Will the Dollar Decline Forever?

Is the dollar going down forever? Well, to paraphrase Benjamin Franklin, nothing is forever except death and taxes, but it certainly seems that the DGDF crowd is having their day (week? month? quarter?) in the sun.

The normative question of whether the dollar should go down "forever" is an emotive one; Macro Man is generally sceptical of such arguments, particularly in the current context when the US current account deficit (usual source of DGDF $ bearishness) is eminently reasonable by the standards of the past decade or so. Moreover, a number of the currencies that have performed best against the buck recently (here's lookin' at you, NZD and ZAR!) haven't exactly been paragons of balance of payment virtue themselves.

However, while market focus is usually (and justifiably) on the flow of currency movements (i.e., portfolio flow versus the US need to finance an ongoing c/a deficit), it seems as if the current bout of dollar weakness may have more to do with a stock adjustment...i.e., Asian and Middle East CBs reducing the share of dollars in the reserve bounties that they've accumulated over the past year or so.

Throw in a step-shift in the perceived equilibrium level of USD/JPY, thanks to DPJ laissez-faire, add a dash of flow recycling from Asian CBs standing in the way of overdue currency appreciation (so what else is new?), and throw in a pinch of dollar-negative seasonality, and these are the things of which market trends are made.

EUR/USD has broken up to new highs for the year, courtesy of both public and private-sector flow. Near-term resistance lies at last December's high of 1.4719 and the Sep '08 high of 1.4866; above those levels, there's quite a bit of fresh air.

The breakout was confirmed, or indeed foreshadowed, by therally in precious metals a few weeks ago. Gold is not far below its nominal high of 1032 (though obviously well below its real high), but there appears to be more near-term upside in silver, which has broken and held the key $16 level.

There are still a few holes in the DGDF story, however, particularly if it's one predicated on a cyclical rebound. Base metals have been taken to the smelter recently (boom, boom), whereas one might reasonably expect the rising tide of a broad-based DGDF-deval to lift all boats... even those made of base metals. The chart of aluminum is indicative of the complex.

Similarly, oil (as measured by CLZ9) is off its recent lows, but doesn't exactly scream "breakout!" Now, this may be down to promised OPEC supply, or it may be down to spec limits. But in a world where the dollar truly is "going down forever" and inventories are sharply off their highs (though admittedly above long-run averages), one might reasonably posit that crude would have put in a better show.

So how are we left? Much as it pains Macro Man to say it, it looks like we may well be at the mercy of his old adversaries, the FX reserve managers. Should they continue their recent behaviour and consistently buy EUR/USD in the open market, the private sector will happily piggy-back and a trend will be born.

Should they pull the bid and start selling (because as you know, punting someone else's currency for a percent is a vital part of FX reserve management), well... then we might find that the dollar going down isn't forever after all....

Comments

[chap08:]

"Macro Man is generally sceptical of such arguments, particularly in the current context when the US current account deficit (usual source of DGDF $ bearishness) is eminently reasonable by the standards of the past decade or so"

I can't believe you said that. What, if anything, was reasonable about the standards of the last decade or so?

Long term, the dollar's going down some more, but not in a straight line.

Sep 16 08:35 AM

[wdhalgren:]

Of course the dollar won't go down forever. Eventually it will reach some level of intrinsic value. Think of all the things dollars can be used for: fuel, scratch paper, wallpaper, bathroom tissue, bedding material. The possibilities are endless. Hold onto those dollars, they will certainly be useful for something.

Sep 16 08:52 AM

[GeminiAtlas:]

As long as the Fed is in charge of the printing presses, of course the dollar will go down forever. That's what's happened in the last 90-odd years, hasn't it? The purchasing power of a dollar today is a tenth (probably less even) of what is was in 1913. That's what the congress wants because it imposes a tax without calling it a tax. Good thing most of the electorate is too stupid to realize it. :)
Except it lets them (congress) spend more than they receive in revenues so that eventually money supply is inflated to pay off its debts in depreciated money. I bet they laugh too "haha, suckers!"

Sep 16 12:18 PM

[Jan Paul:]

The dollar won't go down forever but, it could easily do what we have seen in hyper-inflation situations in other nations.

The cause of hyper-inflation is not the same as that of high inflation. Hyper-inflation is a loss of faith in the government that issues the currency as much as the loss of faith in the currency to hold its value.

Thus, it won't be what U.S. consumers do and possibly not even what the U.S. government does with the dollar, but, what world does with the trillions of dollars they hold. To cause a collapse of the dollar, all they have to do is stop buying our debt. They don't have to sell dollars or sell our debt, just stop buying it and the dollar collapses. THEN, they would sell them and fast.

While selling debt and dollars would also do it, it doesn't have to happen that way.

When bread is $25 or more a loaf and going up each day, how far the dollar can fall won't matter. We have seen inflation rates of over a million in some nations that get into currency trouble. Because we have the world's reserve currency we are at great risk if faith in our government declines much more.

All the talk about the dollar around the world is really more about a loss of faith in our government, and with good reason. We passed the point where the private sector can ever catch up with government spending, borrowing and interest on debt. The GAO warned Congress of this for years before this crisis even hit. Their warning was about when cash flow went negative in the entitlements in 2015-17.

Yet, because of this crisis and falling payroll taxes, that crisis they feared is here now. There is no more, a few years from now. We are now borrowing for both Medicare/Medicaid and Social Security short falls to buy the bonds back in the trust funds.

If you doubled, taxes on payroll (which is what legislation currently requires funding for those two programs come from) you still couldn't catch up as payroll taxes are expected to continue to fall as more layoffs occur and hours and wages are cut. Yet, that is just a portion of what the private sector now has to fund and other tax revenues are falling, too. Corporate tax revenues fell 57% over the last year. Individual income and cap gains, etc. fell 22%.

The dollar can't be strong if the FED has to keep monetizing debt, but, if they don't, then interest rates will go to double digits and totally destroy the economy, tax revenues, budgets and faith in our government. This is not like it was when Volcker let interest rates rise. This time the world is leaving the dollar due to the loss of faith in our government.

We would not have enough tax revenues to even pay interest on debt, even if we raised taxes. Just under optimistic forecasts the CBO says interest on just the public portion of our debt, will quadruple to over $800 billion or about what corporate and individual tax receipts for the last year have been.

To get a positive GDP the government is going to try and borrow and spend more than the declines in the other three sectors of the GDP formula. Marc Faber is calling for $2 trillion in deficits for years due to this type of thinking to keep GDP higher and create an illusion of soundness in our economy.

Sep 16 12:20 PM

[user396040:]

I am reminded of the story about Will Rodgers - one day it was raining very hard and someone asked him "Do you think it will stop?" He answered, "It always has."

Sep 16 12:39 PM

[User 357705:]

Certainly not forever. At some point the rest of the planet will stop accepting USD which will be replaced by New Dollars or wampum....

Sep 16 01:17 PM

[Nathaniel C:]

While I usually do not like to follow the herd, in matters of FX trading you have to. Right now they have decided to use the dollar as the new funding currency for the carry trade. The FX market is primarily a momentum driven market where you make money following the herd. It does not pay to be a contrarian in this market. So I am naturally long Eur/USD and long AUD/JPY.

Sep 16 03:14 PM

[Donald Ingram:]

Drop back and take a new look from a long view.
Since 1970-71 when the US reneged on backing the green back with gold, the dollar has lost 82% of it's purchasing power. In other words what you could buy for $1.00 in 1971 now costs you $5.54!
I think it's a little late for the USD. It will be replaced on the global stage with some other form of exchange. Get ready here at home for the coming devaluation.

Sep 16 03:18 PM

[Prohobo:]

Obviously no one here is German or old enough to remember...

They have had the "Mark" and in 23 had after hyper inflation created the new devalued Pension Mark at 1:1 billion. Then came the Realm Mark in 24 that replaced the temp Pension Mark at 1:1. Of course that was fine until the world economic crisis of 29. Of course the Nazi's did a little aquiring and price fixing so the citizens didn't really have a clue as to inflation in the 40s. Of course it became worthless (because of the war) on the foreign currency markets. They even had bank backed currency durning this time in certain ZONES. After teh war the questionable Realm Mark was replaced by the German Mark in 48 at a 10:1 conversion. But inflation forced them to replace coins (just like in the U.S.) from silver into cheaper zincs and nickel by the 70s. Then of course you get the Euro in 99 for about 1:2 DM conversion.

So for those who stored wealth in the 20s with the first mark - you are S.O.L.

The have blind faith that our currency will not devalue and it is right infront of our eyes.

It only took a couple of decades to see the Germans blow through several different currencies (always devaluing down). Are we too foolish not to think it could happen here.

That confederate money is worth what?

We shouldn't call it a FIAT currency, we should call it a faithed backed currency. Are you keeping the faith.

Sep 16 04:05 PM

[Ad Orientem:]

I am not attempting to be facetious. But the answer to the question in the title is yes. Arguments can be made for and against fiat paper currency. But one thing is undeniable. They are inherently inflationary. As long as the dollar is backed by nothing more than good intentions and wishful thinking it is doomed to a gradual but certain demise. The day will come, perhaps long after we are all dead or maybe much sooner, when the dollar will be effectively worthless. That is simply a fact. The question is how soon?

There in the first three decades of the preceding century a number of cases where the dollar was debased in its relationship with gold. But since 1933 when the United States went off the gold standard the dollar has lost well over 90% of its purchasing power. Even if the mass printing of money and staggering deficits do not create a sharp uptick in the CPI (which I fully expect) just a continuation of the "normal" average inflation we have seen for the last 75 years would mean that in 2084 a dollar will be worth a penny in 1933 money.

When you consider that for much of the last 75 years (from roughly the early 1950's - 1971) there was at least a halfhearted effort to keep our currency pegged to gold, and no such prospect exists for the future; I think the dollar will be worth the 1933 penny in far less than 75 years. Add to that the great inflation being created even as we type away here on Seeking Alpha and we may see the dollar= one 1933 cent by the end of the next decade or sooner.

No I am not urging everyone to put all their money in gold. But I do think everyone should be investing with inflation in mind at all times.

Disclosures:
Long PRPFX, GLD, AEM
Short CASH

Sep 16 05:30 PM

[Long Silver...:]

In 1923, as I recall reading, there was a fairly steep drop in the value of the Mark on world currency exchanges (down 2/3rds in four months). Then it paused with government intervention. Then, as the dam broke and faith evaporated, the value of the Mark simply vanished. The ones who survived were those who bailed out and converted into gold/silver. If the same pattern is happening here, look for a 3-4 month steep drop in the dollar (spike in gold/silver), followed by government intervention, then a swift demise of the dollar as the Chinese and others bail out of Treasuries. Just think of that. The Chinese are able to destroy our country by doing almost nothing. We can then expect to see political instability here, as the Internet makes organizing against government that much easier, accompanied by military adventurism by rogue states abroad (just wait and see as Iran gets the bomb). All this because our elected leaders believed their primary objective was to get re-elected.

Sep 16 06:27 PM

[Steven Vincent:]

I have also noticed the divergence between the precious metals and the rest of the commodity complex. Over the last few days commodities are showing signs of playing catch up however. My sense is that the dollar will retest its lows from March 08.

Sep 16 08:24 PM

[Whoa Nelly:]

It will reach a point under your scenario where the system will break down and "the masses" will be rioting in the streets.

Full on revolt kinda stuff, unless the powers to be get the guns first.


On Sep 16 12:18 PM GeminiAtlas wrote:

> As long as the Fed is in charge of the printing presses, of course
> the dollar will go down forever. That's what's happened in the last
> 90-odd years, hasn't it? The purchasing power of a dollar today
> is a tenth (probably less even) of what is was in 1913. That's what
> the congress wants because it imposes a tax without calling it a
> tax. Good thing most of the electorate is too stupid to realize
> it. :)
> Except it lets them (congress) spend more than they receive in revenues
> so that eventually money supply is inflated to pay off its debts
> in depreciated money. I bet they laugh too "haha, suckers!"

Sep 16 09:51 PM

[Whoa Nelly:]

Hope the powers to be don't get our guns first - we'll need 'em to get the bankers and politicians and renew USD to the gold standard.


On Sep 16 06:27 PM Long Silver John wrote:

> In 1923, as I recall reading, there was a fairly steep drop in the
> value of the Mark on world currency exchanges (down 2/3rds in four
> months). Then it paused with government intervention. Then, as the
> dam broke and faith evaporated, the value of the Mark simply vanished.
> The ones who survived were those who bailed out and converted into
> gold/silver. If the same pattern is happening here, look for a 3-4
> month steep drop in the dollar (spike in gold/silver), followed by
> government intervention, then a swift demise of the dollar as the
> Chinese and others bail out of Treasuries. Just think of that. The
> Chinese are able to destroy our country by doing almost nothing.
> We can then expect to see political instability here, as the Internet
> makes organizing against government that much easier, accompanied
> by military adventurism by rogue states abroad (just wait and see
> as Iran gets the bomb). All this because our elected leaders believed
> their primary objective was to get re-elected.

Sep 16 09:53 PM

[Albertarocks:]

No, the USD won't go down forever. The Zimbabwe dollar didn't go down forever. It did go down far enough that they actually printed trillion dollar notes though. And Zimbabwe certainly wasn't as masterful at printing fiat as the FED and treasury are. Compared to the US "money out of thin air" masters, the Zimbabwe money magicians were mere amateurs.

No, the USD won't go down forever but it might go down far enough that it'll just slip into oblivion as some new scheme is hatched... like a one world currency. And if the Rothschilds and their cabal own that currency as well, we're all hooped forever. We can never accept that.

But first, I wouldn't be surprised if there is a temporary resurgence in the USD. I suspect that will coincide with one last weak drop in the price of gold and silver. But once that's over... it won't be long before we're looking at $2,500 gold in the rear-view mirror.

Sep 16 11:49 PM

[acttang:]

Actually this is the problem with democracy. When the mob elects, the mob wins. Blaming the elected leaders kinda misses the real problem. By design, should they NOT aim at being re-elected?


On Sep 16 06:27 PM Long Silver John wrote:

> In 1923, as I recall reading, there was a fairly steep drop in the
> value of the Mark on world currency exchanges (down 2/3rds in four
> months). Then it paused with government intervention. Then, as the
> dam broke and faith evaporated, the value of the Mark simply vanished.
> The ones who survived were those who bailed out and converted into
> gold/silver. If the same pattern is happening here, look for a 3-4
> month steep drop in the dollar (spike in gold/silver), followed by
> government intervention, then a swift demise of the dollar as the
> Chinese and others bail out of Treasuries. Just think of that. The
> Chinese are able to destroy our country by doing almost nothing.
> We can then expect to see political instability here, as the Internet
> makes organizing against government that much easier, accompanied
> by military adventurism by rogue states abroad (just wait and see
> as Iran gets the bomb). All this because our elected leaders believed
> their primary objective was to get re-elected.

Sep 17 05:38 AM

[acttang:]

You've been arguing for the case of a sharp $ rebound. Have you changed your view?


On Sep 16 08:24 PM Steven Vincent wrote:

> I have also noticed the divergence between the precious metals and
> the rest of the commodity complex. Over the last few days commodities
> are showing signs of playing catch up however. My sense is that the
> dollar will retest its lows from March 08.

Sep 17 05:41 AM