Is the U.S. Dollar the Fed's Next Weapon? 53 comments
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The second anniversary of the credit crisis has arrived and, in the light of the plethora of fiscal and monetary policy initiatives, it makes for interesting reading to reflect upon how the U.S. economic landscape has changed since the start of the crunch.
• Fed funds rate: down from 5.25% to zero
• Fiscal deficit: up from 2% to 13%
• Mortgage rates: down from 6.5% to 4.7%
• Home affordability: 70% improvement
• Fed’s balance sheet: up from $850 billion to $2 trillion
Yes, the Fed has tried just about everything, and yet real GDP growth is negative at about 5% and the unemployment rate has doubled to almost 10% over the past two years.
David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, points out that there is one policy tool that is practically unchanged since two years ago … the U.S. dollar:
It is the only policy tool that has not budged one iota since the crisis erupted two years ago. But we are sure that as the unemployment rate makes new highs and increasingly poses a political hurdle in a mid-term election year, it would make perfect sense for a country that always operates in its best interest - even if it may not be in everyone’s best interest - to sanction a U.S. dollar devaluation as a means to stimulate the domestic economy.
It follows that Rosenberg is of the opinion the greenback has significant downside potential. He therefore suggests that investors should start thinking about protecting their portfolios against a declining dollar by taking positions in commodities, gold, the Canadian dollar, resource stocks and U.S. sectors that have high foreign exposure (materials, industrials, staples, health care).
For more on the most likely short-term direction of the U.S. dollar, Adam Hewison’s (INO.com) short technical analysis provides valuable insight. Click here to access the presentation. (Adam also covered the outlook for gold bullion in a recent analysis. Click here to view his outlook for the yellow metal.)
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This article has 53 comments:
The US needs inflation to erode the economic value of its debt, a weaker USD to help exports and reduce the trade deficit and another 6-12 months of loose monetary policy to force the economy into positive growth.
The USD is the only tool for this isn't it?
It is a dangerous weapon because the many of the staples that the average American relies on are cheap when we have a strong dollar (oil, petro-plastics, petro-fertilizers, textiles). There will be inflationary pressure caused by both more dollars in the money supply and increased price of imports due to devaluation. However, I expect China to print more Yuan to keep buying dollars. Let the race to the bottom begin...
Once the current jawboning green shoots nonsense is shown to be...nonsense, of course they will debase the dollar.
"Fiat protectionism" if you will, that will have the same effect as closing boarders to trade during the great depression. The end result could be the total destruction of fiat.
A big game of every country playing chicken with their currencies. Who ever pulls up first suffers from their overpriced currency. Who ever pulls up last, well that's not gonna be good either.
Apparently politicians, the Fed, the Treasury and the pundits have not bothered to drive through their local industrial parks.
Do it, then follow it up with a few runs through office buildings.
What they would see if they bothered is that THERE IS NO DOMESTIC ANYTHING anymore.
Mott's Apple Juice is made in China. I'm still waiting for Kraft to tell me where my kid's Mac n Cheese is manufactured.
We don't have much to "export" other than our natural resources to China. Well, that and debt. We do seem to have a surplus of debt we could send off shore.
"Free trade" with the third world has decimated our wealth production and middle class.
Yet the experts keep hoping (beyond hope) that somehow the handful of items we still make here will manage to prop up our entire economy.
On Jul 20 09:18 AM TeresaE wrote:
> Domestic exports? What "exports"?
>
> Apparently politicians, the Fed, the Treasury and the pundits have
> not bothered to drive through their local industrial parks.
>
> Do it, then follow it up with a few runs through office buildings.
>
>
> What they would see if they bothered is that THERE IS NO DOMESTIC
> ANYTHING anymore.
>
> Mott's Apple Juice is made in China. I'm still waiting for Kraft
> to tell me where my kid's Mac n Cheese is manufactured.
>
> We don't have much to "export" other than our natural resources to
> China. Well, that and debt. We do seem to have a surplus of debt
> we could send off shore.
>
> "Free trade" with the third world has decimated our wealth production
> and middle class.
>
> Yet the experts keep hoping (beyond hope) that somehow the handful
> of items we still make here will manage to prop up our entire economy.
Perhaps we could export all the failed bankers and CEOs who melted away into the woodwork with most of their loot after bankrupting their companies and shafting their investors, all in the name of juicing short-term profits.
On Jul 20 09:40 AM The Geoffster wrote:
> Can we export the uninsured and 48% who don't pay income taxes?<br/>
The arguments presented in the above article do make sense, but I think that conclusions are being drawn in a very narrow way that does not consider the interests of all parties, and how those interests will affect the government's decision making.
While I do agree that a reasonable hedge against the dollar is wise, I think the extreme devaluation that some are expecting is unlikely any time soon.
Things would have to get much, much worse before they play that card, mainly since other countries could easily respond in kind, making the effectiveness quite questionable.
With that said, the long-term plan is obviously to devalue the dollar in an orderly manner over multiple years. There is no other course that makes sense considering the crushing public and private debt.
Doing this in the traditional manner of recent decades where incremental monetary inflation is applied is their preferred method, since it is hard for voters to notice (frog boiling in a pot?). Doing it through outright devaluation is impossible to hide.
Bernanke ask, Geithner for more money so AIG wouldn't have to go bankrupt. So, they could have a substitute situation.
This come out of the mouth of the vice chairman, of the feds when
being question by a committee. And he said most people didn't know this, because they didn't advertise it.
Summers and Co. are ignoring the obvious - neomercantilism works, like it or not. Even if the US doesn't aggressively push for competitive devaluation, it should at least push for balanced trade.
On Jul 20 09:18 AM TeresaE wrote:
> Domestic exports? What "exports"?
>
> Apparently politicians, the Fed, the Treasury and the pundits have
> not bothered to drive through their local industrial parks.
>
> Do it, then follow it up with a few runs through office buildings.
>
>
> What they would see if they bothered is that THERE IS NO DOMESTIC
> ANYTHING anymore.
>
> Mott's Apple Juice is made in China. I'm still waiting for Kraft
> to tell me where my kid's Mac n Cheese is manufactured.
>
> We don't have much to "export" other than our natural resources to
> China. Well, that and debt. We do seem to have a surplus of debt
> we could send off shore.
>
> "Free trade" with the third world has decimated our wealth production
> and middle class.
>
> Yet the experts keep hoping (beyond hope) that somehow the handful
> of items we still make here will manage to prop up our entire economy.
Second, by devalueing the currency you don't actually solve the crisis, you merely push it into the future and eventually we are back on square on, with one difference: the crisis has now been blown up to an even greater extent.
On Jul 20 05:07 PM Greenville wrote:
> How does devaluing your currency help your economy? It is rather
> evident it helps trade, however, besides this how does it stimulate
> an economy?
We spend almost on our military as the rest of the world combined. Plus we have quite a few unemployed 18 - 30 year olds that have registered for the Selective Service...
So if a foreign dollar holder wants to declare war, bring it on! We need it, quite honestly, a real knock-down, drag-out, toe-to-toe war, not the drive around the desert, bring freedom and democracy BS war we've been slow-bleeding with for the past 8 years.
If one looks at the late 20's as a guide, however, we are still about 10 years out from WWIII.
On Jul 20 11:24 AM Gary Griswold wrote:
> If the US government aided the devaluation of the dollar, wouldn't
> the US governments creditors regard the action as a deliberate attempt
> to avoid the payment of debt? And if such devaluation was done to
> a significant degree wouldn't some creditors consider it an act of
> war?
>
> The arguments presented in the above article do make sense, but I
> think that conclusions are being drawn in a very narrow way that
> does not consider the interests of all parties, and how those interests
> will affect the government's decision making.
>
> While I do agree that a reasonable hedge against the dollar is wise,
> I think the extreme devaluation that some are expecting is unlikely
> any time soon.
Sadly, we export porn.
Instead of monetary games, Congress should be crushing the unions and trial lawyers who gamed the corporations. Foreign earnings should be taxed. Domestic workers should be taxed little to nothing on wages. Only one thing can create wealth: Manufacturing takes worthless goo from the ground, modifies it into a "resource," and the value-added labor gets spread around.
Without industry, the manipulation of the dollar (or Euro) is a short-term trick, because fiat currency rots by its nature.
But in the meantime, we do export porn.
(sigh)
On Jul 20 09:18 AM TeresaE wrote:
> Domestic exports? What "exports"?
I really think that a collapse is coming, probably within the next ten years. everyone talks about how are economy is recovering, but i only think that that is temporary. china and russia are getting tired of the dollar.
this recession is like no other, the circumstances are far different than any other, people dont seem to understand that.
the dollar has been losing its value for awhile, and as for the fed, screw them! they will only speed up america's downfall.
Thus I wouldn't put it past them. The Fed tends to keep doing the same maligned things until they crash the market. That seems to be their modus operandi.
The Us government and the US FED can spew out tailored data to make anything look good. Naturally employment is a key factor in the economy and it has a major role as to a sovereign's ability to service its debt. This is like dominoes ... If employment is down then tax revenues are down, so not only are small businesses struggling under such circumstances but the ripple effects end up on the US TREASURY'S bottom line. Once that becomes a trend then a sovereign credit rating comes into play, whether officially announced or not.
I really do not care what the "official" unemployment rate is since there are so many versions of unemployment calculations they become worthless. One fact is clear and that is if the BLS used U7 rate like they did in 1994 to measure unemployment then America would be sitting at 21% unemployment right now. I cannot speak for others here but I personally have never known so many relatives, friends and associates who are either unemployed or under-employed in all my life.
Lets measure employment using tax revenue growth rates.
- Q4/2008 drops down to -2% growth from Q3 of +2.75% growth.
- Q1/2009 drops to -6.5% growth from -2%.
- Q2/2009 drops to -9.2% growth from -6.5%.
- Q3/2009 drops to -14% growth from - 9.2%.
I see a pattern ... Now the last time these growth rates slid into negative territory was in 2002 when the USDX was at 120. By using these growth rates it is obvious that the USDX is in another down leg like it was in 2002 when the USDX was at 120. The USDX slid from 120 in 2002 down to 80 in 2005, a 40 point drop. In Q1/2009 the USDX peaked at 89 so a similar 2002 move down would give the USDX a 40 handle within two years. Definitely Q1 2009 validated the Q4/2008 negative growth rate trend and it has been downhill ever since for tax revenues and that will point to a downtrend in the USDX that I believe history will record began in 2009.
Given the massive US DEBT load and the Crony Socialist governments of the past decades there can be no other direction for such a system to morph other than more debt USSR style and we all know how that ended. A Russian tank blew a hole right through the Communist Party Headquarters with a drunken Yeltsin swinging form the gun turret. As far as I can see that is about the only thing that would awaken the US Congress from their stupor is a hole in the Rotunda! My point is, even as I have veered offtrack into politicos, is that OBAMA has no other choice than to increase spending.
Now in 1908 there existed a similar situation as we have now, except that 1908 was prior to 1913, so the US FED did not yet exist. Back then Lindberg, the famous aviator, had his Father in Congress, Charles A. Lindberg, who coined the term MONEY TRUST. Follow along and we get to FDR and in 1933 he defaulted to gold and by 1935 FDR was looking at weak inflation instead of deflation. Fast forward to Bernanke at Princeton and he reiterates the exact same FDR devaluation policy to the letter in numerous speeches. So Bernanke knows his monetary history, he just doesn't make it public like he used to when all he had to worry about is tenure at Princeton. There is something to be said about the comfort and safety of academia.
So in reality this is a monetary crisis ... and in every monetary crisis it is "confidence" that is the last straw.
Ever since Rubin there has been this STRONG DOLLAR POLICY mantra at the US TREASURY. Well, just a few months ago Geithner carried on the mantra at the Beijing Improv, where his STRONG DOLLAR stand-up act met with much laughter from Chinese students. So if Chinese, 20 something, students find the US STRONG DOLLAR POLICY a joke what must the Communist leaders know?
The US TREASURY outlays spell it out loud and clear ...
"Government is essentially the negation of Liberty." - Ludwig Von Mises
"GOVERNMENT IS ONLY AS HONEST AS ITS MONEY" - Me
Was the US obliged to bail out AIG and subsequently the foreign counter parties? Well it's what China has been doing for the last decade - bailing out America.
A weaker dollar helps trade, with additional benefits
1) makes it easier for domestic producers to compete with foreign companies (and stay in business)
2) increases the wealth of the country vis-a-vis foreigners.
Several major economies have deliberately maintained a weak currency for some time. Japan has for decades. Ditto Taiwan. China has more recently pursued the policy, but much more aggressively. Russia is building up its reserves for geopolitical purposes. Brazil does not actively seek a trade surplus but does actively prevent investment inflows from giving it a trade deficit.
In contrast, Argentina in 2000 or Latvia today are perfect examples of what happens when trade deficits get out of control.
Surpluses and deficits are a zero-sum game. If other countries actively pursue surpluses and the US believes in laissez faire, then the US will be (and has been) pushed into deficit. These outside factors heavily influence the "savings rate" of US households.
I hope this helps.
---------------
On Jul 20 05:07 PM Greenville wrote:
> How does devaluing your currency help your economy? It is rather
> evident it helps trade, however, besides this how does it stimulate
> an economy?
However, if labor rates fall (including skilled worker pay as well as minimum wage), the decline in the dollar required for the US to regain competitiveness and produce goods and services to repay our debt will be less.
Either we produce more to repay/avoid debt sooner rather than later, or we will take a serious hit to national living standards later. Cutting social security in half (or more) when the baby boomers are in their 80s and 90s could be troublesome. Then again, perhaps they (I suppose I should say we) could just stay home, watch TV, and eat cheese and crackers.
(But hopefully, gold will be good enough :-)
On Jul 21 09:20 AM DONE_SONZ wrote:
> Yours and my weapon is gold.
look for a 1 to 3.9 reverse "split" on the dollar.
Stocks and real estate are the safe haven.
Tell the transfer agent/ registrar you want physical possession of the stock certificate
Note that this strategy is a tax on everyone (including the aforementioned foreign sovereigns), but it "disproportionately" affects the wealthy for two reasons: 1) they have more dollars; and 2) they can't evade the tax like they normally would (i.e. enforcement is automatic, no tax shelters available). The only way for rich folks to avoid the devaluation is to move into commodities or other currencies and subject their wealth to the vagaries of those markets. It's a bold gambit by the Obama administration: tax all dollar holders, change inflation expectations so that spending becomes more attractive than saving, and hope that the economy improves enough to keep the national debt from getting hopelessly out of control.
If the plan goes south, another administration in the future (perhaps one with a greater desire for military conflict), will have to seriously think about defaulting on foreign-held U.S. debt. BRIC would not be too happy about that, but it would have a certain benefit for the American public.
The currencies of interest should be the commodity currencies (NOK, AUD, CAD, BRL, NZD, even the RUB), not the EUR.
On Jul 20 09:18 AM TeresaE wrote:
> Domestic exports? What "exports"?
>
> Apparently politicians, the Fed, the Treasury and the pundits have
> not bothered to drive through their local industrial parks.
>
> Do it, then follow it up with a few runs through office buildings.
>
>
> What they would see if they bothered is that THERE IS NO DOMESTIC
> ANYTHING anymore.
>
> Mott's Apple Juice is made in China. I'm still waiting for Kraft
> to tell me where my kid's Mac n Cheese is manufactured.
>
> We don't have much to "export" other than our natural resources to
> China. Well, that and debt. We do seem to have a surplus of debt
> we could send off shore.
>
> "Free trade" with the third world has decimated our wealth production
> and middle class.
>
> Yet the experts keep hoping (beyond hope) that somehow the handful
> of items we still make here will manage to prop up our entire economy.
"Domestic exports? What "exports"? Apparently politicians, the Fed, the Treasury and the pundits have not bothered to drive through their local industrial parks. Do it, then follow it up with a few runs through office buildings. What they would see if they bothered is that THERE IS NO DOMESTIC ANYTHING anymore."Free trade" with the third world has decimated our wealth production and middle class.
I do beg your pardon, "Ms. TeresaE", but that's just sooo provincial, especially to the many members of this forum. After all, where something is made that Americans will consume is just academic and abstract. As long as the consumer gets more than they want, nay, even more than they need, at a price so cheap as to be almost free, whats to complain? And the "Money People" do this for us by by massive international wire transfer and we can use our debit cards at the consumer store, WHO NEEDS MONEY! It's only the pass-through that counts.(velocity) not the value.
From the importer, to the distributer, to the wholesaler, to the retailer and, eventually, to the one dollar surplus liquidator (and the garage sale after that) each party in the consuming chain skims their puny profit from the behemoth volume of transactions and we all either become millionaires or can think that we live like one.
America doesn't need "manufacturing", it only makes things dirty and yucky and requires skilled people that we can't train in our schools or import from Third World countries. Swapping paper for a living is just sooo much easier. And Green too! I'm going to the Mall.
(end sarcasm)
Whether you go with the $57 trillion or $99 trillion total, 15 or so years out, it is absolutely impossible to pay that off under any remotely normal conditions.
As I watch every congressional testimony and presidential speech, it is clear that total governement money vacuuming techniques are the direction we are headed: maximum tax increases, ever higher fees on every possible business and individual, tightening up on every perceived "fraud and abuse", abolishment of entire industries designated as "middle men" or "tax avoidance" promoters, etc..
I have gone over both the GAO, CBO, IG and Fed projections extrapolated 16 years into the future, (when my granddaughter turns voting age and can fight back). Despite the "magically favorable" numbers they use (as Bernake puts it) it paints a very clear picture for my granddaughter. It is also "us", but the point is the thievery we are commiting as we spend her money without her approval. Despite the favorable numbers they use, it clearly shows her living under the slavery of perpetually high taxes, interest rates and low standard of living, secondary to the debt. Since she bought (accidentally) her first stock at 10 months, I am teaching her early to deal with it by trading as well as possible, but she will, under any actions taken by government, live in a broken, indebted country.
The only way to even apporach dealing with the debt is to remove colas on social security, federal retirees, etc. first, then drop the dollar and inflated away.
The little cutting at the edges proposed, such as raising the retiree age to 70 over several years or recaculating the CPI used for the colas, would only lower the debt a couple of trillion at most (out of 57 to 99 trillion). To get impossible and eliminate Social Security or severely cut back somehow, even if enacted, won't work, because the money still has to come from somewhere to support retirees: from families, the private sector or government. It is still the same debt. That drastic proposal, short of a sudden disapearance of retirees (to Mars or elsewhere), just doesn't change the debt.
Medicare, of course is the worst. Even with the impossibly favorable numbers used, it is a disastor. There is no way to fix that, though early in inflation the hospitals and doctors who are losing money on medicare cases would feel a little better temporarily with small increases in pay.
what was that? the sound of the very last bubble we've got left?