Sunday, September 13, 2009

US$ is back on the Ropes

"Houston, we have a problem".

Forget comparing the US$ to the Euro.  They are in the same boat as we are.  Compare the US$ to the currencies of the Asian industrial exporters, Oil, Gold, etc...

Read this.  Then consider what the cure is. A nation whose regulatory system, tort system, and government spending has precluded that nation from providing basic goods and services to itself is not long for political stability.  How will the markets bring this back into equilibrium?  By making the US$ fall versus the currencies of the economies that are eating the lunch of American industry.  There is no other way.  And that means... Drum roll... import price inflation EVEN IN AN ENVIRONMENT OF MONETARY DEFLATION.

In other words, in layman terms (I am the epitome of a "Layman"), while the banks may continue to shrink credit to the American economic system our trading partners are going to demand more for less. That $2 tool from Home Depot?  That'll be $10 please.  This will go for imported food, vehicles, clothes, electronics, OIL, chemicals, etc...

On a macro basis, there is little that can be done to prevent this given our sh*t stain of political discourse: Our smug Left, who in addition to being innumerate (can't count and can't work a calculator)  lay their claim of intellectual enlightenment at the feet of the murder of innocent children and gay marriage; and our mean spirited Right who never met a problem that couldn't be cured with more prison space or the bombing of innocent children.

I long to hear the "thud" of their deceased bodies hitting the floor.

But I digress...

I have been a US$ bear for years, but a few weeks ago I thought that this sell off was overdone.  No more.  The only reason the US$ has ANY value is the world's system relies on it exclusively - but who said the system could continue to function as currently constituted?  In any kind of US$ crisis world trade would hit the skids.  Anybody notice what has been happening with the Baltic Dry Goods Index lately?  You can read the graphs for yourself.  That is not exactly indicative of something good for the US$.

Of course, an engineered "crisis" would send people for the exits and back into the US$.  My friend the Mad Scientist thinks that this will be necessary in order to fund the deficit over the next couple of years (if capital is driven out of risk assets and into "safe havens" like the US$ and U.S. Treasuries, the U.S. Treasury Department can get the funding it needs for our outrageous deficit spending).  Unfortunately, I believe he is correct.

Could there be one more US$ rally?  Yes, sort of.  The US$ could rally against the Euro, but is that really a broad rally indicating VALUE?  NAFC.  This is not to say that there will be a straight line decline in store for the US$ - that just isn't how markets work.  

The U.S., one of the first Liberal Democracies of the World, Fighter of Fascist and Communist regimes the world over and WINNING, and then being brought down by Social Security, Medicare, Fannie Mae, Freddie Mac, AIG, Goldman "The Anti-Christ" Sachs, et al... brought down by our own... what an ignominious end.  

It does not HAVE to be this way, but it is the most likely outcome.  I get ill thinking about it.

But at least we have "Hope" and "Change you can Believe In."



bureaucrat said...

If the last 30 years was "easy investing," or more commonly known as "put it all in the Vanguard S&P 500 and leave it there," the next 30 seems to add up to be the opposite, because no company can grow and no shares of such companies can grow, in this coming overwhelming debt, high interest rate and scarce resource environment. An investment in anything that ISN'T the S&P 500 seems to be the way to go.

Anonymous said...

Wouldn't creating another crisis to fool people into buying dollars and gov't bonds just bring our banking system to it's knees again???

Creating another crisis before the mid term elections is a sure way of giving away the Democrats power at the hill... I don't see that happening.

The dollar will keep getting devalued to increase our export market. What I find really odd is that the yields on the 10 year is really low even though the dollar got wacked. Someone is obviously buying our debt to simply bail out our economy.

The Mad Scientist said...

That would be Japan,
based on the TIC data.

Dan said...

Plutarch laid it all out circa 100AD, this is just a case of SSDD

Greg T. Jeffers said...

Anon at 1:16:

Why would giving incentive to buy US$ and bonds hurt the banking system? Wouldn't increasing demand for Treasuries LOWER interest rates? Wouldn't that be good for debtors (by making it easier to refinance to a lower rate and/or repay the debt)? Of course, flattening out the yield curve will take away the bank's easy money (taking in deposits at 1/4 percent and buying 10 year Treasuries yielding 3.5 to 4%).

REgarding your "dollar will keep getting devalued to increase our export market" I see the mirror image:

The currency markets will devalue the US$ vs the Asian exporters to bring trade into equilibrium.

Donal Lang said...

Inflation and deflation can co-exist; they aren't opposites. Inflation is the devaluation of the currency, even if it isn't an obvious devaluation (e.g. all currencies can go down together so the exchange rate is the same). Deflation is a slowing of the circulation of money, just as people save more and spend less. Both are happenning now.

The fiscal stimulus is just borrowing from the future to spend now, so it appears to replace the lack of circulation of money. It only works for a short time, it doesn't change the fundamentals. But that borrowing also undermines the value of the dollar, potentially making the delayed depression even worse.

The next feature will be real interest rates rising as real money is invested in those economies with some hope of profit - China and India, maybe South America. Then oil prices will rise too. That'll be the last nail in the coffin as far as recovery goes.

But hey, let's look on the bright side! ;-)

Anonymous said...

We've been living in an artificial economy for the last 35 years, sponsored by the US Gov't. This credit bubble had three political purposes. These were to finance economic development in China, finance the federal deficit by repatriating the foreign trade deficit into Treasuries and to provide cheap oil and a vision of prosperity to the US voter while our economy was being trashed and industrial base demolished.

Who benefited? The Chinese benefited for obvious reasons. The world at large benefited because China is probably less dangerous than it used to be. The Democrats and Republicans benefited. They could spend their asses off without raising taxes. OPEC benefited. They sold us far more oil than they would have had the dollar not been artificially propped up by creation of all that cheap, fraudulent debt. The investment banks made a KILLING by selling fraudulent bonds, as the federal government rigged the ratings system. The rest of us benefited in the medium term as we have experienced 35 years of unprecedented affluence. Now its time to re-adjust.

By now it is apparent that the average American is holding the bag and has been screwed big-time. The dollar is seeking it's realistic level given the absence of the credit bubble that buoyed it by sucking up all those foreign dollars. We will start to pay now for what we received in the past. It will hurt in the short run, but it is part of healing.

Greg T. Jeffers said...

ANon @ 5:54am:

Now that was a lucid, well reasoned, intelligent commentary on the state of things...

Feel free to expound on that...

Anonymous said...

We're like a sailor coming off a three day bender. We've got a really bad headache and a case of the clap, but we DID have a GREAT TIME! Time to see the doctor and get back to business.

Also, my parent's generation, that grew up in the depression and fought World War II, got paid back in full. Most got to enjoy the prosperity and have passed before all this happened. Good for them!


Coal Guy (Anon @ 5:54 AM )

Donal Lang said...

Re Anon @ 5.54

Who benefitted? You forgot to mention the many Americans, who borrowed FAR more than they could ever repay, wasted it on throwaway crap, used up the World's resources, polluted the air and the oceans, and continued to vote for leaders who overturned legitimate governments and killed thousands of innocent people to get more of it! Then when their corrupt banking system collapsed they pulled down the the RotW's financial systems too.

Or maybe you were all just being nice to China.

Publius said...

Addicts always think another fix will fix everything.
BOA will continue until the system is DOA.

The majority of commentators on financial and energy-related blogs are far more optimistic than the facts warrant, because they (and most everyone) has a stake in the system. As Mark Twain pointed out in his book on the nature of man, the vast majority of humanity are not capable of independent thought, and are incapable of holding an opinion that would get in the way of their "bread and butter."

Also, as Joseph Tainter points out, societies handle all problems by increasing their complexity. This works, until it does not.

The response to the "fiscal" and economic crisis has been a vast expansion of complexity, in terms of Fed Gov intervention in the markets. Unfortunately, peak oil means that involuntary simplicity is on the way.

When these two forces collide: the need for greater complexity to sustain the unsustainable, and the involuntary simplicity of an energy-poor future, look out. There is no hope that the current system will survive. The only thing to wonder about, and try to affect like a butterfly's wing, is the violence and lethality of the devolution.

Focus on your pension funds and long-term educational goals at your peril, while the ship goes down. Your real pension will be your children, grandchildren and your neighbors. You'd better be well-loved. Your education should focus on the essentials of life (which include spiritual sustenance like music and story-telling and religion/spirituality).

Vast amounts of quickly devaluing currency will be spent on PR campaigns to keep the consumers, er I mean citizens, from realizing this truth. Once the truth sinks in, the mayhem automatically ensues. Human systems undergo entropic phases, like all other systems. Better that the "confidence" bubble burst while there is still the capability, on the part of some, to deal with devolution. Wind-turbines just ain't gonna cut it.

Anonymous said...

And, Europe participated in none of it. Yeah sure. Europe was more than happy with Laissez Faire while Milosevic was committing genocide. The French and the Germans were dealing with Sadam Hussein under table. Europe was more than happy to sit under the US's umbrella during the cold war, and still is afforded considerable protection thereunder. Since WW2 the US has had the unsavory task of keeping the world relatively stable no only for our own sake, but for yours, too, you ungrateful, ignorant slob. I'd just as soon be done with you, too! At some point, the US will stand down. It would serve you just right to come under the Russian's sphere.

Good Luck With That!


Coal Guy

Anonymous said...

Now that I've calmed down...

At the end of World War II came the Marshall plan, which simply was a plan to rebuild Germany and Japan in order to crate a more peaceful future. Europe was rebuilt and became prosperous. Japan was rebuilt and became properous. Japan's example was model for the rest of the Pacific Rim. A huge success by any measure, and much to the US's credit. Same with China! It is the extension of the same policy.

During this seventy year period, we have seen the end of European Colonialism with mixed success, and a very unstable Third World. The third world was courted by the West and the Russians. The third world played one side against the other for favors. Realpolitik is an ugly game.

Yes, the US got in some wars that ought to have been avoided, and supported despots that ought to have been ousted in popular revolutions. And the US supported popular revolutions against despots that turned out very badly for all involved. Cuba and Nicaragua come to mind. During the 70 year period for which you despise us, Donal, the US has done more for human rights and freedom than has been done in the rest of the world through recorded history. The results of US foreign policy are indisputable. The UK, is also much responsible for this success. The rest of the runners up are far behind.

The US will probably not be able to play policeman for much longer. I take it you and much of the rest of the world will enjoy that. Just be careful what you wish for. You might just get it.


Coal Guy

Greg T. Jeffers said...

I would really, really like to have a small dinner party with MS, Donal, Coal Guy, and Publius. I would not have to entertain one bit... Clearly some of the better minds around.

Donal Lang said...

Coal Guy

As I recall we PAID you to get into WW2, and laissez faire summed up YOUR foreign policy (in fact you didn't have one!).

Interesting that you go back 60 years to the Marshall Plan (which was passed through Congress on the basis of creating a market for American companies!) and you conveniently miss out Contras, in fact pretty much all of your South American escapades, Israel, Saudi, Egypt, Somalia, Iran, and Iraq, and a few more I can't think of right now.

It's not that you've supported murderous dictators - you've overturned democracies to INSTALL murderous dictators! And tell me with a straight face that the CIA isn't working to overthrow Chavez right now! (and is that anything to do with the fact that he's got oil??)

Then of course Afganistan, where you armed and trained the Taliban to fight the Russians. Talk about what goes around comes around.

As for Saddam, he was YOUR creation, along with Osama Bin laden. Why did the Bush administration get the Bin laden family out of the US after 9/11, by the way?

Russia is a failed state, not the bogieman you'd like to suggest. The easiest way to finish it off is to get your profligate oil consumption under control and drop the oil price! Or is that 'un-American?

Yes, the US has done some good, (usually by accident)and, on the odd occasions you do, we're all grateful to see you get it right.

But I just hate the sanctimonious bullshit you guys sometimes come up with to post-justify your cockups. You may not realise it, but the oxymoron joke around the world is 'American Foreign Policy'!

The reason you are in the shit now is because you have a society which worships greed; from the gambling bankers to Mr 4X4 Suburban in a house he can't afford. It was greed that took you (and us, sadly) into Iraq - if it didn't have oil you wouldn't give a f*ck about Saddam gassing a few thousand people.

America won't 'stand down' as you put it - it'll go bust and won't be able to interfere anymore. The thing we're all scared of is the final acts of you military machine to try to keep itself going, and what mayhem it might dream up to grab oil. Venezuela maybe?

To be honest, I'll be glad when the US stops trying to be policeman. It isn't good at it.

In fact you worship greed so much that your ultimate hero is the cowboy crook who beats the system and gets away with the loot. Madoff (and Enron, and the others) wasn't wrong because he's a crook, he's wrong because he didn't get away with it!If he had, he's be another Hollywood Hero film in 10 years time! The sad thing is, you've taken everyone else's savings down the tubes too.

Americans don't yet seem to have worked it out yet, it is who you are that matters, not what you own.

Donal Lang said...

Hey Greg, is that an invitation?

I'll bring a hard-hat! ;-)

Greg T. Jeffers said...


If you guys find yourself in SOuth Florida or Nashville TN consider it done!