Are Reports of the Dollar's Death Premature? 9 comments
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In today’s highly charged political environment, apparently everything and anything is game for the machinations of partisan political hacks. Even the U.S. dollar has been pulled into this. So much so that it is generally believed and accepted that the US dollar is kaput, done for, worthless. And that the blame resides on the shoulders of Obama and his young administration.
But what if we step back from the raging and weeping talking heads on TV and instead of opinions, we just look at the facts?
Here is a chart of the US dollar for the past quarter century:
Reagan’s presidency presided over a boom and bust in the dollar - with the bust being the winning side. Trickle down didn’t really work but the deficit ballooned as tax cuts to the wealthy reduced government revenues. In 1989, the Republicans continued control of the White House with George H. W. Bush’s presidency. While his administration managed to avoid a similar feat, the US dollar fell to new lows during the first half of his term.
The US dollar regained 50% of its value during Clinton’s presidency. You could argue that it was due to the balanced budgets and the elimination of the federal deficit. Or that it was due to the increase in the tax burden on the wealthy. There was even talk of reducing the federal debt. All that ended with the advent of the George W. Bush administration.
Budget deficits and the US debt ballooned due to massive spending increases as well as tax cuts for the wealthy. The result was another major decline in the US dollar. Almost at the end of Bush’s second term the US dollar fell to multi-decade lows but recovered slightly as the last days of his administration drew to a close.
And that brings us to the present day with President Obama. He inherited an economy which almost overnight went into free fall. While I don’t agree personally with the measures taken to buttress the US economy, it bears noting that the US dollar is still above its recent George W. Bush low. Also, as a contrarian, it is difficult to ignore the incredibly bearish view on the dollar right now.
So talk of a US dollar crash is either prophetic (if it becomes true) or Chicken Little-ish (if it doesn’t). And while 25 years or so is too small to make judgements on which, the Republicans or Democrats, are the better custodians of the US dollar, it is reminiscent of the counter-intuitive result of looking at the returns of the stock market under different political banners.
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Babak:
Thanks for examining the U.S. dollar under both parties.
The lesson from the last 25 years is that BOTH PARTIES have helped inflate the deficit, and undermine the solvency of our country. What makes the dollar weakness so frightening are the long-term reasons for pessimism: America has debts it cannot pay, and foreign investors know it. They are buying gold and Euros since it's clear that the math doesn't work anymore for the debt-addicted U.S. economy.
You are right to say that Obama inherited a mess. And both parties have been profligate: Republicans took us into a war we cannot afford, and Democrats want to expand our health care obligations when we cannot afford our current social entitlements (Medicare and Social Security will begin to bankrupt the country when they become cash expenses in three years). The Federal Budget is fiction, since it grossly understates our military and social obligations.
I try to be cynical, but it's hard to keep up. (Lily Tomlin).
Fortunately, Goldman Sachs is still printing money, and Google is set to dominate the Internet and what's left of the free world. Today's college grads can aspire to work there, or to polish their shoes, trim their lawns, and tend to their pets.
Rob
What we have now is 1. A massive debt. 2. The coming retirement of the Baby Boomer generation. 3. Exploding health care costs, with neither party having a serious interest in controlling costs (the Republicans wanting to continue the current mess as is, the Democrats wanting to tweak the system a little to add coverage for the uninsured). 4. The dominance of both parties by Wall Street bankers (who have the philosophy privatize the gains, socialize the losses); thus both parties favor massive banking bailouts--as well as numerous other special interests. 5. Both parties supporting massive, increasing deficits (the Democrats more by spending on social programs, the Republicans more by tax cuts for the rich, expanding defense spending). 6. Peak oil. 7. The transfer of American manufacturing abroad. 7. An American culture hostile to thrift, hard work and other traditional American values. 8. A general agreement by everyone to kick the can down the street; mortgage the next generation.
On the demand side, with ALL of the U.S.'s trade partners having lower trade and/or budget surpluses, there has been a MASSIVE reduction in the amount of money available to soak-up U.S. debt (and increased UNWILLINGNESS to do so).
Secondly, the U.S. dollar is steadily losing its status as "reserve currency". Announcements of new bi-lateral or multi-lateral trade agreements to exclude the USD as the currency of settlement have gone from being MONTHLY occurrences to WEEKLY occurrences. And the IMF "SDR's" have already been announced as a vehicle to further "wean" the world off of U.S. dollars. This will result in an even LARGER drop in demand.
HUGE increases in supply, and HUGE decreases in demand mean a much lower dollar.
2. The dollar "carry-trade". The U.S. economy is carrying roughly $60 TRILLION in total public/private debt. This means the U.S. government can NEVER (voluntarily) afford to raise interest rates again. Even a 1% rise in interest means an EXTRA $600 BILLION per year in interest payments (equal, by itself to a 5% drop in GDP). The spin-off effects of those increased interest payments would likely lead to an ADDITIONAL 5% drop in GDP.
This has established the dollar as the NEW "carry-trade" currency. It is an inevitable fact that the carry-trade effectively results in a HUGE increase in supply (of USD's) - further aggravating the fundamentals in (1).
3) The worth(lessness) of the USD. With the dollar no longer backed by gold, this means there is NOTHING "backing" the dollar except the net worth of the U.S. economy. With $60 trillion in public/debt, plus ANOTHER $70-$100 trillion in "unfunded liabilities" (for the federal government), the net worth of the entire U.S. economy is a huge, NEGATIVE number.
This means the actual VALUE of a U.S. dollar today is ZERO. To suggest that a worthless currency, with horrible supply/demand fundamentals can go anywhere but DOWN is (to be polite) wishful thinking.
Yes, the corruption started a long time ago but it has been brought to a much higher tempo lately.
The ability to tax is only meaningful (from the perspective of dollar-holders) if the U.S. government can USE that ability to IMPROVE its wealth/creditworthiness.
The problem is that U.S. structural deficits are now so large that the "ability" to tax no longer even POTENTIALLY allows the U.S. government to do so.
With a less-than-zero net worth for the United States AND no possibility of simply breaking even on a cash-flow basis, the ability of the U.S. government to tax becomes irrelevant with respect to providing any "value" to the dollar.
On Nov 05 03:20 PM Mark Anthony wrote:
> Jeff:
>
> I agree with most of what you say. But I take problem with the follow
> paragraph:
>
> "3) The worth(lessness) of the USD. With the dollar no longer backed
> by gold, this means there is NOTHING "backing" the dollar except
> the net worth of the U.S. economy. With $60 trillion in public/debt,
> plus ANOTHER $70-$100 trillion in "unfunded liabilities" (for the
> federal government), the net worth of the entire U.S. economy is
> a huge, NEGATIVE number."
>
> No. Not at all. The dollar is NOT based on the full net worth of
> the US economy. It is based on something much less, and become even
> lesser.
>
> 1. First the dollar is based on the full faith and credit of the
> US Federal Government. The US federal government has faith and credit
> because it has the ability to tax the American people.
>
> 2. Second, the full faith and credit of the US Federal Government
> itself, is backed up by the full faith and credit of individual states,
> and the people, in supporting the federal government. Such faith
> and credibility is fading, unfortunately.
>
> Note, individual state and individual rich persons, CAN choose to
> walk away from that faith and credit in the US federal government,
> and remove themselves from the jurisdiction, if they believe this
> government is no longer acting on their best interest.
>
> Consider the US federal government as a corporation, and the dollar
> as the stock. This is a now bankrupt corporation which has lost its
> credit worthness.
>
> Why it is no longer possible to avoid a total collapse of the dollar:
>
> seekingalpha.com/user/...
"Trickle down didn’t really work but the deficit ballooned as tax cuts to the wealthy reduced government revenues."
-Babak
Actually the Reagan-Thatcher economic policies broke the back of inflation and socialism, and produced a dramatic bull market with historical levels of wealth creation for everyone for a generation.
His "tax-cuts for the wealthy" were actually across-the-board cuts in tax rates which resulted in more -- not less-- more government revenue, as well as more job creation and economic growth. The problem was that Congress kept spending money even faster which produced the deficits; at least one or both houses of Congress were controlled by the Democrat party for Reagan's entire two terms as President.
"The US dollar regained 50% of its value during Clinton’s presidency. You could argue that it was due to the balanced budgets and the elimination of the federal deficit. Or that it was due to the increase in the tax burden on the wealthy. "
-Babak
This is what I will argue: Again, look who controlled Congress. Gingrich swept into power in 1994 with his Contract For America, which allowed Republicans to control both houses of Congress for the first time in 40 years. Look at charts of the S&P; the point at which Congress got adult supervision, is the exact point at which the market took off like a rocket shooting upward for 6 years, yet Clinton gets all the credit.
However, the "elimination of the federal deficit" never happened. Although there was a "budget surplus" in 2000, it never materialized in reality, and was consumed by yet more government spending. Thus in no year did the national debt ever go down under Clinton, nor did he leave President Bush with a surplus.
If you seriously think that Obama-Bush-Bernanke is good for the dollar, then you can make a lot of money ... just buy a few hundred thousand dollars' worth of UUP. Good luck wit dat; smart money will be doing the exact opposite.