This page has been archived and commenting is disabled.
The Death-Defying Dollar?
Submitted by Leo Kolivakis, publisher of Pension Pulse.
Not
a day goes by where I don't hear or read something on the U.S. dollar's
demise. Today I received an email from Penguin Group promoting Charles
Goyette's new book, The Dollar Meltdown. Mr. Goyette also wrote an article for The Street.com, They're Destroying the Dollar.
Now,
I have not read Mr. Goyette's book, but this isn't the first book
predicting the doom of the U.S. dollar, nor will it be the last. One of
my favorite books on the U.S. dollar was written by Richard Duncan back
in 2003, The Dollar Crisis.
He might have been a little early, but Mr. Duncan described the
economic ills plaguing the U.S. economy and how it will impact the
greenback.
More recently, William Engdahl wrote an article on his site, Collapse of the Greenback? Will the Dollar get an "Arab oil Shock"?:
Ever
since Washington tore up the Bretton Woods treaty in August 1971 and
went onto a “dollar paper reserve system” instead of a dollar backed by
gold, the United States, as the world’s most powerful military power,
has been able to dictate financial terms to the world. Nations like
Japan and later China, dependent on US export markets, would dutifully
invest their trade surplus dollars into US Government debt, in effect
financing wars such as Iraq or Afghanistan they opposed. They saw no
choice. Arab oil producing countries, under US military pressure, were
forced to sell oil only in dollars, a direct prop to the dollar when
the US economy was in terminal decline. That may be rapidly about to
come to an end.
According
to a leaked report from Arab Gulf oil producers, there have been a
series of secret meetings in recent months between the major Arab oil
producers, including Saudi Arabia, and reportedly also Russia, together
with the leading oil consumer countries including two of the three
largest oil import countries?China and Japan.
Their
project is to quietly create the basis to end a 65-year long “iron
rule” of selling oil only in US dollars. As I document in my book, Century of War, following
the 400% oil price shock of 1973, which was deliberately blamed by US
media on “greedy Arab Sheikhs,” the US Treasury made a secret trip to
Riyadh to tell the Saudis in blunt terms that if they wanted US
military defense against potential Israeli attack, that OPEC must
privately agree never to sell oil in currencies other than the US
dollar. That “petrodollar” system allowed the US to run staggering
trade deficits and remain the world reserve currency, the heart of its
ability to dominate and control world financial markets until the
crisis of the sub-prime real estate securitization in August 2007.
The
participants in the project reportedly envision using a basket of
currencies reflecting producer-consumer trade relations, one backed by
gold as a solid backbone. It would not initially be a new currency as
some have surmised, but rather an arrangement that would eliminate the
risks of pricing oil sales in fluctuating and likely depreciating
dollars.
Iran
announced recently that in the future it would sell its oil for euros
not dollars. According to these reports, the basket of currencies would
include a mix of yen, euros, Chinese yuan, gold. Brazil would
reportedly join as both a producer and consumer country.
The
secret plan was first reported by respected Middle East correspondent,
Robert Fisk, in the UK Independent. Fisk claims to have confirmed
existence of the plan from Arab as well as Hong Kong Chinese sources. I
have confirmed from very senior and well-informed Gulf sources that the
talks are in fact real. The oil producing countries have been fed up
for years about having to price their oil in dollars or face US
reprisals.
They are steadily losing as the dollar depreciates against
other currencies and against gold. Following the US declaration of the
War on Terror by the Bush Administration after September 11, 2001 most
leading Arab oil producing countries privately saw US policy as being
aggressively aimed at them. The unjustifiable US invasion and
occupation of Iraq in 2003 merely confirmed that as well as subsequent
US threats against Iran.Initially
various governments involved in the leaked plan have publicly denied
vehemently such a plan. That in no way invalidates that such moves are
afoot. They are well aware that the United States as a wounded tiger
can be far more dangerous. The leak of the plans in the world media,
whether every detail reported by Fisk is true or not, feeds what is an
inevitable decline in the dollar as a reliable reserve currency for
world commerce.
What
is not clear is what the potential response of Germany and France, the
two pivot powers within the EU will be. If they decide to cast their
lot with oil producing and consuming countries, they open their doors
to vast new trade and investment potentials from the countries of
Eurasia. If they cringe from that and decide to remain with the British
Pound and US dollar, they will inevitably sink along as the dollar
Titanic sinks.
With
that decline of the US dollar goes the lessening of the political power
of the United States as sole economic and financial superpower. We face
very turbulent waters ahead and gold not surprisingly is gaining in
this uncertainty.
But
before you rush out to buy gold and convert your U.S. dollars, you
should read Barry Eichengreen's latest article published in the Gulf
Times, the death-defying dollar (hat tip Tom Naylor):
The
blogosphere is abuzz with reports of the dollar’s looming demise. The
greenback has fallen against the euro by nearly 15% since the beginning
of the summer. Central banks have reportedly slowed their accumulation
of dollars in favour of other currencies.
Economists
have no trouble explaining the dollar’s weakness after the fact. With
American households saving more in order to rebuild their retirement
accounts, the country has to export more. A weaker dollar is needed to
make American goods more attractive to foreign consumers.
Moreover,
disenchantment with the sophisticated instruments that American
financial institutions specialise in originating and distributing means
more limited foreign capital flows into the United States. Fewer
foreign purchases of US assets again imply a weaker dollar.
Extrapolating the past into the future, forecasters predict that the
dollar will decline further.
The
first thing to say about this is that one should be sceptical about
economists’ predictions, especially those concerning the near term. Our
models are, to put it bluntly, useless for predicting currency
movements over a few weeks or months.
I
should know. When the sub-prime crisis erupted in early September 2007,
I published an article entitled “Why Now is a Good Time to Sell the
Dollar” in a prominent financial publication. What happened next, of
course, was that the dollar strengthened sharply, as investors,
desperate for liquidity, fled into US Treasury securities. Subsequently
the dollar did decline. But then it shot up again following the failure
of Bear Stearns and the problems with AIG.
Over
periods of several years, our models do better. Over those time
horizons, the emphasis on the need for the US to export more and on the
greater difficulty the economy will have in attracting foreign capital
are on the mark. These factors give good grounds for expecting further
dollar weakness.
The
question is, Weakness against what? Not against the euro, which is
already expensive and is the currency of an economy with banking and
structural problems that are even more serious than those of the US.
Not against the yen, which is the currency of an economy that refuses
to grow.
Thus,
for the dollar to depreciate further, it will have to depreciate
against the currencies of China and other emerging markets. Their
intervention in recent weeks shows a reluctance to let this happen. But
their choice boils down to buying US dollars or buying US goods. The
first option is a losing proposition.
In
the longer run, Opec will shift to pricing petroleum in a basket of
currencies. It sells its oil to the US, Europe, Japan, and emerging
markets alike. It hardly makes sense for it to denominate oil prices in
the currency of only one of its customers. And central banks, when
deciding what to hold as reserves, will surely put somewhat fewer of
their eggs in the dollar basket.
Beyond
this, the dollar isn’t going anywhere. It is not about to be replaced
by the euro or the yen, given that both Europe and Japan have serious
economic problems of their own. The renminbi is coming, but not before
2020, by which time Shanghai will have become a first-class
international financial centre. And, even then, the renminbi will
presumably share the international stage with the dollar, not replace
it.
The
one thing that could precipitate the demise of the dollar would be
reckless economic mismanagement in the US. One popular scenario is
chronic inflation. But this is implausible. Once the episode of zero
interest rates ends, the US Federal Reserve will be anxious to reassert
its commitment to price stability. There may be a temptation to inflate
away debt held by foreigners, but the fact is that the majority of US
debt is held by Americans, who would constitute a strong constituency
opposing the policy.
The
other scenario is that US budget deficits continue to run out of
control. Predictions of outright default are far-fetched. But high
debts will mean high taxes. The combination of loose fiscal policy and
tight monetary policy will mean high interest rates, sluggish
investment, and slow growth. Foreigners – and residents – might well
grow disenchanted with the currency of an economy with these
characteristics.
Mark
Twain, the 19th-century American author and humorist, once responded to
accounts of his ill health by writing that “reports of my death are
greatly exaggerated.” He might have been speaking about the dollar. For
the moment, the patient is stable, external symptoms notwithstanding.
But there will be grounds for worry if he doesn’t commit to a healthier
lifestyle.
I
agree with Barry Eichengreen, reports of the U.S. dollar's demise are
greatly exaggerated. The mighty greenback will come roaring back,
perhaps sooner than you think.
»
- advertisements -
Within 6 to 9 months, you will likely see the 2009 lows undercut, particularly on an inflation or dollar-adjusted basis. This is not based on any rabid adherence to any ideology. It is based on a calm perusal of numerous trends, many of which have been in motion for decades, and a historical understanding of how those trends have terminated when left unchecked.
Ponzi scheme commitments and, sadly, so far a complete lack of political will to come anywhere near starting a coherent dialogue on them, do not bode well for the future. Foreigners seem to have noticed this far better than citizens and politicians. Instead of trying to address unsustainable spending levels, our political class is more interested in adding fuel to the fire in order to expand the scope of an already bloated government and create more "constituents".
Say what you will about the accuracy of government data, but the latest TIC data shows that since the beginning of this year, there have been net outflows in excess of $500 billion. (http://www.treas.gov/tic/npr_history.csv). You can go back over a decade and not see a negative year. Folks are voting on the fiscal policies of the US with their feet and assets, and until they change their mind, the dollar will continue to decline.
That does necessarily mean that the dollar will go away. But it may well become a decrepit shell of its former self. While many other parts of the world do not make particularly attractive investment destinations due to corruption that makes that of the US pale in comparison, or far more egregious lapses in property rights (Russia or Venzuela anyone?), money is clearly leaving our shores and finding a home elsewhere. And it will likely continue to do so until the dollar reaches a level that engenders enough domestic economic pain to force [hopefully] constructive action.
barry is not a sharp economist when he says that
a currency's strength in based upon economic
conditions....currency strength is a monetary
issue - not economic....
to say that the dollar will have to depreciate
against the yuan in order to evince weakness is like saying that paris hilton will have to be upstaged by
rupaul before she loses an oscar nomination....
the yuan is irrelevant in currency calculus and
thus not a measure of strength....the other
currencies' economies are just as irrelevant....
but their monetary policies are not....was the
yen weak at all times during the past 20 year -
during the great deflation of the 1990s?
a 15% decline in the dollar in less than a year
is prima facie evidence for the gross mismanagement
of which eichengreen speaks....is that decline
a sign of strength or weakness? and what does
it matter?
if economies matter to monetary strength could
you please fashion a case where the high taxes
spoken of by the great economic poohbah will
generate an economic boom to resuscitate the
dollar...or could you fashion a case where the
high interest rates needed to attract capital
will fashion a boom? feed a fever to starve a cold
or vice versa?
monetary problems stem from over production of
currency and in the usa that condition exists
and has been promised as a future development -
trillion dollar deficits as far as the eye can
see.....those deficits will be financed through
debt and then monetized - we have already seen that.....and at some time soon the
returns will have to rise to lure bond buyers...but
not if the fed is your primary buyer....but then
that drives inflation....oui?
major movements are afoot to displace the dollar
which even the economist concedes - that is a
development which would have failed the laugh
test 3-5 years ago...however today no one is laughing....
the petro-dollar scheme will be gone in 3 years....
not the 10-20 year predicted by some....that is
if the usa does not invade someone's shiekdom....
gold? gold has appreciated as currencies such as
the dollar have debased....gold has an excellent
reistance to debasement which the frn does not
posess....so for those interested in value gold
is the money of first resort....
floating currencies theoretically seek equilibrium
and after massive deficits the usa dollar should
decline....however, central banks do not believe
in floating currencies....intervention city is
where the action is....and thus pathologies in
the currency are nurtured and propagate....friedman's
scheme has fallen apart....
no one can state the date of the death of the dollar
but the survival rate of mismanged currencies is
grossly exaggerated....i don't see the currency
under good management and thus see dismal prospects
for the dollar....
Very nicely said.
Adam Smith, in "Wealth of Nations" spoke a good deal about this very situation.
About the only difference is that it was England and America/India, not America and China/Brazil, but the principal, the debt, the taxation, all of it is a close approximation of a repeat of history.
That was in the late 1700's and it took WWII to shake the pound loose as the world reserve currency.
For all it's notoriety Goldman Sachs' governmental influence is is nothing compared to the East India Trading Company and England has never been blessed with the staggering amount of resources that the USA continues to enjoy and even expand upon.
It is a great read if you can get through it. I sure hope Ben and Tim have used it as a game plan during this Economic Pearl Harbor.
Nice point, Leo... especially for the numerous souls who have borrowed money to buy gold.
QuantamCat, please name one of these souls who have borrowed money to buy gold. In fact, since you said "numerous", please name three.
Assuming you and both your neighbors (either side) still owe on a mortgage and have bought gold instead of paying down debt... one, two, three. The average Joe is up to his ear in debt, so there are many more than three. Owing debt and buying gold is effectively a bet that your return from gold (via monetary devaluation) will exceed the interest rate paid on your loan. Oh, but you can simply decide to walk away from your obligation. That's called debt destruction, and feeds the deflation machine. See how it works? Fractional reserve lending has this slave like quality to it... I hope you figure it out, but as of now, about 97% of the market hasn't, and they sow the seeds of their own demise through leverage and greed.
People ARE buying gold on their credit card, sure. But they're never paying off the credit card, from how I understand the strategy!
even with gold not being half as great, that still makes it better than a tanking dollar.
You speak of herd mentality but how are you any different? The "deflationist" claim the same thing you're claiming. I believe the dollar is sick and the stock market is a even sicker.
LEO NBER is in the banksters pockets...well documented...
The only thing I take exception is "sharp" and "economist" used in the same sentence...
I tried to google "Barry Eichengreen called the collapse" or "Barry Eichengreen warns+2008"....but nothing. He very well have but again we are in a planned global economy so until people realize who the players are (and from what it appears he is one) then there are only a few to voices that matter...(regardless of fundamentals or technicals)
Any link to his work or where I can find his ruminations..... I would be greatly appreciate it ...again no offense...we all understand that nobody knows anything about the future policy except for a very select few. We are all just one big reality show....
He is co-author of the famous article, Tale of Two Depressions.
Here: http://www.voxeu.org/index.php?q=node/3421
Eric King of King World News today did an excellent interview with Tocqueville Gold Fund manager John Hathaway, who remarked that GATA is right about government manipulation of the gold market and that circumstances are developing for an "astonishing" rise in the gold price, the gold market being so small and real metal being so scarce relative to money creation. Gold, Hathaway said, is "climbing a wall of worry," with little enthusiasm for the metal.
You can listen to the interview with Hathaway at the King World News Internet site here:
http://tinyurl.com/yfmyehz
http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2009/10/23_...
Gold just emerged from a multi-month B wave triangle a little over a month ago... B waves almost always precede a final move in the direction of the current trend. Anything and everything traded is simply the "other side" of a dollar trade as evidenced by increased correlation of various unrelated markets. IT IS ALL A DOLLAR TRADE, and currently a very crowded one in the direction of the current trend which appears ripe for reversal.
So the author doesn't think we have reckless economic management NOW? That's funny.
Jesus. Another Keynesian article explaining that the US fiat isn't doing bad b/c so many other fiats are doing even worse. Still talking in terms of why USD as global reserve won't be 'replaced' by xxx fiat as global reserve. And looking hopefully forward to the so-called 'exit strategy' of the hopelessly bumbling Federal Reserve, which is of course 'anxious to reassert its commitment to price stability'. Yeah, thanx Tiny Tim.
Such faith in the Fed was charming for awhile, touching even, but Christ I'm getting bored with the 'strong dollar policy' propaganda thought-stoppers. Higher taxes on low wages/income, without inflation...a nice easy exit out of QE and into Depression...Japan and China continuing to finance an exponentially rising debt...check check blahblahblah.
Oh, and...'weakness against what?' he asks. Gold and other real assets, duh.
Leo, I appreciate that you're the guy primed on this site for the 'contrarian' viewpoint, but how about a little NEW (and smarter) material????
Keynesian? You don't understand monetary physics and psychology. You're conclusions about the ultimate outcome are right, but your timing is absolutely horrible. Currencies that become overextended in debt and credit usually have a deflation phase. Where has all that printed money gone that you worry so much about? EXCESS RESERVES. USD CASH is the next, and last great bull market before the dollar dies... thanks for playing the part of the herd and providing the liquidity for the next leg down.
from a trading perspective, currency is an exit strategy.
from an economic perspective, currency transfers information, asymmetrically as it turns out.
in a world of abundance, where less than 25% of the population is semi-employed in a productive capacity, the fed stated that money can be expanded infinitely, we have a global information system, and excess production capacity is chasing excess human capacity down the rathole, why are we using global banks as intermediaries again?
We have a distribution problem, the symptom of which is the distribution of wealth. The distribution sub-systems are run by computers, they have no idea what's wrong with those computers so they have been changing out entire product lines in a bull market, and now we are entering a bear market.
They wanted to replace the useless eaters with computers, and now they have their wish.
This should get interesting
USD is the new 21 century trade war...
Until the Yuan floats we will print the shit out of USD's--- make no mistake, the bankers want it to float so they can control it in the open market...if people are expecting a monster rally in the dollar well I think your nucking futs....(not to say it can't catch a bid but "flight to safety" is almost hard to type let alone used as an investment thesis)
Don't watch what they say...TTT "we believe in a strong dollar" (que chinese student laughter) ...look at policy...Medical, Welfare, Cap and Trade for everyone...never work again...everything is free in the good ol' USA.
I believe you are right about reserve status (the CFR said so) but that doesn't mean it can't lose alot of value and you will see this as it relates to gold more than anything as CB's step in to devalue thier currency in the "old school import/export model" of the last half century.....remember the IMF has gold so if everyone prints then everyone continues on the same currency relationship but as it relates to gold the IMF wins...fantastic strategy if you ask me....
Only when China figures it out (that the bankers are not allowing the US consumer to consume) will they then go into hyper drive to concentrate on its domestic consumption. If they don't pull this off quickly the Greatest Depression is coming...
The USA has offshored its manufacturing, its tech sector has leveled off and begun shrinking, no next-great-thing is on the horizon, its service economy consists of paper traders, real estate sycophants, and garage sales.
It has massive liabilities to soon-to-retire and retired boomers in SS, Medi-care(caid). It has two (soon to be three) overseas wars draining the treasury. It has impossible to service interest payments throughout the gov't structure (without open monetization) just as sales, income, property taxes are declining.
It has suspended faith and confidence in financial accounting allowing mammothly underwater institutions to continue to operate that will in future cost untold billions (on top of bailouts and backstops) to resolve.
The Fed is cornered. It can either:
(a) stop monetizing, rein in liquidity, allow market forces to clear the rot...but will lose control, may lose more TBTF, suffer systemic collapse, and lose bond, commodity, and forex markets or
(b) continue to monetize without restraint, resolve slowly every garbage bank losing in excess of 30% on assets average, hold down interest rates, support real estate, prop remaining american industry and equities, and flood country with $. They will maintain control somewhat, be allowed to steer direction of contraction, BUT LOSE $. The dollar must continue falling
This is the price of control, this is the price of deflating a balloon without a sudden pop. This is why the Federal Reserve exists. It has failed at keeping the economy on a stable course and fulfilling its mandate. Since that is so, it must pilot as best it can a directed crash.
Sacrifice the dollar for control over the other issues.
"The one thing that could precipitate the demise of the dollar would be reckless economic mismanagement in the US."
Yeah, and what's the chance of that happening right?
WTF dude?
remember events that are unforseen will play a part. we understand best looking in the rearview mirror. king dollar has suffered a fatal blow. the grave digger is busy preparing the final resting place of the dollar. me thinks the power elite have a plan "B" ready to roll out ,including brand new devaluated notes. convert, the end is near.
+1,000