Topic: Economics
BULLISH on the Dollar What goes down, Must come upby James Luko
(centrist)
Friday, October 16, 2009
Let us not forget the investment axiom " buy low sell high." Well, now is the time to "buy" the dollar, because over the medium term, she is going back up- I am bullish on the dollar.
There are several reasons why the dollar is headed up in value- both in non-inflationary terms- as well as relative to other currencies.
First; the dollar is also not about to be dumped as the overall world reserve currency.
One should read the new headlines in detail, the recent meetings of a few OPEC members did NOT convey that they were not going to take payment in dollars, they said they "might" change "denominating" their oil prices in dollars to another currency or basket of currencies. This is not much more than geo-political business bravado, there is already a currency which represents a "basket" of currencies which is the IMF's SDR (Special Drawing Rights) and has been around since 1969. It was specifically created as a world currency, reserve currency or a currency for traders to denominate their trade in. So, why doesn't OPEC use that ? Why, because they have no intention of carrying out the bravado pushed by Iran and Venezuela. In fact, a substantial volume of oil trading "already" denominates their transactions in other currencies, so its really a moot point and has no bearing on the dollar.
Second; we are in a 'low' of a business cycle, its not doom and gloom of a collapse in our economy
I don't know how old you are, but I'm a young 41 years old, however, I can't count the times the "dump the dollar" theme has made its way into the media headlines whenever the U.S. Economy is in a recession. This is what we call in Keynesian economics- a "cycle" in our economy, and not a collapse in our economy. There is much criticism, naturally, of the "boom-bust" cycle, but that's what happens when you can't completely predict reasonably free markets. There is no question that this "bust" portion of the cycle was enhanced by bad policy application and bad oversight by the Congressional banking committees. However, that, an ECONOMIC COLLAPSE does not make, nor does it mean the demise of the dollar.
Third; (very important) When the fiscal stimulus ends a lower supply of dollars will give upward pressure on value
The fiscal stimulus is going to end and the Fed's are already beginning to take actions to mop up liquidity. The general media does not mention, often enough, that the American economy was NOT in short supply of cash nor were banks "technically" bankrupt (1), at all, they suffered what is called a "loss of velocity" and that quickly extended to the economy as a whole. That "loss of velocity" meant that other financial institutions which were flush with cash, curbed loaning which created this "cash crash" ! That is why the Feds' "dumped" dollars into the market, not because of lack of liquidity- but loss of velocity. Now, obviously there is a lot of hot money out there now, (fiscal stimulus plus renewed credit extensions from financial institutions) and the Fed has initiated aggressive buy backs and withholding inter-bank lending, etc. to begin mopping the hot money up. As this occurs, the dollar will experience upward pressure again. One should also remember that in fact, where the dollar is NOW is just at about where it was early last year before it [the dollar] experienced a run up in value against other currencies. So, why the panic ? Cause it sells headlines and books- "The Coming Crash" " Get into your fall out shelter- the dollar is dead" " Rome, the British Empire, Now America" [ I just made these titles up myself- pretty cool eh ?] Yes, talking in terms of gloom and doom makes an easy sell. I mean, who would want to buy a book like " Dollar Fluctuation: Status Normal." Yes, people want the headlines and books which gives them a great excuse to buy more ammo and clean the shotgun barrels, cause the dollar is going to collapse and we may have to use sea shells and 1/10th gold panda coins from China to buy food !
Fourth; Our largest single trading partner, China, has not budged the RMB/Dollar exchange rate
Proof is in the pudding, China has no desire for the U.S. Exchange rate to change, how do I know- because China has not moved its RMB value an inch against the dollar for over a YEAR ! (it's been 6.82-6.83) for more than a year (16 months). As the dollar drops in value relative to other currencies, why is China, the second largest trader in the world (and thus second largest user of international currency), not adjusting its value against the dollar ? Is it that China is not adjusting at all ? No, in fact, the RMB has moved quite a bit against the Euro and Yen over this past year. It is specifically the dollar rate that China is quite happy with and no matter that the Fed is printing like it's Chinese New Years, China has not lost confidence in the dollar, nor is it pursuing any practical (like changing exchange rates) action to replace the US dollar as a reserve currency or its value. In fact, China realizes that it's complaints about the US government fiscal policies fell on deaf ears in Washington because China itself greatly manipulates the RMB (purchasing hundreds of BILLIONS of dollars in US treasuries would qualify as "greatly manipulates") value to keep it artificially low. Thereby keeping the competitive edge for Chinese products lest they lose out to lower wage countries like the Philippines or even North Korea.
You should know, that based on Purchasing Power Parity, the dollar RMB parity exchange rate should be approximately 3.7 - 3.8 RMB per dollar (according to the World Bank). So, the Chinese are cheating us by 50%, yet, the U.S. Has NOT taken actions against that, save a few faint complaints- but avoiding the words "currency manipulation" which would make China in violation of the WTO and subject to trade sanctions (which is not something we want to get into now so we avoid the words "currency manipulation." Bearing this factor in mind, how would the Chinese NOT be bending over backwards to keep the RMB at 6.8 rather than 3.7. I hope you can now understand better, that China is NOT helping America in buying treasury bonds- they have NO intention of "financing" American debt, they are engaged in a titanic exchange rate battle against world markets to keep the dollar up and the RMB down. They buy American financial instruments to help THEMSELVES, not America. Otherwise, they could lose half of their 250 Billion dollars in exports to America.
Fifth; There isn't enough gold to replace the dollar
There simply isn't enough physical gold to harness the trillions of world liquidity, soaring prices in gold last year led to a shift to oil commodities to park cash. In addition, with the fact that gold is legal to own for individuals, and more importantly, there is no longer any "fixed" price for gold, talk of returning gold as a "base" for currencies is nonsensical and a pure waste of time.
Sixth; Alan Greenspan himself, said just yesterday (Oct.15 2009) (2) that he is "not overly" concerned with recent weakness in the dollar. That's good enough for me.
My advice, if you are holding any forex, start buying dollars- you are getting a great deal and by the medium term, the dollar will rise and you'll make smart profits.
Banks were not "technically" bankrupt because as we all know, banks use fractional reserve banking, thus, even a small "run" on a bank would "dry up" the small cash reserves that they hold. The negative side of fractional reserve banking means that even the most minor loss of confidence- ala the collapse of Lehman Brothers, makes most banks vulnerable to a cash crunch. This cash crunch made it imperative for the Fed to step in- and it's one of the MAIN mandates of the Federal Reserve, to bring back "confidence" in the market by restoring liquidity. The fiscal stimulus provided by Congress was the second phase- of restoring "velocity" in the economy- getting hot money to move around and restore confidence in financial markets which literally seized up. Source: myself- cause I know what I'm talking about.
(2) Oct. 15, 2009, Bloomberg Stock Report
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Posted By: Walt Thiessen
Date: 2009-10-16 10:41:58
Your fifth point is misleading. It assumes a fixed price for gold. Also, it assumes that gold can be the only hard-money currency.
Ideally, we should have multiple hard-money currencies available us, separate from each other, not a gold standard or a bimetal standard where everything is automatically indexed to everything else at a fixed rate. Hard-metal currencies should be in competition with each other, with all permitted to exist and flourish under the law.
Allow hard-money currencies to exist and to float relative to the dollar (as well as to each other), and this issue you raised will completely disappear.
Posted By: Walt Thiessen
Date: 2009-10-16 10:43:49
Also, regarding your last point: "Banks were not 'technically' bankrupt because as we all know, banks use fractional reserve banking..."
They may not be legally bankrupt, but they are certainly morally bankrupt for the exact reason you specified. Fractional reserve banking is legalized fraud.
Thanks for your comments. Regarding the first comment, I don't "assume" a fixed or non-fixed price for gold, it's a fact that there WAS a fixed price for gold- didn't work well, and NOW there is NOT a fixed price. So, no assumptions on my part. If you refer that I am "assuming" there MUST be a fixed price for gold to be a base metal- YES I am, otherwise, the benefits sought after in a based currency is not realized. However, that brings other problems of inelasticity to your "money" system- bad news.
Yes I am including Gold as the "example" of a hard currency because that's what most media, including the Nolan Chart, is talking about. The dollar and Gold- linked- in price is the "main" topic in the media, so that's why I'm talking about it- not a coincidence. However, "hard money" is based on some sort of specie, and that is usually gold and silver. Basing it on other precious and semi-precious metals may "pro-long" the limitations on "just" using gold as a base, but in the long run, you end up with the same problems, as well as the issue of the specie- to whichever specific specie you are refering to- of whether its going to have a fixed or un-fixed price- so, same problem exists.
We have multiple currencies already, its called the forex market. Using "that" (forex) example to have multiple "domestic" currencies as American legal tender- I shudder to think of such an idea and its variable and multiple problems it would pose in our dynamic financial markets. But I don't rule that out as a possibility, just not a realistic one. ( I would note that we DID have multiple currencies in America before and it was generally a disaster.)
Walt, I would "contest" the term "legalized fraud" ( I know its a popular term in certain circles because it gives a whiff of revealing another DaVinci code) when refering to the Federal Reserve, the US dollar, the printing press, etc. as not applicable. First, it's a contradiction in terms right, a misuse of the English language much like a run-on sentence. Second, legally speaking, what the Feds are doing and the policy of fractional reserve banking does NOT (assuming what you imply about fraud is true) meet all nine elements of criminal fraud. So, it would be incorrect, legally speaking, to label those practices as "fraud." Even in loose usage, as hyperbole, it would still imply that somehow, this massive fraudulent scheme is "knowingly" for the "benefit" of the bankers and "knowingly" at the expense of the citizenry. I don't believe for one second that all those Americans, millions, involved in banking and government- including Congress, State and local government, and media- all have signed up to the conspiracy to defraud Americans to enrich the bankers. The idea or proposal that it's "fraud" is a non-starter, it doesn't apply, neither in the loose use of the word fraud nor certainly in its legal definition.
Posted By: Andy Wilcoxson
Date: 2009-10-16 14:29:12
James, Do you think we'll see higher interest rates in the United States anytime soon? Whenever the Fed has needed to mop-up excess liquidity in the past interest rates have gone up (such as in the late 70s and early 80s).
It seems to me that we're caught in sort of a catch-22 and there's no easy way out. If they don't raise interest rates, then inflation could become a problem. On the other hand, if they raise rates the U.S. housing market would be crushed along with probably the stock market -- and neither outcome would be good.
My preference would be for higher interest rates, because who cares about the dollar-value of your home equity or your stock portfolio if the money won't buy anything. On the other hand, I think raising rates would be difficult politically -- when interest rates were raised in the 70s and 80s it was very difficult politically and we didn't have bubble prices in real estate.
I agree with your assessment that the dollar will strengthen against most major currencies. If it hasn't bottomed already, will do so shortly and recover to about 1.40 to the euro, as an example. Its value relative to non-currency assets, however, will continue to deteriorate (with the exception of housing) as will currencies generally. There are no incentives currently for manufacturers to produce to meet demand. New entries into manufacturing are not a threat because of credit tightness, and extensive capital requirements.
Entities with extensive currency reserves will seek to convert those in an effort to pursue and consolidate control of industries whose products retain consistent or growing demand.
The new bubbles will not be controlled by central banks.
Posted By: Jahfre Fire Eater
Date: 2009-10-16 18:11:55
Hi James,
I have no idea when the dollar will collapse but the only certainty is that it will. Not in one fell swoop, for sure. The function of the market it to separate fools from their money so there has to be a lot of ups and downs along the way that continue to entice folks who still have money that the time has come to lose a bit more because 'things have bottomed out'.
I'll just watch. I don't have a dog in this fight.
Yes, many things are certainties- it's certain im going to die- but if I don't know when its not very useful to think about it. The dollar is here and it would be pretty hard to avoid using it. On the other hand, if you travel around the world, you will see that we have one of the highest standards of living, and because of inevitable accululation of capital, along with other problems related to a "real" free market, I don't think it (a free market) would offer a much higher standard of living than we have now.
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