The Crash is a Good Thing?

[Rajiv]

The Crash is a Good Thing? by Dale Allen Pfeiffer

Since Bernanke cut interest rates last Tuesday (Sept. 25th), the already weak dollar has gone into a tail spin. Bernanke's banker friends complained that they did not have enough money to cover their obligations and Bernanke responded by revving up the presses and printing up a slew of fresh funny money. In doing this he ignored the rest of the world, which was hoping that he would show some backbone and stand firm in support of the dollar. So now, everywhere you look, the dollar is losing its value against other currencies.

The Saudi's unpegged their currency from the dollar for the first time since the oil dollar was established. They had no choice; it would have been suicide for them to follow Bernanke's move. And elsewhere, other countries will have to follow suit or the US will drag them down. Japan is scrambling for shore.

Not long after the cut in interest rates, the dollar passed a key point against the Euro when it surpassed 1.41 dollars to one Euro. Since then the value of the dollar has continued to drop. The US dollar has been dropping against the Euro since January 2003. It now worth less than 59% of the value it had four years ago. At this point a dollar crash is nearly inevitable. US dollars may soon have as little value as confederate dollars.

For many years we have depended on foreign investors to support our economy by stockpiling our currency. These foreign investors cannot hold onto their dollars for much longer. Already they have lost over 40% of their investment. They will have to cut their losses and divest. This has already started to happen, and as the sell-off accelerates the dollar will find itself in a freefall which will quickly leave it a worthless currency. A massive sell-out could see the dollar losing as much as 90% of its value within days.

Snake Oil

You would not know any of this from the major news networks. They are trying to tell us that the drop in the dollar is actually a good thing. They reason that foreign consumers will flock to the US to buy devalued goods. This is a load of crap, and they know it.

US goods will not devalue. There are very few goods that are wholly US-made today. Most are at least partially manufactured offshore. Because of that, US goods will not devalue, they will simply go up in price. Soon, US consumers will find that their dollars can only purchase half of what they currently buy. And this ratio will worsen as the dollar continues to plunge. Once this crash is complete, US consumers will learn that they have lost everything. They will find that their salaries, their pensions, their health insurance coverage, everything is worthless.

[Mega]

Re: The Crash is a Good Thing?

We will soon find out!
Mega

[jacobdcoates]

Re: The Crash is a Good Thing?

I have a question that might seem stupid, OK in all likely hood it is. But wouldn't the collapse of the dollars lead to a inflationary depression. As the price of imported goods soars due the falling dollars, wouldn't the lack of demand cause the price of U.S. made good fall, because of rising unemployment? I think I am misunderstanding the nature of internal and eternal effects of a falling currency in a large economy.

[GRG55]

Re: The Crash is a Good Thing?

I have a question that might seem stupid, OK in all likely hood it is. But wouldn't the collapse of the dollars lead to a inflationary depression. As the price of imported goods soars due the falling dollars, wouldn't the lack of demand cause the price of U.S. made good fall, because of rising unemployment? I think I am misunderstanding the nature of internal and eternal effects of a falling currency in a large economy.

Seems to me you've got it figured out, and there is no mis-understanding on your part at all.

For much of this decade the US$ has been falling against most major floating currencies. Contrary to the expectations of many economists, this has had no effect closing the trade or current account imbalances - in fact they have continued to grow. The merchantile economies, primarily China and Japan, have manipulated their currencies to largely avoid the adjustment against the US$, which provides part of the explaination. This is not sustainable, and hence the purchasing power of the US$ for traded goods is now likely to fall (e.g. just as you point out, expect price inflation for Asian-made big screen TV's, etc.).

If you are an auto worker in Detroit you are already in an inflationary depression. Once again, as you point out above, the lack of demand of, say US-made GM cars, has caused the real price to fall for years now - why else would they need to repeatedly give out cash rebates to entice people to buy the unwanted inventory? The threat of rising unemployment is now being used to re-negotiate UAW contract terms with the goal of further reducing the price of GM cars in order to maintain market share - exactly the point you make above.

If your income depends in some way on real estate you might be in the incipient phase preceding a deflationary recession in that sector.

If you work for Boeing, Peabody Coal, Exxon, Freeport, FPL, GE, P&G or a myriad of other top-class US businesses, the economy probably looks just fine - the nagging feeling comes from watching your mortgage-broker neighbour lose his/her job (and reading all this stuff on iTulip ).

Finally, I think most of this community believes there are NO stupid questions.

[jacobdcoates]

Re: The Crash is a Good Thing?

Thanks GRG55,

Another question, since the asian economies are as you point out mercantile economies, won' their currencies initially strengthen against the dollar, due the lag time for the effects to be felt in the asian economies. The economies will still be doing well by the numbers when the US economy tanks. Then wouldn't they also literally fall of a cliff as lack of demand from the US consumers marks rising unemployment in their economies. With their CB lowering interest rates/ printing money in a futile attempt to keep their economies above water. I have looked back over about 2 decades worth of yen/dollar exchange rates, but given that the japaneses have been in a depression for 15 years, their currency has not appreciated/or depreciated much verses the us dollar.
There debt has exploded do to the conversion of trade dollars and govt debt spending and by the govt debt numbers the Japanese it seems they could not afford higher interest rate no matter how well the economy does. At .5% the amount of debt you can afford to carry is simply staggering, but if the normalized say to 5% then carrying cost obviously rise 10 times. At 10 trillion (dollars) that would be an extra 450 billion(dollars) in interest payments and the yearly deficits would be mind boggling . Immediately causing the the japanese govt to default on the debt. Since fundamentally they are in much worse shape financially, should one be worried that japanese interest rates will also rise substantially in a economic down turn due to the even greater likelihood that they will not pay back the debt?

The decline in dollar revenue, even lower value dollars, is significant, since most trade at multiple to the dollar, the effects it seems would be magnified like the use of leverage in investing. Or would it be that the exchange rate brings parity to the effects, the numbers would just be bigger?

[GRG55]

Re: The Crash is a Good Thing?

Thanks GRG55,

Another question, since the asian economies are as you point out mercantile economies, won' their currencies initially strengthen against the dollar, due the lag time for the effects to be felt in the asian economies. The economies will still be doing well by the numbers when the US economy tanks. Then wouldn't they also literally fall of a cliff as lack of demand from the US consumers marks rising unemployment in their economies. With their CB lowering interest rates/ printing money in a futile attempt to keep their economies above water. I have looked back over about 2 decades worth of yen/dollar exchange rates, but given that the japaneses have been in a depression for 15 years, their currency has not appreciated/or depreciated much verses the us dollar.
There debt has exploded do to the conversion of trade dollars and govt debt spending and by the govt debt numbers the Japanese it seems they could not afford higher interest rate no matter how well the economy does. At .5% the amount of debt you can afford to carry is simply staggering, but if the normalized say to 5% then carrying cost obviously rise 10 times. At 10 trillion (dollars) that would be an extra 450 billion(dollars) in interest payments and the yearly deficits would be mind boggling . Immediately causing the the japanese govt to default on the debt. Since fundamentally they are in much worse shape financially, should one be worried that japanese interest rates will also rise substantially in a economic down turn due to the even greater likelihood that they will not pay back the debt?

The decline in dollar revenue, even lower value dollars, is significant, since most trade at multiple to the dollar, the effects it seems would be magnified like the use of leverage in investing. Or would it be that the exchange rate brings parity to the effects, the numbers would just be bigger?

JDC: There's lots of folks on this site that are much more qualified than I am to answer your question - FWIW here's my best shot. I don't have any direct way to gauge what's going on in the Pacific Rim part of Asia - so I gather information from sources like iTulip, where EJ and others provide their first-hand experiences and conclusions. No doubt you've read two different outlooks for China posted recently on iTulip (John Rubino and Louis-Vincent Gave). Over the past 8 years I have spent a lot of time in the other parts of "greater Asia", namely the Arabian Gulf, India and Central Asia (predominantly Kazakhstan), as well as parts of north Africa and the Levant. Following is purely personal opinion:

• Currencies are the most blatantly manipulated markets in the world, but the evidence is mounting that the inflationary pressure of greater Asia pegging to the US$ is unsustainable. I see the effects of this first-hand where I live, which convinces me even more that they are all going to eventually give up and let their currencies rise. None of them, including Japan, will have to raise interest rates for this to happen - the Fed will see to that. As the Japanese are high savers, I believe that most of their debt is yen denominated (they owe most of it to themselves so to speak, much like the USA about 50 years ago) so there is no danger of a Govt. default.
• As they relax the pegs greater Asia should have to print less currency, and rising exchange will lower their finished goods import & raw material input costs. Whether it's yuan or yen, riyals or rupees, dinars or dhirams this should be dis-inflationary, which might allow them to lower administered interest rates. In the meantime the rising US$ price of their exports (it's already happened with oil) will put more inflationary pressure on the US economy. Congress should really be careful what it wishes for...
• I have difficulty believing the merchantile economies of PacRim Asia won't experience some loss of market share to US domestic suppliers, but after decades of increasingly integrated globalization, I am sceptical of the "decoupling" thesis. If necessary they will undoubtedly deploy their massive Govt. surpluses to keep from "falling off a cliff", and it's probably dangerous to underestimate the now legendary American consumer - or the political desire and Fed's ability to engineer a way to keep him/her spending, albeit at a less frenzied pace than recent years.
• I also wonder if there may be an asymmetric result from a slow-down in the USA (and Europe). The Asian countries I frequent are fair to large (in the GCC - huge) importers of finished goods, with a well developed and/or fast-growing internal consumer dynamic. Unlike merchantilist PacRim Asia, I think these economies may be largely indifferent to the state of the US consumer. As their currencies rise it should fuel more consumption of imports from the Eurozone, and PacRim Asia (and maybe the USA). Example: On my last trip to Almaty, Kazakhstan I saw three brand-new Toyota showrooms, in different parts of the city, that replaced the one dealer that used to get all our business. If there is a US consumer-led slow down in PacRim Asia, this could be the real "decoupling".
• One last observation. Whether it's the Khan el-Khalili in Cairo, the bazaars in Bombay, or the glitzy Dubai Duty Free, I just don't see very much out this way that is actually made in the USA. Sure the latest gadget from Apple might be engineered in Cupertino, but I am starting to wonder if there is any US$ exchange rate at which the USA can successfully re-build its (non-armaments) homeland-based export manufacturing. Believe it or not GE, a leader in liquified natural gas and other specialty oil & gas equipment technologies in high demand here, manufactures, tests and ships most of that stuff from Italy despite the high Euro.

[jacobdcoates]

Re: The Crash is a Good Thing?

Thank you very much GRG55, very informative. But aren't those surpluses denominated in dollars? I have noticed that it is hard to find U.S. made good on the parts of the world that I have traveled too, also. Although that was 10 years ago. Back then you could find the name brand stuff, like caterpillar and, GE, GM, and of course Coca Cola.

I agree that the larger more developed countries(non-mercantile) in greater asia would be indifferent as least immediately to a US slow-down. Do you think that they would suffer due to the know on effects of a slow down, since US consumption makes about 50% of world demand(read some where but can remember)?

[GRG55]

Re: The Crash is a Good Thing?

Thank you very much GRG55, very informative. But aren't those surpluses denominated in dollars? I have noticed that it is hard to find U.S. made good on the parts of the world that I have traveled too, also. Although that was 10 years ago. Back then you could find the name brand stuff, like caterpillar and, GE, GM, and of course Coca Cola.

I agree that the larger more developed countries(non-mercantile) in greater asia would be indifferent as least immediately to a US slow-down. Do you think that they would suffer due to the know on effects of a slow down, since US consumption makes about 50% of world demand(read some where but can remember)?

Probably going to take a long time to shift away from a US$ centric system. Lots of chatter about that, but notice all those brave politicians now want their central banks to depreciate their currency. What's the reference that they are measuring against?

The name brand stuff dominates here, and US brands are still highly prized - but I can't help but notice, for example, that my Crest toothpaste is now made and packaged in Saudi Arabia. One recent shift is an noticable increase in US agricultural products. The stores have a lot more fresh fruit (Washington State apples, California plums, apricots) coming in the past year or so as the $ & local currencies have depreciated.

Only time will tell how severe the US slow-down turns out to be, and what effect it will have on greater Asia. Gonna be interesting to watch...

[jacobdcoates]

Re: The Crash is a Good Thing?

That it will GRG55, may take the better part of a decade I think for the real trouble to begin. When the baby boomer's realize that the ROW is not going to loan the US money to fund their retirement,:p. Sorry can help but gloat about the baby boomer's. The sheer audacity to vote themselves benefits that no one could pay for and then act as if the already have them and further more that they in fact deserve them.

[c1ue]

Re: The Crash is a Good Thing?

Probably going to take a long time to shift away from a US$ centric system

GRG,

You may be right, but I'm preparing for the opposite.

I'm thinking the currency market is going to be like the Japanese consumer market: once you achieve 20% market share, the remaining 60% is overnight.

The only reason I see that this won't happen is that there is not a single currency that can take over the mantle.

However, I am beginning to see greater realization that it is unnecessary for those countries with strong and growing economies to rely on an outside currency when in fact they themselves can provide a more stable currency which is fully in their own control.

20/80 rule evidence: Russia has literally overnight gone from dollar price standardization to euro price standardization. Last year everything major was still quoted in US$, now every single sign has changed to y.e. (Euro). When the euro collapse comes, I am certain we'll see the ruble standardization happen equally quickly.

Collapse of single fiat currency - replaced with multi-fiat currency world: The next question is whether the separate currencies will be stable - I believe the SWFs will have a major impact on the impression of stability. SWFs are the new 'hard currency reserve' it seems and the measuring units will be ownership/control of vital assets/companies as opposed to numerical currency values.

[GRG55]

Re: The Crash is a Good Thing?

GRG,

You may be right, but I'm preparing for the opposite.

I'm thinking the currency market is going to be like the Japanese consumer market: once you achieve 20% market share, the remaining 60% is overnight.

The only reason I see that this won't happen is that there is not a single currency that can take over the mantle.

However, I am beginning to see greater realization that it is unnecessary for those countries with strong and growing economies to rely on an outside currency when in fact they themselves can provide a more stable currency which is fully in their own control.

20/80 rule evidence: Russia has literally overnight gone from dollar price standardization to euro price standardization. Last year everything major was still quoted in US$, now every single sign has changed to y.e. (Euro). When the euro collapse comes, I am certain we'll see the ruble standardization happen equally quickly.

Collapse of single fiat currency - replaced with multi-fiat currency world: The next question is whether the separate currencies will be stable - I believe the SWFs will have a major impact on the impression of stability. SWFs are the new 'hard currency reserve' it seems and the measuring units will be ownership/control of vital assets/companies as opposed to numerical currency values.

You could be correct C1ue. You are dealing with Russia in your business as I recall, and that gives a great picture window into what's going on there - and I for one appreciate the insights you share with us.

Being an gearhead, I have to take a fairly simple minded approach to this stuff. For example, IMHO anytime I hear about yet another country wanting to be paid in, or link to, Euro's I tend to think its just anti-US political posturing. As long as the Euro is freely exchangable with the US$, in quantity, I can't see what difference it makes. For example, the GCC sell their oil in US$ and then promptly exchange some of them for Euros for their bank reserves. If they sold it all in Euros we can be absolutely certain they would promptly exchange a bunch of it for US$ for the same reason.

For all the chattering class speculation about the Euro that I hear in the European press and amongst my UK business associates (motivated largely by an Iraq-related knee jerk anti-American, anti-Bush attitude in my view), I can't help but notice as soon as the SHTF this summer which nation's sovereign paper was in most demand.

Finally, I notice that the whining coming from Sarko and the French Connection is about the Euro's value compared with...er...the US$. I haven't heard them complain once about the Euro's value against the ruble, or Norwegian Krown, or the South African Rand or the Chinese yuan, or any other currency. All dollars, all the time...

Maybe I am reading too much into these indications, but I don't see how the world can quickly replace or abandon the currency of the world's largest economy and, for many, biggest trade partner. It's also the reason why I am sceptical about any US$ "crash". It's not out of the question, but it's not in anybody's interest either, so I would think the probabilities are low, compared to a continued gradual depreciation as we have experienced for 6 years now. And for all the nonsense promulgated earlier this year about the Chinese nuking the $ by mass selling Treasuries, for once I actually agree with Greenspan - you can't sell unless you have a buyer and both agree on price. Who on earth would be willing to take the other side of that trade?

Just wondering...

[c1ue]

Re: The Crash is a Good Thing?

Finally, I notice that the whining coming from Sarko and the French Connection is about the Euro's value compared with...er...the US$. I haven't heard them complain once about the Euro's value against the ruble, or Norwegian Krown, or the South African Rand or the Chinese yuan, or any other currency. All dollars, all the time...

I can't speak for the NRKr or Rand, but ruble vs. Euro has been fairly stable at least in the past 7 years.

My first visit to Russia in 2000 showed a ruble/Euro ratio around 31, it is now 35-ish.

In comparison the US$ has gone from 32 to barely 25 rubles.

As for yuan, the black market price for yuan is still showing major undervaluation.

[GRG55]

Re: The Crash is a Good Thing?

I can't speak for the NRKr or Rand, but ruble vs. Euro has been fairly stable at least in the past 7 years.

My first visit to Russia in 2000 showed a ruble/Euro ratio around 31, it is now 35-ish.

In comparison the US$ has gone from 32 to barely 25 rubles.

As for yuan, the black market price for yuan is still showing major undervaluation.

I fully expect the Euro zone China/yuan bashing to start rising in amplitude. The official line, probably in a joint strategy between the Europeans and the USA, will be that the "real problem" (for both the Euro and the $) is the yuan. That's may be how the ECB and Fed try to get off the hook...

Having said that, here's an excerpt from an International Herald Tribune article this week. It's pretty clear that the primary focus is still on the US$:

"Mounting concern over the euro's strength against the dollar failed to translate into a common European strategy Monday, as finance ministers disagreed over how much to press Washington before a meeting of the Group of 7 industrialized countries next week.

French calls for central bank intervention to cut the costs borne by European exports failed to sway Germany's finance minister, Peer Steinbrück, who insisted publicly Monday that he loved "a strong euro."

But before a meeting of finance ministers from the 13 countries that use the euro, Pedro Solbes of Spain underlined concerns about recent volatility that are shared across much of southern Europe. After saying that exchange rates should reflect economic fundamentals, he insisted that efforts to correct the euro-dollar relationship should "not only be made by the Europeans, but by all the parties concerned," according to news agencies.

That coded call for the United States to help avert further depreciation of the dollar - which fell to a record low against the euro last week - underlined the growing trans-Atlantic tensions over currency movements.

Link to article:
http://www.iht.com/articles/2007/10/08/news/euro.php