Well, the dollar is going to have problems from the outside view in the long term - I don’t and won’t dispute that. We have passed the point of having any credible message as to how we’re going to contain deficits for the next three years, and absent a huge sea change in DC, I don’t think we have a credible message after the 2012 elections, either.
The unfunded liabilities in entitlement schemes are already showing that they’re reaching their tipping points a decade earlier than projected; for the last five months, Social Security has taken in less money into the “trust fund” than it has disbursed - in other words, the tipping point predicted (variously) in 2014, 2018, 2019, 2023, etc - it is here and now: social security is now having to be made whole by the general fund.
So for investors in long term US debt (ie, longer than 2 year paper or especially in 10-year notes), there is a very real issue here. There’s only one likely outcome for foreign paper holders, and that will be devaluation of the USD.
There’s a little wrinkle in the worldwide economic situation, tho, which causes informed speculators to question the “dollar is going to die” scenarios: other countries are starting to devalue their currencies - and quickly. Too many countries are waking up to the prospect that a declining US dollar will hit them in their export-based budgets - and hard - and they’re devaluing their currencies to counter the falling dollar.
It is interesting that you mention Japan’s economy. There are news stories out (from Bloomberg, so I won’t post them here) about Japan mentioning a possible large sale of the yen to reduce its value vs. the USD. The Japanese are talking with EU-zone banks on bringing down the value of the yen. Why is this coming about?
In part, because Japan depends on exporting to the US consumer. A strong yen makes Japanese goods go up in price (no big mystery there), but it also devalues the large wad of US debt that they already hold - two huge pains in the rump for the price of one!
Well, the debt devaluation can be managed (to some extent) by manipulating your own currency. Oh, and since Japan is dependent upon exports to the US, they have a happy coincidence in seeing their exports remain competitive.
This isn’t going to be a one-off situation. Nooooooo. All countries that export to the US are in the same boat.
Consider Vietnam’s actions on Wednesday:
http://online.wsj.com/article/SB125928712852165885.html
If we’re now starting to see competitive currency devaluations, trade wars won’t be long behind.
Oh, and BTW — this week, Japan reported that their consumer prices fell by 2.2%, reinforcing the threat of deflation. The Japanese government is scratching their heads, wondering “WTF can we do now?” that they haven’t done before, with little success. Trouble is, manipulating the yen vs. the dollar is one of those things - last done in 2004 (if my memory serves). And yet, their economy is still in a go-nowhere funk.
Excellent information-rich post. Thank you. I hope you don’t mind if I pepper you with questions as I digest it. If you do, I guess you can always just ignore me. :-)
>> Too many countries are waking up to the prospect that a declining US dollar will hit them in their export-based budgets - and hard - and they’re devaluing their currencies to counter the falling dollar.
It’s clear to me how China would revalue its currency, because it’s a more-or-less hard peg. Of course, they’ll go up against the dollar and others, not down. It’s also vaguely clear to me how ONE country might devalue its currency against everyone else’s.
But when “everyone’s doing it”, how is it done? What is the mechanism by which “the world” will devalue their currencies? That part I don’t get. I’m not disputing that it will happen, just seeking to understand HOW.