories than ours. As long as new avenues of demand are continually created, supply can increase to no end.

Comments

[basehitz:]

True. But do they have more flawed futures than ours? Western Europe and other highly indebted nations with aging populations share our dilemna. But developing nations and resource rich nations with stronger balance sheets, it would seem have a much brighter future than ours. I am concerned that our indebtness, exporting our production capacity (except financial engineering), foreign oil dependency, and aging population puts us in a high risk category. I am hoping, but as yet unconvinced, that we have the political will and discipline to make the tough decisions now to be better prepared for the future. If we don't, the world depending on the USD indefinately seems improbable. Short term, if the market correct, the USD is a usual hiding place. But only short term.

Jul 09 07:38 AM

[basehitz:]

editorial note - my comment referenced your statement

Jul 09 07:39 AM

[Dave Wrixon:]

The Author clearly does not recognise that the size of foreign held dollar reservers is simply a measure of the scale of the failure of the US economy to generate reciprocal trade. Treasury issues, similarly, are just a measure of the failure of US Government to balance its budgets. The World is awash with US paper. The big question really is not when US Government will repudiate its debts, but at which point the World will anticipate the occurance of such repudiation and simply stop accepting US paper. When you talk about developing nations, perhaps the biggest level of under development has been their academic failure to recognise a Ponzi scheme when they see one. However, I think that deficit is rapidly correcting itself. Tell me, could ordinary investors have saved themselves from bankruptcy by continuing to supply Madoff with sufficient liquidity for him to maintain the illusion of solvency?

Jul 09 07:54 AM

[Vuke:]

From your article: "As long as new avenues of demand are continually created, (dollar) supply can increase to no end."

Quite true, but the value of those supplied can decrease correspondingly. Gold is the one asset that will signal that decline.

Jul 09 09:05 AM

[Tony Daltorio:]

The author should try to find other sources of information besides the Wall Street controlled media. Demand for the dollar is declining globally - that is why currency swaps in other currencies and even barter is growing rapidly.

The problem is that countries have these pieces of paper that they are realizing are just that - paper. Their problem is how to get rid of these pieces of paper in an orderly manner and get something back for them.

Jul 09 10:22 AM

[Danny Furman:]

I left opinions out of this piece because, well... it's not what I believe. IF other nations ever truly grasp the black hole of debt that runs the US economy, the dollar may be doomed. The problem is that, in most walks of life and business, no country can compete with the US and they know it. China may have its priorities straight, but what other country ever will? As far as we continue to fall we are still miles above almost every economy not only in development, but in structure.
The simple minded responses above fail to see is my obvious point that international misconceptions, despite a failing US economy, could keep dollar demand high enough to maintain its value despite exponential supply increases.

Jul 09 11:11 AM

[deuxsous:]

Agreed. The US dollar is the world's reserve currency. The arguments against it are the same arguments as in the 1950's and 1970's. Foreign central banks want a strong dollar because they own it and want to preferentially export into the US with their own weaker currencies.

Jul 09 11:43 AM

[Dave Wrixon:]

Name one, and then explain how that actually benefits the economy.


On Jul 09 11:11 AM Danny Furman wrote:

>The problem is
> that, in most walks of life and business, no country can compete
> with the US and they know it.

Jul 09 12:51 PM

[Dave Wrixon:]

Yes, but that was when they thought the US had creditworthy consumers which they could lend to indirectly. The problem is, that for the foreseeable future they can pump as much money in as they like, it is not going to generate sales. They can play the trick elsewhere with other countries. It is not hard to find people with no money but also no debt, that are actually better risks.


On Jul 09 11:43 AM deuxsous wrote:

> Agreed. The US dollar is the world's reserve currency. The arguments
> against it are the same arguments as in the 1950's and 1970's. Foreign
> central banks want a strong dollar because they own it and want to
> preferentially export into the US with their own weaker currencies.

Jul 09 12:54 PM

[Danny Furman:]

education, technology, entertainment, athletics. benefits are in confidence, or lack thereof elsewhere.


On Jul 09 12:51 PM Dave Wrixon wrote:

> Name one, and then explain how that actually benefits the economy.
>

Jul 09 01:03 PM

[Dave Wrixon:]

Well there is absolutely no evidence that you are educationally superior to the rest of the World. Most US Maths undergraduates would fail the tests required to gain a place at a Chinese University, and compared with Europe frankly you are laughing stock.

Certain areas of technology, granted. Particular with relationship to destroying other human beings, but how much do you have that gives you a commercial edge? And if so why are you exports so pathetic?

On entertainment, you probably could not match the shear volume of Bollywood, and as for athletics, didn't you take a bit of a pasting all round at the Olympics at the hands of the Chinese. Most of your success is based on superior African genes, which are not in short supply elsewhere, so any advantage you have is likely to prove ephemeral, especially as nearly half your school population is now obese.

On Jul 09 01:03 PM Danny Furman wrote:

> education, technology, entertainment, athletics. benefits are in
> confidence, or lack thereof elsewhere.

Jul 09 02:19 PM

[Danny Furman:]

it's about the best, not averages. leadership comes from the States

Jul 09 02:31 PM

[Danny Furman:]

Dave,
I agree with almost all the things you've said, however most are irrelevant regarding the article, which is not about the US at all. The dollar is its own beast.

Jul 09 02:36 PM

[scoad:]

As someone who has lived day to day in a foreign country for many years, amoungst ordinary people, I sometimes wonder if our problem is not too many dollars being printed but too few. The demand is enormous and growing rapidly. What many American provincials don't realize is that, even in countries w/their own national currency, the people, even people barely above subsistance, use the US $ as a daily currency for their savings and for transactions above a certain amount. This is because, despite it's problems the US $ is more stable and secure than their local currency. As these people get wealthier and more sophistcated they rely on USD more not less. This demands more dollars. I'm not sure anyone has a clue the right number.

Jul 09 03:00 PM

[deuxsous:]

Dave Wrixon has clearly made his point several times over: he doesn't see much to like about the US. He has had a lot of company for the past 200 years.

Jul 09 03:41 PM

[TinyTim:]

Dave-
Re education. I hear what you're saying and have seen the data to support it. How is it that most US universities, especially grad schools, are overflowing with foreigners??

Jul 09 03:54 PM

[Dave Wrixon:]

It is not just the US. The UK for years has had a huge foreign student population, but it is also true that many of the lectures have also been foreign nationals, although I don't recall many Americans from my own experience. In terms of Engineers and Science graduates, however, China probably produces as many as the US and UK combined. And don't kid yourselves that it is just worthless bits of paper. You might be able to buy degrees in the US, hell I get a dozen emails a day, but I don't think that sort of thing is common place in the PRC.


On Jul 09 03:54 PM TinyTim wrote:

> Dave-
> Re education. I hear what you're saying and have seen the data to
> support it. How is it that most US universities, especially grad
> schools, are overflowing with foreigners??

Jul 09 05:30 PM

[Rokjok777:]

I think it's like a Ponzi scheme, but it's a Ponzi scheme that EVERYONE is in on.
If everyone is in on it, does it ever unwind? Or do we all just keep playing?
Pass the hot potato to the next generation. I heard that Britain still has not repaid some of the debt incurred in the Hundred Years War....
The IMF said yes, the dollar's share of global reserves will shrink. From 60% all the whopping way down to 52% in the next decade. Sure that's a big move but not a catastrophe.

Jul 09 06:12 PM

[Moon Kil Woong:]

The fact of the matter is that dollars are internationally more available than ever before and most economies have far more flawed histories than ours.

Yes, dollars are more available than anything else simply because we have an inconcievably massive debt compared to anyone else and that we are not likely to be able to pay of decade after decade. Is this an argument for why the dollar should be a reserve currency or why it shouldn't?

As for flawing our history, we seem to be doing a pretty good job of us. If currency values were based on a good clean living the Canadian dollar would be about 10 times higher than ours by now. I think this point is obviously moot.

Jul 09 08:14 PM

[derryl:]

scoad makes a good point:
"our problem is not too many dollars being printed but too few. The demand is enormous and growing rapidly. What many American provincials don't realize is that, even in countries w/their own national currency, the people, even people barely above subsistance, use the US $ as a daily currency for their savings and for transactions above a certain amount."

The US can print money and use it to buy imports because people in other countries want to circulate those dollars in their own economies. This is called 'seignorage', where the government who prints the money gets the benefit of the spending without the usual cost of having to fund the spending from taxes. Seignorage is usually associated with moral hazard, lack of spending discipline. Sound familiar?

A month or 2 ago I read a SA post explaining that many foreigners borrowed money in US$ denominated loans and now that everyone wants to repay loans there is huge demand for US$ from these deleveraging foreigners. So this, the need to get your hands on US$ to repay your loan, and the desire among foreigners to use dollars as their everyday money, goes a long way to explaining the dollar's ongoing strength when money supply expansion (asset dilution) and frightening fiscal fundamentals (risk of default) would suggest a weaker greenback.

Jul 10 02:29 AM