Saturday, April 14, 2007

The Dollar's "Death March"

I like that phrase. It comes from this article at, quoting Peter Grandich.

Gold is pushing upward again, and the dollar is testing new recent lows.

This weekend should be instrumental, what with the G7 meeting taking place. Will they decide to allow the dollar to sink? Or will they try to prevent it from doing so? This rarely succeeds anyway, but are they ready to accept that reality?

[Thanks to for the photo that I have tweaked.]

Recent noise suggests that the central bankers might just try to change the color of their interventionist stripes this time and jawbone, at least, about how a lower dollar helps the US trade balance by lowering the price of our exports. Okay, but what about the price of imports, and the fact that all kinds of markets now exist (many of them backed by our own globalized US industries) that depend upon a strong dollar but that would be wiped out by a sudden drop in our currency?

They might answer, "Oh don't worry, we'll control the drop." Yeah, right.

In that case, I guess those foreign exporters who depend upon our strong dollar will just have to bite the bullet over a slow drop, like those subprime borrowers in the housing market and the buyers of ABS who are soon going to be holding the short stick. (ABS stands for "asset-backed securities" that are the secondary source for the funding behind the housing boom of recent years. With recent foreclosures, some of these securities are drying up like raindrops in Death Valley.)

Once again, I'll repeat the scenario as I see it. The Fed is stuck between a boulder and a granite wall. Inflation will surely continue its inexorable climb to unacceptable territory, while at the same time expansion will slow as market players try to second guess the Fed. They won't dare invest in a climate where the Fed might raise rates.

What will the Fed do? Raise the target rate to stop inflation? This would eventually help the dollar, but at what price? Because it would also precipitate the housing crisis into a deeper chasm as it hurts the burgeoning expansion of US exporting industries. Will they lower rates to encourage exports and save housing and the stock market? This would encourage inflation and kill the dollar in the long run, making us "just another player" in the global fiat currency game and risking the shortening of our "tallest dwarf" advantage. It could also damage our creditors like Japan, China, our oil partners (Saudi Arabia, et al.), and others who hold mucho mucho dollar instruments as foreign reserves. It might cause a flight from the dollar, and that is a massacre that you don't want to see.

In fact, neither choice is a good one. The only third option is to do nothing. I personally would opt for this -- in fact, I would abolish the monetary role of the Fed altogether and restrict them to surveillance of the banking industry on a private level. But who's listening to me?

They may just keep the rates where they are for a good long time in the hopes that the problem will go away. This might be the best tactic, because they might preserve their job, too. At least for the time being.

This weekend should be very interesting. We won't get a transcript of what will be said behind closed doors, but even their jawboning will have everyone's ears pointed in the same direction.

And in the meantime, gold anyone? -- although it's interesting to note that everything is historically high right now: the Dow, the S&P, and gold. Looks like investors have spread out some portion of their chips on all the spots as they wait for the "denouement."

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Anonymous Anonymous said...

what is ur prognosis for th $USD? all set for a collapse ?

9:20 PM  
Blogger Katy said...

First of all, I don't make prognoses. On the other hand, I'll make a guestimate with the caveat that this is just for fun.

I suppose there is some percentage of chance of a collapse, but I would be more willing to wager that the dollar's demise will be a slow one. We may go through some hard times like the 1980s again, and I suppose this might be therapeutic in the sense that those in control could finally learn to stop fiddling with our money.

However, it is even more likely that the lesson won't stick for long, as a look back in time seems to illustrate. No government in history has abstained from eventually debasing its currency, and the final -- perhaps coincidental -- stage is the collapse of the government itself.

9:56 PM  

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