Dollar Nearing a Critical Level 32 comments
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This chart is arguably the best way to look at the dollar's value vis a vis the currencies of our trading partners, because it uses a very large basket of currencies and makes adjustments for cross-border inflation differentials. As you can see, the dollar is about 7% above its all-time low, a level that has provided solid support three times in the past.
In today's world of floating currencies, almost every currency rises and falls against other currencies at one time or another. But a currency that is persistently weak or continually falling relative to others presents a problem. If the dollar's value were to continue to fall to new lows, eventually this would trigger rising inflation pressures. Indeed, supply-siders usually assume that any significant decline in a currency's value (particularly against gold) is a sign of easy money and therefore rising inflation risk. That's because inflation can be defined as the loss of purchasing power of a unit of currency.
Weak and falling currencies are also bad for growth, since they scare away investment. Who wants to invest in a country if there exists the real possibility that one's investment will be eroded by a falling currency? At the very least investors require special incentives (i.e., premiums) to invest in an economy with a weak currency.
Weak currencies are symptomatic of a variety of factors: easy money, weak economic growth prospects, lack of confidence, weak currency demand, and bad fiscal policies (e.g., wasteful spending, high tax rates). Strong currencies, on the other hand, typically reflect tight monetary policy, strong growth prospects, confidence, strong currency demand, and good fiscal policies.
So as the dollar nears its all-time low and the Fed is concluding its deliberations, the world wants to know what the Fed thinks about the weak dollar. If the Fed is unconcerned about the dollar because it is only worried about engineering a recovery, that will be bad news for the dollar and it will likely test its lows.
This next chart compares the dollar to the euro (it goes back in time by using the DM as a proxy for what the euro would have been worth). The green line represents the inflation-adjusted level of the exchange rate that would theoretically make prices in the U.S. and Europe roughly equal. Again we see that the dollar is with 5-10% of its all-time low (1.60) against the euro.
I'm guessing that the Fed is not going to make a fuss over the dollar, and that it will therefore continue to decline. But before too long, either the Fed will have to pay attention or the world will suddenly come to reassess its opinion of the U.S. economy and the Fed's monetary policy.
At this point I doubt that the dollar will make new lows, even though there is no shortage of problems weighing on the dollar: easy money, bad fiscal policies, falling dollar demand (i.e., rising money velocity), weak growth prospects, and a general lack of confidence. I'm inclined to be a contrarian when everything seems pointed in the same direction and valuations reflect an extreme.
There are two things that could turn the dollar around at this point, and I would expect to see one or both surface before the end of the year: 1) a Fed that becomes concerned over the dollar's weakness, and is thus willing to tighten policy sooner than expected, and/or 2) a growing perception that the U.S. economy is not as weak as so many seem to think. (This latter development will rebound to the first, since a stronger-than-expected economy would give the Fed plenty of cover to tighten policy.) I see plenty of signs that the economy is doing better than most people give it credit for, and I see no reason the economy can't grow at a 3-4% rate for the next few years.
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On Sep 23 11:49 PM ardon wrote:
> What should have happened long time ago finally happened today at
> 14.35 EST: the major indices tanked. The midday reversal was so unambiguous
> and strong that I have high confidence that it is the major reversal
> of the stock market trend. Expect a long and brutal wave down for
> equities. This shameless market manipulation has come to an end...,
> but there will be others, of course. What can be expected when the
> Fed irresponsibly give free money to greedy bankers, who have the
> nerve to tell the world that our economy is doing great, knowing
> all along that it is a lie.
that the greenback is circling a black hole.
Conceptwizard writes: "I do not question the need to inject liquidity into the banking system after the onset of the financial crisis in August 2007. "
And the Geezer replies: Nice try Wizard, but the financial crisis did not hit till AFTER Sep 15, 2008, when the FED declared bank assets worthless. Just as there was no recession until the GDP went negative in Q3 (and continued negative in Q4) after the money was frozen in the banks and the GDP began to plummet. If you know the formula for GDP, Money velocity and Prices, you can see what caused the meltdown and when. Unfortunately for us, the CHANGE that people got was not what they thought they voted in. Don't be surprised that the dollar is losing its value. It happened during the Rooseveltian years also.
EXACTLY.
Investors with half a brain know this and are not going to put their money back on the casino green felt of Wall Street. The anger at town halls and tea parties is about this tyranny, not just politics as usual.
I have NO TRUST
On Sep 23 03:36 PM conceptwizard wrote:
> What is to be understood is that the weak dollar is the direct consequence
> of the Fed's extraordinary cheap money policy. To summarize, the
> average American household is being hit from all sides with this
> policy. First, if it is a net creditor (as most retirees are), its
> savings are earning paltry returns (most likely negative after inflation
> and taxes). Second, the U.S. dollar keeps falling in value, raising
> the cost of traveling abroad and of everything that is imported.
> Third, real incomes fall with rising prices as the purchasing power
> of stable or declining money incomes contracts. Fourth, the exploding
> public debt will translate sooner or later into higher taxes, thus
> reducing private disposable incomes. All in all, the standard of
> living of most people falls.
>
> Don't get me wrong. I do not question the need to inject liquidity
> into the banking system after the onset of the financial crisis in
> August 2007. What I question is the way this was done and how the
> public interest was sacrificed in favor of narrow private interests.
> Indeed it was done in the worst possible social way, with private
> gains and social costs. They (the Bush and Obama administrations)
> recapitalized the banks to the benefit of a small class of bankers,
> while taxing the entire population in a multitude of ways to finance
> the public subsidy.
Hope he doesn't have to wait in line for a doctor.
At that point several things could happen but it is certain growth will be harder to achieve, cost of money will become higher. The important thing is that printing and borrowing more money to fix every economic crisis will no longer work but instead make it worse. The money printers like Bernanke, Obama, and Bush will have to be pushed aside in favor of proponents of small, efficient government. Policies will be needed to encourage real economic growth and real work above politically correct causes.
It will be a critical time. If the transition is not managed well it could end in disaster for the country.
How do you GROW an economy that has deficits everywhere? It appears to me that the more the US economy grows the more deficits we rack up - trade as well as budget.
Where once American Corporations exported Made in USA goods, they now export jobs and factories. It's been going on for a long time but ever since China became a member of the WTO, it became a frenzy.
I don't know too much about all the economic theories and I don't have reams of data to review, but I do have common sense and a keen eye for trends and reading what others have to say and my own observations have never let me down.
Welcome Ladies and Gentlemen to the new Amerikan Ekonomy.
Go to India (just one example): they're extremely well-educated, young population, unbelievably hard-working. Are they sitting on the couch, watching Jerry Springer, stuffing themselves with Cheetos, maxing their credit cards, waiting for the next "stimulus" check? Not a chance. They're crowding universities, taking night classes, working two jobs, hustling. This is a gross generalization. But is America spending its money educating the population, building infrastructure, growing new industries? Or is it enriching the banking elite, building multi-million dollar missile systems, supporting troops and bases in >100 countries, all while encouraging real jobs to relocate abroad? Do we wish we still had that $1 trillion we poured into the sands of Iraq? You betcha. Wake up people. By, For, and Of the People has become a joke, time to take it back.
Clearly uncharted waters.
The Fed has made several announcements that would tend to indicate that the USD may rally. It has said it is ending its Treasury buying program by the end of October. It has said it intends to end its MBS buying program by the end of Q1. It intends to slowly phase this out. It has said it intends to reduce and then end its TAF and TSLF programs. The Fed also intends to use reverse repos in the $2.5T money market mutual fund business to drain liquidity from the financial system. Plus the Fed has been slowly decreasing the money supply since June (after increasing it dramatically for the 8 months prior to that). All of these things mean there are substantive reasons the USD may rally.
The Japanese monthly report that their exports have fallen again was instrumental in helping the USD gain ground against the Yen today.
The US dollar is due for a bounce. It is as badly thought of as stocks last March. It's not a long term hold, but the bounce is inevitable.
At the risk of using the discredited cliche "this time is different", this time is different! The reason that it is different is because the lion's share of the easy money is not going into the economy in the sense of buying goods and services and generating the so-called multiplier effect, but rather a large share of it is being hoarded by banks to rebuld their balance sheets, plus consumers are using it to pay down debt including mortgages they can't afford while others are just putting it in savings accounts. So banks are the ultimate recipients either directly or indirectly of a large share of the easy money and not the economy.
Of couse, some money is going into the economy but not enough to generate solid growth in money supply which is a precondition to inflation. So what is happening is either stagflation or deflation, only time will tell.