Where Does the Dollar Go from Here?

After disinflation, ZIRP.

After ZIRP, QE.

After QE, DXY.

After DXY... ?

Fill in the question mark.

Broad indicies (represented by SPX in yellow above) spiked up in lock-step with the Dollar's continued sacrifice (inverted DXY, white) yesterday. Bernanke voiced his optimism earlier yesterday that 'the recession is "very likely" over.' Oh my, how I hope he's right... for my children's sake.

We've ventured out into uncharted waters so far in this crisis, and it's taken a lot of inventive policy to save the system... to marginal avail. The Fed's printing has far displaced all the M2 (and M3) that was vaporized through the March '09 lows, but with all that redoubled liquidity and easy credit, markets are still far from 2007 highs--even on a trailing PE around 130.

The chain of emergency strategies listed about are kind of like those little Russian dolls: you open each and find a smaller one inside. Except, those Russian dolls are finite, so I guess it's more like slipping half-way closer to death with each episode: you keep getting closer, but you'll never actually die... you just get infinitely close to death.

So where do we turn from here while the USD lives a slow death?

Dollar demand is low as it suffers from FX carry-trades under a ZIRP regime. International economies are divesting of dollar-denominated assets as some combination of debt-inflation and a loss of the USD's perceived "safe-haven/risk-free" status takes hold.

Inflation fears can send stocks higher, but we'll scarcely see an improvement in the nominal (and ultimately the real) economy. Nominal growth at the corporate level just doesn't exist anymore. The US is a mature economy that's reached its sustainable growth rate. Even while corporations can turn profits, there won't be real [revenue] growth to flow up into Macro real growth or GDP growth. The consumer, the private sector and the public sector were all as leveraged as possible. After asset price deflation, they're all STILL as leveraged as possible.

In a very similar situation back during the Great Depression, it took WWII to rev up the US secular bull market. Not to discount the possibility of WWIII, but today what bubble can debilitate the entire foreign trade landscape in such a way as to cast global dependence back upon America? I emphasize today because the mature, globalized economy would never have to turn to America as, say, a global arms supplier like it did back in WWII.

No future bubble could grow systematically important enough and quickly enough to dampen or offset real estate's lurking dead-weight. The government intervened, then subsidized, then manipulated real estate (RE) to keep the time-bomb ticking. They did so much for so long that RE has been installed as an engine to our economy with resonance in every gasket. Banks fuel that engine, and they're being asked to empty their tanks to underwrite loans tacked to an artificially low LIBOR risk gague. Yes, to save RE, our entire economy's risk gague has been explicitly pinned at artificial lows.

As terms of trade enter a sweet-spot, some export demand will help US production and shave the trade-deficit. Kindling GDP one last time, we'll rebuild inventories over 4Q09. But, neither offer real growth from 2007 levels; it just retraces. You arrive at the same problem: the US keeps bumping up against that pesky sustainable growth rate ceiling.

Seriously, where do we from here?

I'm interested to see if a dialogue starts between the US and the IMF. I wonder what the global, systemic risk exposure to the US in Sept 2009 is compared to Sept 2008. The lender of last resort is now the IMF. Truly, the IMF was designed to be just that, but the notional magnitude of the US economy made it the natural placeholder. Can the US turn to the IMF for rescue? Would an IMF lifeline be installed in secrecy to save systemic backlash? Will some other sleuthy creditor rain phantom investment upon the US? If so, where's the demand outlet for any more US investment? Domestic demand has reached its peak, so it has to be abroad.. but I don't know if there will be enough demand in all of Africa this century to power the US locomotive.

The only solution I can come up with is that our government has to actively manipulate demographics by encouraging immigration for its subsequent fresh demand. My political opinions aside, it would compromise the American standard of living while investing what remains of taxpayer dollars in substantial social welfare programs for decades to come. Nevertheless, soliciting demographic demand-flows is the only trap door I can find to breach that sustainable growth rate--particularly in the face of inopportune demographic forcasts like the baby boom bust.

Disclosures: no positions

Comments

[User 357705]

l
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2009 Sep 16 10:25 AM

[conceptwizard]

Benanke has been wrong about the housing debacle, and every thing else hes said. The truth is there are landmines everywhere. No one truly knows when and how to sort this all out.

They have not even dealt with the toxic assets, or fixed the "to big to fail" scenario. Any one to big to fail is a hazard to the financial health of America.

The dollar will continue its slide as Benanke has no other choice but to keep the presses on

2009 Sep 16 10:59 AM

[Donald Ingram]

? = Devaluation. Plain & Simple.

2009 Sep 16 03:11 PM

[Romeo Fayette]

Agreed. However, the US govt allowing devaluation is conceding that the situation is out of anyone's control. That's the equivalent of doing nothing; devaluation is hardly a strategy. Not to mention the whole "rock and a hard place" argument: I think it's clear that the US chose inflation over deflation since March, favoring a battered global standing to utter insolvency. Now we're seeing the flight of capital associated with an inflated currency, so the inflation stunt is up.
My, oh my, we left the Greenspan era with a comfy, cozy feeling of security: we thought a central bank could control the economy like moving pieces on a chess-board. Now, it's like we're stuck with nothing in defense of our king.


On Sep 16 03:11 PM Donald Ingram wrote:

>
> ? = Devaluation. Plain & Simple.

2009 Sep 16 05:15 PM

[Jason Tillberg]

Credit destruction will bring back a strong dollar. There's still tremendous amount of debt outstanding and there are many deflationary forces still.

-Wages not rising and wont
-Rents unlikely to rise anytime soon, especially if incomes are not rising
-Economic recovery will be anemic in my opinion

Deflation in a debt based money system loaded with debt will mean dollars should be in demand as that's whats needed to pay off debt.

Had government allowed debt to evaporate instead of backing with US taxpayer (our kids and grandkids) , the interest on that debt will continue to be a major drag on the economy.

All that has already been done and we still have -1.7 inflation (deflation) ..

... Who knows what's under the table with respect to the folks who want a new world order financial system to replace the dollar. Regardless, the debt is still there and bankers want it paid back...with interest!

2009 Sep 16 11:36 PM

[LKofEnglish]

looney, looney looney!

2009 Sep 16 11:40 PM

[Romeo Fayette]

Deflation in a debt based system loaded with debt means that the debt gets relatively larger. From there, the system is faced with two options:
1. Inflate to reign-in the relative cost of that debt
2. forgive the debt/renegotiate/restr... loans/make concessions
Neither are loaded with much consequence as long as you have an endogenous economy. But, we of course participate in a globalized system. We operate in a severe current account deficit. Because we're so dependant on financing from foreign sources, our global standing is under attack. Not only that, but we're also at the point where we can't even function autonomously if we were to turn protectionist & isolating ourselves (however unrealistic of an option anyway). From a natural resources point of view (e.g. oil), from a liabilities point of view (e.g. Social Security), from a banking point of view (e.g. I'm not sure, but I doubt our banks can finance their domestic obligations without foreign cash flows), I think the US can't stand on its own two legs.

On Sep 16 11:36 PM Jason Tillberg wrote:

> Credit destruction will bring back a strong dollar. There's still
> tremendous amount of debt outstanding and there are many deflationary
> forces still.
>
> -Wages not rising and wont
> -Rents unlikely to rise anytime soon, especially if incomes are not
> rising
> -Economic recovery will be anemic in my opinion
>
> Deflation in a debt based money system loaded with debt will mean
> dollars should be in demand as that's whats needed to pay off debt.
>
>
> Had government allowed debt to evaporate instead of backing with
> US taxpayer (our kids and grandkids) , the interest on that debt
> will continue to be a major drag on the economy.
>
> All that has already been done and we still have -1.7 inflation (deflation)
> ..
>
> ... Who knows what's under the table with respect to the folks who
> want a new world order financial system to replace the dollar. Regardless,
> the debt is still there and bankers want it paid back...with interest!

2009 Sep 17 09:28 AM