Friday, March 14, 2008

Dollar collapsing 03/14/2008

I can't be the only one who saw this coming. I can only assume that the financial media simply didn't want it reported. December 21, 2006 I wrote a post entitled Watch the dollar in 2007. Obviously the problems were predictable. Here is the new report from the Associate Press (by way of TPM.)
AP News

Mar 13, 2008 14:04 EST

Antique store owners in lower Manhattan, ticket vendors at India's Taj Mahal and Brazilian business executives heading to China all have one thing in common these days: They don't want U.S. dollars.

Hit by a free fall with no end in sight, the once mighty U.S. dollar is no longer just crashing on currency markets and making life more expensive for American tourists and business people abroad; its clout is evaporating worldwide as foreign businesses and individuals turn to other currencies.

Experts say the bleak U.S. economic forecast means it will take years for the greenback to recover its value and prestige.
So how did we get here? Here are a few posts from 2007 that provide examples: The dollar has been artificially too high for years, but that was for political purposes. The Bush administration has been using this artificially high dollar and borrowed internationally (especially from China) to fund the war in Iraq and the tax cuts for the wealthy.

The low interest rates and bad underwriting procedures Alan Greenspan permitted and encouraged during Bush's first term in order to ensure his reelection created the Housing bubble. The collapse of the housing bubble has effectively destroyed the American credit market and is throwing the economy into the current recession. The only solution available to the federal reserve is to lower interest rated. (Anyone want to argue that when Alan Greenspan started increasing interest rates a quarter percent per month in February 2005 that he let is go too long and interest rates got too high too fast?)

Now the bill for all the borrowing the Bush administration has done to pay for their war in Iraq is coming due. The economy is in recession and the federal reserve is having to lower interest rates .

But lowering interest rates makes the dollar less attractive internationally. So the value of the dollar is dropping. How far? Well, Ben Bernanke is expected to lower interest rates again later this month. So the fall will continue.

As the dollar falls, the price of oil to run the economy will keep going up. So will everything else Americans buy internationally. Can you spell I-N-F-L-A-T-I-O-N?

It has already started. Food prices have gone up sharply starting in December 2007, and the price of gasoline has gone high enough to reach the headlines and the TV "News".

Inflation, of course, means that lenders will raise interest rates on their loans, and this is beyond the control of the Federal Reserve. So the economy will continue to sputter along, the fed will continue to try to lower interest rates, and we will all suffer with inflation as well.

It is interesting that the unemployment rate has not gone up. That's not the same as saying that there are not enough jobs being created in the economy to bring in the new workers. It says that a lot of people simply don't think that they can find a job so they have quit trying. So what, you say? Low unemployment means that wages will not be bid up. So along with inflation and shortage of jobs, wages will not keep up with inflation. For most workers additional skills and training will not improve their conditions.

So how long will this set of problem be inflicted on the American workers? As I said in December 2006 - "Watch the dollar"

There is a whole set of problems (most set in place or aggravated by conservative economic policies of the Reagan Revolution) but they will work their way out after a period of suffering. The indicator that things are starting to get better will be the international value of the dollar. The dollar will continue to fall as long as the problems are getting worse. At some point after international speculators and investors decide the worst has passed and things are getting better, the dollar will level off and possibly even recover a little. That turning point is what we are all looking for.

It won't be soon. The announcements in the business press that things will start getting better in 2009 are optimistic, based on hope rather than knowledge. When asked why they make that prediction, everyone will say fuzzy stuff like "The economy is inherently strong and should quickly recover." That's as far as their thought goes. They have no current facts to demonstrate inherently strong, just feelings like "It's always gotten better quickly." Or "We know more about the economy than we did during the Depression." Yeah, and the Japanese economists knew about the Depression and still underwent a decade of really slow economic growth. America is in uncharted economic waters, so hope isn't going to provide any realistic answers and experience in financial markets is more likely to be a negative than be useful.

So we need to keep watching the value of the dollar. It's the canary in the mineshaft, but to mangle the allusion, right now the canary is dead. We are looking for its resurrection. Maybe in 2010?

No comments: