NY Times calls US dollar peak?
This morning, the lead article on the NY Times website is titled ‘A
Rising Dollar Lifts the U.S. but Adds to the Crisis Abroad.’ Here is an
Because worries are deeper nearly everywhere else, the United States
and the dollar have essentially benefited from the worldwide panic. In
the last year, the dollar has risen 13 percent against major foreign
currencies after adjusting for inflation, according to Federal Reserve data. Foreign holdings of Treasury bills rose by $456 billion in 2008.
“It’s a huge safe haven effect,” said William R. Cline, a senior fellow
at the Peterson Institute for International Economics in Washington.
“The basic assumption that people are making is that the U.S.
government will never default on its debt.” As the dominant
flavor of money used in business worldwide, the dollar has once again
been affirmed as the global reserve currency.
In ordinary times, the rise of the
dollar would provoke American worries that it would crimp exports by
making goods more expensive on world markets. But for American policy
makers, what matters now is attracting enough buyers of American debt
to finance the rescue plans, and if the dollar must rise along the way,
that is a cost worth paying.
“The fact that we can still borrow
at lower interest rates is saving us from much more severe
adjustments,” Mr. Rogoff said. “We’re really still staring down an
The reek of hubris in this article — ‘the dollar has been
reaffirmed as the global reserve currency’ — is breathtaking. From a
contrary opinion, ‘fade the media’ standpoint, it might mark a top.
I profoundly disagree with the writer’s factual interpretation.
Arguably, a strong dollar — at a time when other nations had devalued
— is what made U.S. deflation and unemployment so comparatively severe
during 1929-1933. And Frank Roosevelt’s 41 percent devaluation of the
dollar against gold during 1933-34 is, in my opinion, the sole
effective action he took to counter the Depression.
Against the benefit of being able to peddle Treasury debt to
foreigners — which will come back to choke us as we issue too much of
it — consider the offsetting demerits. The article mentions the
crimping of exports. However, another strong-dollar effect is to weaken
the earnings of U.S.-based multinationals, as their foreign earnings
translate into fewer dollars on the income statement. This is
contributing to the deepest bear market since 1929-1932, amplifying the
Second, low interest rates are a decidedly mixed blessing. They are
wonderful for the planet’s biggest borrower, Usgov. However, low yields
are a nightmare for retirees who thought they would always be able to
earn a safe 5 percent return on fixed income. Now they get 20 basis
points on a T-bill.
Low yields also are a nightmare for pension plans, most of whom
target an 8 to 10 percent annual return from a mix of stocks and fixed
income. The past couple of years have actually produced losses, putting
pension plans (including Social Security, as we’ll learn next year)
five to ten years in the hole, versus where they planned to be. The
pension deficit also is exacerbating the downward vortex in stocks, as
corporations face heavy pension contributions.
A rule of thumb says that devaluing the currency 10 percent is like
cutting interest rates one percent. With Fed Funds already at zero,
devaluing the dollar is one of the last remaining ‘unconventional
policies’ available to ease monetary conditions further. The absurd
expressed in the NY Times article suggests that the market may soon
lower the dollar for us, whether Timmy and Benny are ready or not. A
continued ‘strong dollar’ would savage stocks and employment. How do
you spell relief? C-O-M-P-E-T-I-T-I-V-E D-E-V-A-L-U-A-T-I-O-N.
Got gold ?
There have now been 201 views of this thread with no responses. I think that is because (at least some, myself included) find it difficult to keep up with you. I for one learn something every time you post, and always stop to read when I see your name.
Please don’t let a lack of posts be interpreted as a lack of interest.
Oh yeah, yes, I got gold!
Thanks, Roger. To my annoyance, the U.S. dollar index rose again
today. A chart of the dollar index shows a double top around 89.50 —
one in mid-Nov ’08 (near the Nov. 20th low of the stock market) and
another one this month, coinciding with fresh lows in stocks.
Hank and Tim’s ‘strong dollar’ is not doing stocks any favors. This in
turn is hurting confidence, as the MSM suddenly, unusually gives a
platform to bearish forecasters who are outdoing each other in the ‘how
low can you go’ game.
Contrary opinion forecasting is not an exact science. Or maybe ‘they’ are just trying to poke me in the eye with a stick.
But the smug tone of the Times article, grandiosely claiming that the ‘dollar has been reaffirmed as the global
reserve currency,’ strikes me as a replay of that notorious ‘Why we’re
gaga for houses’ article in 2006. This was the ‘Why we’re gaga for the
dollar’ article. And just like last time, when the MSM tells you that
something is a great investment, desired by the whole envious world —
you’d better sell and sell short.
You can’t expect to raise trillions with a weak dollar… voila…. a strong dollar.
The dollar has been hard to figure out and many pundits have been yelling that the dollar was ready to collapse but inevitably, a dollar rally would follow. The big mystery seems to be that if they are printing so many dollars, where are they going – they are not hitting our circulation (inflationary).
No doubt most of the warm new dollars (from the hot printing presses) are being sopped up by debt like drops to a dry sponge. Now, it looks like we know where many of the dollars have been going –
The BIS said European and British banks have relied on an “unstable” source of
funding, borrowing in their local currencies to finance “long positions in
US dollars”. Much of this has to be rolled over in short-term debt markets.
“The build-up of large net US dollar positions exposed these banks to funding
risk, or the risk that their funding positions could not be rolled over,”
said the BIS.
The report, entitled “US dollar shortage in global banking”, helps explain why
there has been such a frantic scramble for dollars each time the credit
crisis takes a turn for the worse. Many investors have been wrong-footed by
the powerful rally in the dollar against almost all currencies, except the
The BIS said the total “funding gap” in dollars was around $2.2 trillion at
the peak, when money market liabilities are included. This had fallen to
around $2 trillion by the time of the Lehman Brothers collapse. The data is
collected with a lag but it appears that there are still huge dollar
liabilities to be covered.
There are trillions of US dollars floating around globally and the amount is still growing – sooner or later those dollars are coming back – hopefully not at the same time.