Posted on 09/29/2007 10:37:13 AM PDT by frithguild
SINCE THE FED CUT interest rates by 50 basis points last week, the U.S. dollar has fallen by 1.7% against the rest of the world's major currencies. That may not sound like much, but it's actually a big move in the context of world currency markets. And it's especially notable because it takes the US dollar to a new all-time historic low.
Should anyone be surprised? The Fed's interest rate move was larger than expected, but its effect on the dollar could easily have been forecasted (in fact, I did, repeatedly, in this column). In essence, the Fed's move put more money into circulation to prop up what the central bank expects will be a weakening economy. When the Fed prints more dollars, then dollars become less scarce. So the price of dollars falls, just as the price of apples falls if a farmer produces a lot more apples and apples become less scarce. It's pretty basic economic logic.
And it's also basic logic that when the value of the dollar falls, the price of everything in the world — the dollar price, that is — tends to rise. So we shouldn't be surprised to see the price of basic world commodities like gold and oil make new highs after the Fed announcement, just as the dollar made new lows. Over time, all the prices — in dollars — for all the world's goods and services will make similar adjustments.
Yes, we call that inflation. It's not a good thing.
Yet we often hear market commentators saying it's good for the US economy if the dollar falls. The story goes that this lowers the price of US goods and services on world markets, and makes them more attractive to foreign buyers.
But let's check that proposition against simple logic. Let's say the dollar drops by 10%, so foreigners want to buy more US wheat because it seems so cheap. Farmers will sell a larger quantity of wheat and take in a larger quantity of dollars. But each one of those dollars will be worth less than it used to be — the dollar price of oil and everything else the farmer buys has gone up from his perspective. In the end, has anything really changed?
That depends on who you are. Maybe you'll be a winner, maybe you'll be a loser.
If you are a saver, you will be a loser. When the value of the dollar falls, the value of your savings falls, too. It's that simple. But suppose you are a borrower? Then, when the value of the dollar falls, the value of the debt you must eventually repay falls, too.
So it's not "good for the economy" when the dollar falls. Some people and some industries may end up winning more than they lose. But overall, the economy will suffer from all the costs and dislocations that result from suddenly having the value of the currency in our pockets and in our bank accounts arbitrarily changed.
Yet our government is doing everything it can to make the dollar fall. The Fed, which plays the largest role in determining the dollar's value, has made it clear that nothing is more important than bailing out the housing industry from its subprime lending excesses — and if that means flooding the economy with dollars, and driving the value of the dollar lower and lower, then so be it.
Congress and the White House are, in their own way, making a similar mistake. By brow-beating China to raise the official exchange rate of the Chinese currency, the yuan, they are implicitly saying that the value of the dollar should fall.
But that wouldn't really accomplish anything. If the value of the yuan were to rise, then the price (in yuan) of everything in China would fall. It would be deflation — the opposite of the inflation we will experience in the US because the dollar is falling. So once it all settled out, our dollars would still buy the same amount of Chinese goods that they do today. We can't escape the reality that people in China are simply willing to work for less and sell for less, so their goods and services are a bargain on world markets. It has nothing to do with their currency.
In worrying about a weak dollar, it may seem on the surface that I'm in the same camp as Warren Buffett and others who have warned that the US economy is an over-indebted time-bomb, and that the dollar will eventually collapse because of our profligacy. That's not where I'm coming from. I think Buffett's analysis is utterly wrong. The value of the dollar has almost nothing to do with the strength of the economy.
How come the dollar surged while the economy was weak in 2001 and 2002? How come the dollar fell as the economy strengthened from 2003 to the present? Clearly, there is no relation between economic strength and the value of a currency.
No, it's all about the Fed. It's all about how many dollar bills they churn out of their printing presses, and how many helicopters they use to rain those bills down upon our heads. That's all that matters.
So what do we do now as investors, given that the Fed is gearing up the printing presses and revving up the helicopters?
Again, simple logic. Buy the stocks that are the most immediate and obvious beneficiaries of inflation — energy and basic materials. Those two sectors have been the best-performing since the stock market bottom on Aug. 15, and I think they will continue to be. Export-driven industrial and technology companies should be winners, too, at least in the short run.
But in the end, let's not have a lot of illusions about this. Inflation is not good, and inflation is what we are going to get here. There will be winners and losers, but ultimately we'll all be losers. Someday the Fed will have to jack up interest rates sky-high to stop the inflation it's now causing.
Donald Luskin is chief investment officer of Trend Macrolytics, an economics consulting firm serving institutional investors.
I think the highest price for gold was 828 and the lowest for USD was 73. Still a ways to go.
It's brilliant strategery! When all those foriegners holding greenbacks are screwed over by our worthless paper, we win!
Putin, Ahmadinejad and the New Currency Cold War
canada.com | September 28, 2007 | Diane Francis
Posted on 09/29/2007 2:08:52 PM EDT by Tailgunner Joe
http://www.freerepublic.com/focus/news/1904151/posts
IMO, it doesn’t hurt to buy some gold, even if it’s a relatively small amount, to diversify a bit.
Some “experts” say gold YES; some “experts” say gold NO, but I figure I’m ready for whatever happens.
The 1980 gold high does not take inflation into account. It will have to go well over $2,000 to reach the high.
Do you seriously believe that, or are you joking?
It’s Series for sure!
How do "we win" when WE are left holding our worthless paper?
I've diversified in gold and Euros but not nearly enough.
For countries which want to buy U.S. goods, the decline in the dollar is a very good thing - U.S. goods are cheap. For tourists from Europe and other places, the U.S. is a great place to visit - its cheap and they can come and spend, spend, spend.
The cheaper dollar is a good thing for the U.S. Europe is trying to find ways to change the equation - they don’t want the dollar to be so much cheaper than the Euro.
History actually proves him correct.
If you are just comparing the dollar to every other currency, such as pesos, yen, aussie dollars etc.
But the dollar is not just another currency in the basket.
The problem is that once the US dollar loses its position as world reserve currency, (and it is now headed that way), then a series of consequences will occur far beyond balance of trade issues.
Yes, that certainly worked against the Japanese, and I suspect it will even more so against the Chinese. Years from now, we’ll marvel at the chaos in China as their economy goes from a recession to a long brutal depression.
China has played a dangerous game with their currency, pretty soon the dam will bust and instead of a few folks dying downstream, the whole nation will be washed away.
Adam Smith in Wealth of Nations tried explaining this situation to the Brits in 1775, but even then as now, the Brits thought somehow they were being screwed in an import economy. And back then, gold indeed did back the currency. If trade isn’t fairly done, it corrects itself at the expense of the cheater. Pretty funny really.
I’m not a genius, I do work in the field and was smart/lucky enough to buy PJ O Rourke’s book “On Wealth Of Nations”.
Ok, go ahead and describe these domino effect consequences?
Yet the candidate that advocates sound money and fiscal policy is treated as a crackpot.
Among the many advantages of this arrangement, all oil contracts have been denominated in dollars, artificially propping up its value, in spite of its massive creation out of nothing to finance our welfare state, consumer habits, military spending etc.
It's might handy, when playing Monopoly, to be the one player at the board who can simply declare at any time that he has found another stack of $500 dollar bills...that the other players must take for hotels etc. Under such rules, it's very easy for that banker/player to think he is the all time genius of Monopoly players...but this does not endear him to the others at the board.
But even this golden goose can be killed through massive overuse, as we are about to see. And once the dollar dumps into the crapper, this situation will be over, and the dollar will be no more special than the Argentine peso, and there will be no limit it its ultimate fall. NO one will need to convert their national currencies into dollars to buy oil (the Japanese are already buying oil directly in Yen, the first break with the system.) And as banks around the world are damaged by the current credit squeeze, these countries will increasingly blame "poisonous" or "toxic" CDOs originating in the USA for their problems, further turning the world off on dollars.
Even today the Chinese are not showing up at the treasury window, and without them taking our new bond issues, we are screwed.
These are all consequences of the dollar losing its unique and exalted position as the world's reserve currency.
I'm joking. But that is an argument I have acually seen made on these boards by people who really believe that We're America, By God, And The Rules Just Don't Apply Cuz We're The Bestest Ever!
I’m sorry, but all your describing is the consequences of a weak dollar. Yes, other nations decide, temporarily, that there must be a better instrument. A weak currency has effect in that the current state of affairs makes domestic business much stronger, thus more valuable. This weak dollar has what affect on domestic ag biz, auto sales, Boeing, MSFT INTC CSCO ORCL..., medical equipment, tourism, etc? Also, do you realize many American companies are borrowing in foreign currencies now, and doing share buy backs? They intend to pay these loans back, at a discount...
When a deal is made for US cash, not goods, the cash must do something. If they don’t sit on the cash, they must trade it away, buy US securities, R/E, US business interests, or something.
It appears that to a great extent, they’ve traded it away to the lowest bidder, making the currency weaker. At some point, that imbalance becomes so great, that uppity Londoners fly to NY for back to school clothes...
What we are talking about is a financial chess game, that always results in the US returning to the “runner” of the board. Within months really, the USD should rally, this will bring foreign money back to the US equity and bond market, the domestic returns will be very nice.
I feel sorry a bit for the misguided public that has been again tricked into buying foreign stocks and bonds at the peak in the cycle.
“I’ve diversified in gold and Euros but not nearly enough.”
It’s hard to know what is enough, since we can’t predict the future, including the “experts.”
Also, wouldn’t gold be better than Euros, in case the European Union gets in trouble?
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