U.S. Dollar Now Testing $1.50 Per Euro

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Usually when a currency or stock market collapses, it drifts lower for a while, until suddenly the fall gathers momentum.

The dollar has been drifting lower. It has just reached a nice round number, 2/3 of a euro, or in other words $1.50 buys 1 euro. If the European central bank is planning to intervene, this would be the type of point it would choose. If not, then the dollar will probably collapse, which would intensify the recession in the rest of the world.

The fate of the dollar and the world economy is in the European central bank's hands. So what are the European leaders saying? Breitbart reports:

The 16 countries that use the euro single currency are "worried" by the weakness of the dollar on currency markets, the head of the eurogroup said on Monday.

That's it. That's the whole article. They're worried. The many buyers who are driving up gold prices to record levels are worried too. But the American mainstream media is clueless. One year after the Great Recession began, they still haven't even figured out that world is in a recression caused by trade imbalances.

The world entered the recession because the American consumer could no longer borrow enough money to support the expanding exports of the trade surplus countries. There were three possible solutions:

• 1. Chinese Action. China could have gotten the world out of the recession by stimulating its consumption of imports, but the Chinese government instead expanded their export subsidies and increased their protectionism.
• 2. US Action. The United States could have gotten out of the Great Recession by balancing trade through import certificates that tied our imports to our exports, but Obama's incompetent advisors opted instead for a stimulus plan that would destabilize the dollar.
• 3. Economic forces. The forces of economic nature could balance trade through a dollar collapse.

We may be about to see the third option in action. It won't be pretty. There would be a huge cut in U.S. living standards. Imports would become extremely expensive. U.S. interest rates would skyrocket. Even though American manufacturing would come roaring back, the Democrats would be dead meat for the next decade.

There are different ways to solve problems and different ways to not solve problems. President Obama picked incompetent economic advisors. It may soon become evident that he made a huge mistake.

Disclosure: I own gold mining stocks.

Comments

[prairiedog555:]

I remember the Carter years. We were made to feel ashamed to be Americans, industries failing, and had inflation without jobs.
It was a bad time, and I think it is coming back.
I am an independent, did not like Pres Bush policies, (he betrayed conservatives and created Pres. Obama) but these far left people are starting to scare me.
Just thinking of Cap and Trade restrictions at this time is insane.

Oct 21 07:59 AM

[Dave Wrixon:]

"The fate of the dollar and the world economy is in the European central bank's hands."

So much for the Strong Dollar Policy. The US is now blaming us for the financial mismanagement, it would seem.

Oct 21 08:15 AM

[Dave Wrixon:]

China has been stimulating consumption, but it is not going to help if nobody actually wants to buy your stuff.

But then you hypocritically want the US to stop free trade, even though you expect the Chinese to market your gear to their own people.

Of course economic forces will redress the imbalances but it will take a lot more than a 20-30% devaluation to get the dollar roaring back. But it is likely to result in capital flight that will paralyze the economy for a decade. That is what happened in Japan. The Japanese took nearly twenty years to realize they could not solve their problems with a weak currency.

Oct 21 08:31 AM

[Bill Jencks:]

Howard,

Perceptive article this. Especially since Jean-Claude Trichet has been begging the Chinese to lighten up their policies, he even admitted that the Euro was never designed to be a strong world reserve currency.

My view, as you know from past comment, is that the Chinese are in charge of the gold price and therefore have full reign over the US dollar value now. They will let the dollar fall to a level that they want, not the US govt. After this they are likely to maintain a fairly stable dollar -- until they have slowly and sufficiently reached a point when the dollar no longer is a dependency. Then it's anybody's guess.

I don't think the Chinese will let the dollar fall yet, it just wouldn't benefit them.

Oct 21 10:43 AM

[zagrebzagreb:]

Sure... but the Chinese somehow stimulating their internal market and suddenly turning into a large consumer?

This is absurd... 80% of the Chinese population is rural, meaning life is semi-primitive. Imagine neighborhoods that go dark at night because there is no electricity, and you have some idea of what rural China is like.

Oct 21 11:01 AM

[Darrell:]

You made good points, but the fact still remains that the dollar is accepted by most central bankers as legal tender in their country. When I paid for my hotel bill in Prague I was paying in dollars (through my Chase Visa Card) and the hotel then converts the dollars into their currency. The central bank then keeps the dollars in their vault, to be reinvested, usually in American debt securities, and usually treasury debt.

For a long time foreign investors and foreign institutions invested in dollars because our dollar remained stable while their country’s currency depreciated.

Now the world is a-washed in dollars, and central bankers are powerless to stop the continued flow of dollars into their treasury. Our policy wonks think that eventually foreign dollar holders will be forced to spend their dollar holdings buying American made goods, services, and/or assets thus creating the tax revenues needed to pay down our large debt.

And we do see foreign dollar holders spending dollars on commodities, on goods, on services, etc. but they are buying from other countries or foreign companies so the transactions are not taxed by the IRS. At the same time we see more and more Americans retire abroad because they cannot live on their meager pensions in the US.

By now, most investors know that central bankers no longer want to use the dollar as a global currency, or, for that matter, any other national currency as a global currency. Our former enemies and now our competitors: China, Russia, etc. are leading the charge, but other countries have joined the quest to change the current global currency system into a currency system that will be independent of national control.

The dollar is now in a transition stage, and I expect at some point in this transition the American government will no longer be able to dominated debt from foreign lenders in their own currency. And, this, my friends, is why I think the dollar is going down in value.

Oct 21 01:11 PM

[Howard Richman:]

Dave,

You are correct that China has been stimulating consumption, but only for items that are made in China.

China is practicing mercantilism, the policy of maximizing exports and minimizing imports. Unilateral free trade still works when trade is balanced, but it doesn't work when your trading partner is practicing mercantilism. The way to fight mercantilism is to insist on balanced trade.

Howard


On Oct 21 08:31 AM Dave Wrixon wrote:

> China has been stimulating consumption, but it is not going to help
> if nobody actually wants to buy your stuff.
>
> But then you hypocritically want the US to stop free trade, even
> though you expect the Chinese to market your gear to their own people.
>
>
> Of course economic forces will redress the imbalances but it will
> take a lot more than a 20-30% devaluation to get the dollar roaring
> back. But it is likely to result in capital flight that will paralyze
> the economy for a decade. That is what happened in Japan. The Japanese
> took nearly twenty years to realize they could not solve their problems
> with a weak currency.

Oct 21 05:02 PM

[Channon:]

You forgot "Scenario 4": Raise taxes on the highest income earners. It would help balance the budget without causing any meaningful reduction in consumer spending. The marginal propensity to consume among this group of individuals is extremely low. In the aggregate, it would likely be a wash when you factor in the positive wealth effect from the rising stock market and housing markets.

You forgot this because (having read your older posts), you are opposed to progressive taxation, right?

But, to your third scenario, the "collapse" of the dollar -- the US is NOT Brazil. We can still be a self-sufficient nation. We produce more food than we can consume, and we can still produce cars. We really only need oil. This prospect, of the US becoming self-sufficient, should scare the crap out of most nations on earth, as their economies rely on the US buying from them. They need the dollar to retain some value, as much as the consumer shopping for 52" TVs.

Oct 21 05:45 PM

[Howard Richman:]

Channon,

You are mistaken. I favor progressive consumption taxes including the FairTax and the USA Tax. See Chapter 8 of our book:

www.idealtaxes.com/tra...

Howard


On Oct 21 05:45 PM Channon wrote:

> You forgot "Scenario 4": Raise taxes on the highest income earners.
> It would help balance the budget without causing any meaningful reduction
> in consumer spending. The marginal propensity to consume among this
> group of individuals is extremely low. In the aggregate, it would
> likely be a wash when you factor in the positive wealth effect from
> the rising stock market and housing markets.
>
> You forgot this because (having read your older posts), you are opposed
> to progressive taxation, right?
>
> But, to your third scenario, the "collapse" of the dollar -- the
> US is NOT Brazil. We can still be a self-sufficient nation. We produce
> more food than we can consume, and we can still produce cars. We
> really only need oil. This prospect, of the US becoming self-sufficient,
> should scare the crap out of most nations on earth, as their economies
> rely on the US buying from them. They need the dollar to retain some
> value, as much as the consumer shopping for 52" TVs.

Oct 21 08:35 PM