Asbytec

The U.S. Trade Deficit and the Dollar

Imagine that. We run trade deficits and they buy us out with our own money. I wonder what ever happened to the days when trade deficits were settled in gold.

Good argument for the decoupling myth. China could not buy it's own products, it's middle class is just not big enough. A rough guess, it would have to be as large as the American and European middle class combined (roughly) and about as wealthy.

In any case, I like to hear arguments in favor of a strong dollar. Thanks for the insight.

Greenback's Slumped on the Canvas

Hmmm...the 19th century belonged to England because of it's economic and military empire. The sun never sat until the 20th century. The US, same economic and military empire in the 20th century. Will china have some global military reach this century?

I imagine China's resources are largely untapped and it has massive human resources. It's production is unequaled today. But, one problem is China has not a sufficient middle class, yet. And is still, best I can tell, a command economy (with a free market interface.)

Interesting thought, though...

Greenback's Slumped on the Canvas

The "beggar they neighbor" has begun. Has the eventual collapse of all (most) fiat currencies begun as well? "All fiat currencies fail, and all currencies are fiat."

It's like having that root canal, it'll hurt but not after it's over. And when it's over, my bet is the dollar will be on the top of the heap. I think most central banks believe that, too. I suspect that's why none bought into the euro in mass while it was $1.26. Sure, there is some diversification...but not a wholesale flight from the dollar some have speculated.

Scary times. The greenback is certainly on the canvas with the euro moving in for the choke hold. But, the euro just does not have the demographics or might to supplant the dollar. The EU could never support huge trade imbalances with China.

U.S. Dollar Index Has 5th Biggest Decline Ever

Look, most people in here are well aware of the evils of the fractional reserve banking system. Debt is money. A consequence of this growing debt is it can never be fully paid off. When debt plus interest becomes excessive, the banking system collapses.

This is where we stand, now, I believe. We can pump money into Citibank and others, but we are just prolonging the inevitable and making it worse. Though, I applaud the Fed's liquidity injections as a soft landing measure, as ill fated as it may be.

Of course, the end result will be inflation. Commodities will rise in price, and we'll see it at the pump and in the grocery store.

Now, how does one get out of that situation? Well, according to conventional wisdom, increased government spending, eh? Well, the government will rely on Fed printing money and on various debt instruments. But, to rely on debt instruments, the dollar best be strong (or the promise of a stronger dollar at maturity.)

That's what I am banking on (pun not intended) to pull us out of this thing: a strong, respected currency. Now, only if Obama will act in such a way remains to be seen. He must restore confidence in our banking system for those who believe in it (I am hoping for an complete overhaul) and to our currency.

"No nation has ever devalued itself to prosperity." All fiat currencies collapse, and all currencies are fiat. So, it's a race to rebuild fiat confidence. My bets are on the US wining that race.

U.S. Dollar Index Has 5th Biggest Decline Ever

Get them while the dollar is strong...

U.S. Dollar Index Has 5th Biggest Decline Ever

This slump was expected earlier this week and is predicted to be short term. The economic calendar is fairly sparse and risk appetite has returned, especially with Obama's cabinet announcements and the Citibank bail out.. Swellman is right.

www.actionforex.com/te.../

"The US Dollar looks set for near-term loses as a correction in deeply oversold risky assets sees capital flow out of the safe-haven currency, bolstering the forex majors."

On the euro:

"Prices have settled in a wide range roughly defined between 1.30 and 1.25. This is the first meaningful period of pause that the pair has seen since the multi-year uptrend was snapped in mid-July, suggesting a large move may be in the works. Seeing continued divergence, we remain of the view that an upswing is in the cards before the dominant bearish bias reasserts itself."

"Next “soft target” aims for a test below 1.2160."

The pound:

"Our strategy here remains broadly unchanged as we look for a bullish correction to yield a favorable short entry into the dominant downtrend."

Remember, the dollar is already pricing in a 50bsp cut next month. The ECB and BoE will cut aggressively in the coming months. And, importantly, the EuroZone is in deep trouble, too. Not just us. We happen to be benefiting from a popular administration ready to take office, too.

Why the Dollar Has Rallied During Current Crisis

I nuderstand fully well the dollar is benefiting on risk aversion. I also understand the risk of inflation. All of this is correct. Most articles one reads are limited to one subject, for example this one. It talks about the dollar rally during this crisis.

I also understand, and want to share with other readers, a broader dollar outlook.

First, we will come out of this crisis a different financial animal than we went in. One would bet the drivative market will be tightly regulated and will have some transparency. And, sure, no one will be buying into home mortgages anytime soon. So, I assert, the money supply will be at a lower level than previously.

Second, if Obama is to entice China into continuing to fund our debt, bail outs, and stimulus, he will have to restore confidence in our finjancial markets and economy, period. The dollar, being a fiat currency, benefits from this confidence.

Now, sure enough, inflation will rear it's ugly head at some time in the future. I hope later rather than sooner, as I believe we all do. So, the Fed will agressively fend off inflation through it's normal means: intersst rate hikes, higher reserve rates, etc. However, the timing will be very critical, we'll have to be showing sure signs of a recovery, I guess.

So, beyond the risk aversion, there are forces acting (or will be acting) in favor of the dollar during the coming year. And despite the return to risk appetite due to the Obama appointments and Citi bail out.

The dollar might slump a little before thing get better in the longer run. But, I am hopeful they wlll get better, and before the EuroZone can apply full power, pull the nose up, retract gear and ease up the flaps on it's economy.

Regards

Why the Dollar Has Rallied During Current Crisis

5-Cash in theirs... :-)

Why the Dollar Has Rallied During Current Crisis

David, the yen is appreciating from flight from the carry trade brought on by volatility and loss of interest rate differentials, as you are no doubt aware. No one will borrow yen at 0.3% from Japan to lose 50% of it in the current, falling markets and commodity prices.

The nearly dead carry trade is the primary source of the yen's current strength. Realizing, also, the yen carry is responsible for nearly 10% of global liquidity, such a rise is not surprising. And it underscores the depth of this crisis brought on by (what should have been) a simple US housing market down turn.

The dollar is certainly benefiting from risk aversion. No doubt. But, it should, I say...should...benefit from a drop in MZM globally. I argue this crisis is a liquidity crisis. Much of it (in dollars) is disappearing faster than the Fed can print dollars. So, there appears to be some other forces supporting the dollar in the longer term.

Credit appears to be severely down, so less trade puts fewer dollars into the forex and eventually into the PBoC coffers. Blah, blah, blah...I'm repeating myself.

As for inflation eating away at investors treasuries, the basis of a fiat currency is confidence the Federal government will not act to change the value of it's currency markedly. The Fed will have to get control. If not, we're sunk. I assert, the reason the dollar has been so devalued in the past few years is the immense addition to the money supply brought on through the housing market derivatives.

People call the Fed inept. No wonder. They have no control over the enormous amount of money out there...75% of global liquidity, of which MBSs make up some portion. I just don't think the Fed or congress will let that happen again. Once bitten, you know...

Why the Dollar Has Rallied During Current Crisis

Oh, one more thing. As stated in part 1, the dollar is a fiat currency. It's value is no longer pegged to gold. It is pegged to confidence. As long as a nation acts in the best interest of it's economy, the fiat currency retains investor confidence.

One could argue, and I have, part of the rise in the dollar is confidence. The US Fed, despite the hate mongering, has been acting to correct this down turn since (at least) October last year when Bernanke asked congress to shore up the GSE's and act to prevent foreclosures.

One could also argue the Fed is not acting in our best interest by printing money at it's current rate. I've argued, but no one seems to agree, this is actually in our national interest. We have to act, and we did act. We took steps to pull back the reigns of recession before anyone else. We're building confidence in ourselves and, by extention, our fiat currency.

Our current crisis is a liquidity crisis. The Fed is trying to boost liquidity.

I know some have put forth the idea we're in a solvency crisis. And others have argued we're in a "transparency" crisis. Both have some merit. But, those are arguments for another day.

What's scary is, all fiat currencies have failed. It's gonna be a matter of timing and pure moxy to maintain confidence in the dollar. But, we're pretty well equipped for the task.

Why the Dollar Has Rallied During Current Crisis

Well, the author may be correct. But I am sure the Fed will be all over inflation when we begin to show clear signs of recovery. Rates will rise, and the money supply will tighten a bit.

Furthermore, I am confident Bernanke understands how we got us into this crisis. And part of that reason concerns the Fed's lost control over the money supply generated by the lucrative derivative market. I am hopeful the Fed will fight to regain control, and I for one will hold congress to it's constitutional mandate to regulate the price of money. Now, if everyone else will join me...I cannot do it alone. :)

Now, I do not dare to believe we will eliminate those weapons of mass destruction: derivatives. They are just too necessary, in many ways, in our current financial system to be relegated to history. But, I'd bet they will be heavily regulated and monitored.

We must have learned a lesson of easy credit. I suspect after we begin to recover, and we will recover to dominate as the world's premier economy, credit will be a little tighter for many years. We will come out of this crisis a different animal than we went in as.

Furthermore, Obama states on his own web site he is a fair trader and a strong dollar advocate. There will be some pressure to revalue the dollar after all this is said and done. So, I do not believe all is lost for the dollar, even in the long term.

China Continues To Consider U.S. Treasuries Its Best Option

Ary, I agree with you except for the last sentence. Everyone wants to blame Bush. Okay, I'll concede he could have acted more decisively. But, this thing has been building through many presidential terms, including Clinton's. It just happened to fail on Bush's watch.

As far as I am concerned, Paulson, like everyone else including Bush and Clinton, turned a blind eye as long as times were good. As long as people 'felt' richer due to the the wealth affect (which means it's just an illusion of wealth) through higher credit card limits and home equity, hey why stop the gravy train?

Its easy to look back and say the regulators should have stopped this thing, including not allowing huge trade deficits to build with China. So, one has to be careful about tossing stones. But, congress should have been all over this thing from day one. See, I see this as a money supply problem and congress has a constitutional mandate to set the price of money and reign in Greenspan.

But, we buy China's tennis shoes, they buy our bonds. That's how it works. Also, defending Bush in the slightest always earns me a "thumbs down." LOL

China Continues To Consider U.S. Treasuries Its Best Option

China needs to finance at least 6% growth to keep the migratory flow of workers into the urban areas from reversing. How do you think they will finance that. Right, through stimulus packages funded from reserves. That's plan B.

Plan A is to do whatever it takes to keep American consumption flowing. And investing in American debt will help. They certainly do not want to deplete their reserves. Huge reserves have given them a voice on the international stage. They will not give that up lightly. As mentioned above, China will do what's in it's own best interest.

Still believe China will diversify into the euro on a massive scale? Think again, the EU is in serious, serious trouble, more so than the US. German backs are more heavily leveraged than US banks and England has no real industry outside of the financial industry.

I believe the author is dead on, in addition to the reasons I assert are true.