Rubin, Volcker Say Investors May Avoid Buying Dollars

[EJ]

Rubin, Volcker Say Investors May Avoid Buying Dollars
November 15, 2006 (Kevin Carmichael - Bloomberg)

Robert E. Rubin, Treasury secretary under President Bill Clinton, and former Federal Reserve Chairman Paul Volcker said foreign investors probably won't keep increasing dollar holdings, raising the risk of a slump in the currency.

Failure by the U.S. government to shrink its budget deficit may spook the central banks, hedge funds and others who have been buying Treasury notes, Rubin said. Volcker said the U.S. borrowing requirements raise the risk of a "crisis" in the dollar as soon as the next two and a half years.

"It seems almost inconceivable that this will continue indefinitely," Rubin, who now chairs Citigroup Inc.'s executive committee, said in a videotaped message for a dinner hosted by the Concord Coalition yesterday in New York.

Rubin, 68, who served as Treasury chief from January 1995 to July 1999, helped engineer economic policies that allowed Clinton in 1998 to claim the first budget surplus in almost 30 years. The dollar, measured against the currencies of the largest U.S. trading partners, rose 14 percent under his tenure.

AntiSpin: If you've just tuned in to the "imminent collapse of the dollar" story, we started tracking it on iTulip in 1998, starting with the following quip by Hugo Salinas Price, December 23, 1997: "The Soviet Union fell apart because of the inherent weakness of its statist policies; the United States may find that its decline in the world mirrors the fall of the Soviet Union, because of the unsound basis of the monetary and financial system haunted by the ghosts of those two economists, long dead: John Maynard Keynes and Harry Dexter White."

Price is on a mission to re-monetize silver in Mexico and use it as coin in circulation, a staunch critic of the US dollar regime, warns that system is not only unstable but unjust. Most of the other stories we've quoted over the years stick to the refrain: the dollar is over-valued and some day will decline in an orderly way if global central banks put their heads together to cooperate on a staged adjustment or a disorderly way if they do not. Most of the quotations below from our site are so old that the original stories were long ago purged from these news and banking firms' servers, so there are no working URLs, as may be the case some day for the pronostication that is the subject of this AntiSpin.

"The world's leading private banks have warned that the dollar is still dangerously over-valued despite last Friday's intervention to boost the euro."
Banks warn on currency threat (BBC 9/23/2000)

"The US dollar has benefited from exceptional circumstances over the past couple of years, first the emerging markets crisis and second a re-rating of underlying productivity growth which have buoyed capital inflows and bloated the current account deficit. With the US economy slowing and global growth rebalancing, the financability of the C/A deficit will become the key issue for currency markets, we believe. This, together with the specific factors underpinning the yen and the euro, should lead to a sizeable correction in the US dollar."
Currencies: Restating Our Bear Case for the Dollar (Morgan Stanley Dean Witter 7/15/2000)

"When the U.S. economy next slows and the dollar drops, the real value of everyone's reserves will plummet, leaving the world's currencies in disarray. What has been a ravenous market for exports will dry up, leaving other states with massive overproduction and the beginnings of a deflationary crash."
Can the EU Stem the Euro's Fall? (Stratfor 10/21/2000)

"Since it would be too much to ask the U.S. dollar -- the currency of a nation that has accumulated a gaping current account deficit -- to cover the financial transactions of the entire world, we must realize that the euro, despite all its problems, is on its way toward becoming a world currency."
Euro attracts global audience as option to dollar-based trade (Japan Times 11/20/00)

The recent performance of the dollar against the euro is, to put it mildly, puzzling. The US economy is flirting with recession and US interest rates are down 1.5 percentage points. So why has the dollar been so strong? Since the start of the year, the euro's value has fallen back below $0.90 from $0.95: the dollar is at a 15-year high on a trade-weighted basis.
Dollar puzzle (Financial Times 3/22/2001)

My own contribution:

"Since the year 2000, we have witnessed the serious decline of the second greatest monetary brand in world history, the U.S. dollar."
The Late, Great American Dollar (AO 8/30/2004)

Warren Buffett among other markets visibles chimed in last year, some taking heavy losses on their bets against the dollar since then.

Betting against the dollar has been expensive for a while, except in the form of buying gold, which we recommended in 2001, with its strong inverse correlation to the dollar. The nature of the dollar's problme–its longevity in the face of apparently incredible odds–and the likely eventual resolution of its fate is evident when viewed from the perspective of the extreme case.

"galbraithmoney" by John Kenneth Galbraith (Houghton Mifflin 1975), Confederate Bank Notes (Page 104):

"All the confederate note issues totaled by the end of the war about a billion dollars; borrowing came to about a third of that amount. Prices rose throughout the war–until March 1864, at a rate of about 10 per cent per month. An index of prices for eastern states of the Confederacy, with the early months of 1861 equalling 100, was at 4284 by December 1864, 9211 the following April when the end came. Wages lagged far behind. While prices were ninety times higher in 1865 than in 1861, wages by one calculation were up only about ten times. Price commissioners sought to arrest the price increases by setting ceiling prices for staples. On occasion, the newspapers printed these prices side by side with those actually being charged. Confederate notes and bonds alike were worthless after Appomattox.

"No serious scholar has defended this method of war finance. But neither have they stopped there. 'Northern writers of an economic turn of mind have often times attributed the collapse of the Confederacy to its paper money...'

"Without question, more and heavier taxes could have been levied. These would have equalized somewhat the burdens of war. The chaos attendant on the gross price increases would have been lessened; the reputation of the confederacy for stability and good sense would have been enhanced and conceivably also the morale of the troops, not to mention that of the workers. But it also remains that a small new country under blockade, severed from its sources of industrial products as well as its markets, fighting mostly on its own territory, sustained a large army - estimates range from 600,000 to an improbable million - in the field for four years. This was a most formidable enterprise. That it did so on aggregate hard-cash resources of around $37 million was, a minimum, a major feat of financial legerdemain. The miracle of the Confederacy, like the miracle of Rome, was not that it fell but that it survived so long. The tale is told of an archaeologist who, ten thousand years hence, in the diggings that were New York, find the remnants of a pay toilet and identifies it purpose. He concludes that civilization failed because something went wrong with the coinage. Those who attribute the collapse of the Confederacy to its paper money are of the same school."

So it is with the USA. The problem is not the dollar per se, but the financial, fiscal, military, domestic political, and geopolitical circumstances of the nation relative to others'. If you are looking for the dollar to collapse and bring down the U.S. economy, you are looking at events in the wrong order. It is the U.S. economy that must collapse first, due to these other factors, leading to a loss of confidence in the currency, which will surely happen eventually if it does not reverse The Big Bet. If not reversed, it may be said by historians some day, perhaps Chinese: "The miracle of the USA (as we know it today) like the miracle of Rome, was not that it fell, but that it survived so long."
_____

For a layman's explanation of financial bubble concepts, see our book americasbubbleeconomy
For guidance on how to play the coming currency corrections, see "Crooks on Currencies"
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[metalman]

Re: Rubin, Volcker Say Investors May Avoid Buying Dollars

from late, great dollar...

First, a brief primer on currencies. According to commodities and money expert James Sinclair, a currency is valued by:

— The reputation and financial acumen of management. This is expressed in a currency by the actions of the central bank, the quality and actions of the people in charge of the treasury, and the financial direction given by the country's political administration. This has a bottom line in the position of the federal budget in terms of the flow towards deficit or surplus.

— Earnings, which are expressed in the Balance of Trade in terms of its deficit or surplus position.

— The amount of shares outstanding, which in a currency is expressed by the Current Account of the country in question and its deficit or surplus position.

— The "dividend" rate, which expresses itself in a currency in terms of the interest rate paid on six month money. Simply stated, if the interest rate paid on six month money exceeds the anticipated six month inflation rate, the impact is positive.

so the problem is with "reputation and financial acumen of management." i agree this is the right way to think about it. the dollar is a "share" in USA inc. is overvalued but there are a lot of countries propping it up. it's just as in the case of the USA propping up the pound sterling in the 1920s, except lots of countries supporting the dollar vs only the US then supporting the pound, but the result will ultimately be the same... first a bubble in the financial markets and economy, then a collapse of the economy and the currency.

[metalman]

Re: Rubin, Volcker Say Investors May Avoid Buying Dollars

ps, you have to hit the "stop loading" button on your browser to read the late, great dollar piece, else after a few seconds it takes you to some other place. annoying. fred... pls move it to the itulip site.

[Charles Mackay]

Re: Rubin, Volcker Say Investors May Avoid Buying Dollars

I guess Volcker and Rubin aren't reading Jack Crooks who appears to be getting bullish on the dollar.