Jim Rogers on the buck -- headed for the bucket.
THE DOWNWARD SPIRAL
In late January, the Senate confirmed John Snow as our new U.S. Treasury Secretary, the 73rd in the government agency’s
two-hundred plus year history. Snow, like Paul O’Neill and Robert Rubin before him, promised to follow a strong dollar
policy and take steps to help spur on a U.S. economic recovery and long-term growth.
Well, I know you’ve just started your new job, Mr. Snow, but I’ve got some sobering news for you. You and your pals can
keep talking about this alleged "strong dollar policy" until you’re blue in the face, but it’s not going to make a lick of
difference if you don’t start managing our currency more responsibly. The dollar is not just in decline; it’s a mess. If
something isn’t done soon, I believe the dollar could lose its status as the world’s reserve currency and medium of
exchange, something that would lead to a huge decline in the standard of living for U.S. citizens like nothing we’ve seen
in nearly a century.
"Oh, Jim," the disbelievers crow. "You’re just being extreme. That would never happen. After all, the dollar has reigned
supreme for several decades"
True, but it seems to me that people forget that that supremacy isn’t a gimme. A sound currency, after all, reflects solid
economic fundamentals: little to no debt, a trade surplus, a stable balance of payments—the difference between a nation's
receipts of foreign currency and its expenditures of foreign currency—and growing international reserves.
That’s not exactly the picture you get when you look at the U.S. balance sheet. Our national debt to foreigners is now
around $6.4 trillion, with interest payments alone last year totaling $333 billion. We’re importing far more goods than we
are exporting. International reserves remain around $60 billion, but we’re attracting far less direct foreign investment
every year. Our current account deficit runs at roughly $500 billion a year, or five percent of our gross domestic
product. Think of it this way: It costs us about $1.3 billion a day in the foreign markets just to keep the dollar afloat.
We’re like the untrustworthy brother-in-law who keeps borrowing money, promising to pay it back, but can never seem to get
out of debt. Eventually, people cut that guy off.
As a result, the U.S. dollar continues to fall against its foreign counterparts, down 18 percent against the euro in 2002
and 10 percent against the yen. That’s not the worst it has been in history, but it’s certainly a substantial slide. With
a war, a slow economic recovery and future threats of terrorism looming on the horizon , there’s little reason to believe
things are going to improve.
What’s worse, little is being done by Washington’s economic gurus to pull us out of our economic quagmire. Faithful
readers know I believe Alan Greenspan is the grand maestro of this economic debacle. Our esteemed Federal Reserve chairman
is the first to “buy any assets” or lower interest rates to pump money into the economy and give investors the illusion
that things aren’t as bad as they really are. Sometimes I wonder if our central bank is just going to print money until we
run out of trees. People say that inflation is a dead issue, but you wouldn’t guess that shopping where most of us buy
things.
History teaches us that such imprudent fiscal behavior has always led to economic disaster. During the early 1920s,
rampant inflation destroyed the value of German currency. German workers had to be paid twice a day just to survive; it
took a wheelbarrel full of bills just to buy a loaf of bread. In England during the 1970s the government continued to
boost its money supply, injecting its economy with liquidity, until debt levels spun out of control. Suddenly, no other
countries would buy their sovereign bonds. Finally, the International Monetary Fund had to step in and bail the Brits out.
Quite a shift for a country that only 50 years earlier was one of the richest nations in the world. Want a more current
example? Just look south, to Argentina, where its currency recently lost so much value that the government prohibited its
citizens from making withdrawals at the bank.
So why doesn’t our government do something about our flagging currency? At least over the short-term, the declining value
of the dollar does have its perks. A declining dollar is certainly good for domestic manufacturers who must compete with
foreign companies. As the dollar drops, their manufacturing costs decline and it's much easier for these companies to
compete. The global economy is already sluggish, and the falling dollar makes U.S. exporters far more competitive. Again,
it’s the illusion that things are better when they really are not.
Remember also: Our manufacturers may be better off, but foreigners then suffer so the world as a whole shows no
improvement. That is why similar practices in the 1930s were known as “beggar thy neighbor”.
While this helps U.S. manufacturers, it’s not necessarily good news for consumers. The cost of imports, like foreign cars
and foreign liquor, will rise. Since foreign goods become more expensive, U.S. companies may respond by raising their
prices, even slightly, because they can. In the end, the dollar loses value, but we’re still paying the same real amount
for many goods.
The bigger problem for the American economy is that foreign investors and foreign governments may soon lose their appetite
for the declining U.S. dollar. Interest rates, which are now absurdly low, will need to rise to give foreign investors an
incentive to invest and hold on to our currency. If not, these foreign governments and investors may look for somewhere
else to hold their money. Historically, when investors recognize that a currency is being debased or devalued, they tend
to look for sanctuary in currencies that remain stable at the insistence of the population. For years, the Swiss franc was
synonymous with monetary stability.
While currencies like the Swiss franc or the Japanese yen or the Danish krone—all of which I own—are in better shape that
the U.S. dollar, I don’t have a whole lot of confidence in them either. All of these countries’ governments have adopted
the U.S.’s dangerous habit of manipulating their own currencies to compete in the world market. It’s a double-bind of
sorts: Singapore’s government wants to keep its currency strong and sound, but if every other country’s currency is
declining against the Singapore dollar, their exports become prohibitively expensive and it becomes impossible for them to
compete. They are forced to play the monetary monopoly, shuffling the money supply, adjusting interest rates, just to make
their products competitive.
And what about the Euro? It’s certainly stronger than the U.S. dollar, which is down 18 percent against the euro for 2002.
I believe the success or failure of the Euro is one of the most important questions of the twenty-first century, one with
profound implications on the global economy. The world needs the Euro, because it needs an alternative to the dollar.
There really are only two currencies with enough liquidity to be the world’s currency—the U.S. dollar and the Japanese
yen. (The Swiss may have a sound currency, but there just aren’t enough francs out there.) The European Union has
everything going for it—an enormous population base, a balance of trade surplus. Most of its nations are creditors, not
debtors. If the Euro succeeds, people may actually stop using the dollar as a medium of exchange and as a reserve
currency.
That said, I believe that the Euro is a flawed currency. Many of the European Union’s 12 member nations just don’t run a
tight ship. Germany, which became the poster boy of fiscal responsibility in the mid-twentieth century, has again started
running up huge debts. (Have they forgotten about the wheelbarrels?) The Portuguese are running an enormous deficit.
What’s going to happen when these countries can’t balance their books? Is Brussels going to send tanks into Lisbon? I
doubt it. It may take years, even decades to root out all the problems in the EU’s inherently flawed system. Remember:
Hundreds of billions of dollars (yes, dollars, for the moment) have been invested in this new currency. Banking systems
have changed. Accounting systems have changed. Even parking meters have changed. If it fails or even struggles, there may
be huge economic losses.
How long does the dollar have? A year? A decade? I’m not so sure. As long as there’s no other currency stepping up to the
plate and EU continues to struggle with the euro, the U.S. government will likely be able to continue to jigger the books,
essentially floating our enormous tab on the backs of the rest of the world.
But remember: Whenever there has been an economic crisis like this, a new player has always emerged on the economic
landscape. A century ago, few people would have believed that the dollar was going to emerge out of the 19th century as
the dominant world currency. There’s always a phoenix that rises from the ashes. Who will it be for the 21st century? My
guess is the Chinese yuan may eventually have its day in sun. The nation has a recipe for a sound currency—a huge
population, an enormous balance of payments surplus, and a sizeable GDP to match. China is now the world’s largest
importer and the world’s second largest creditor (Japan is first). For the moment, its currency is not convertible, which
must change now that it has been admitted to the World Trade Organization. There are still a lot of cultural barriers to
get over—rampant xenophobia and fear of capitalist interests—but nothing assuages fears like steady flows of money into
your coffers.
Gresham’s law says that bad money tends to drive out good money. Well, whether we like it or not, whether we want to
believe it or not, the U.S. dollar has become bad money. Despite proclamations from Washington about a strong dollar
policy, I see no reason to believe that the dollar won’t continue to decline, that we won’t continue to borrow like
beggars and put Band-Aids on gaping wounds in our monetary policy. That is, until the day when our creditors say enough is
enough. And that day may not be far off. |
