Hi Hawkmoon; Re: "Bilow, this is one of those "is the glass half-empty, or half-full" debates..."
No, it's not. This is another one of those "the Nasdaq is way too high and it's going to crash one of these days" debates.
Re: "What they call rainy day SAVINGS using "safe" USD denominations, is what we call a currency debt, since the bearer can request payment in some other denomination upon demand." More or less true. Re: "THUS, THE KEY is really what form of conversion will be chosen, another currency, or some precious metal." Not the case. No matter what they buy with their dollars, when they decide to cease holding it, the dollar crashes in value. Some things might have a larger effect. As far as their buying gold with it, that would be difficult. There's only about $13 billion worth of the stuff mined each year so it would undoubtedly run the price up:
howstuffworks.com
But the effect on the dollar is the same, it crashes. Gold is, in this sense, just another "currency", it just can't be printed by a bank. But the US Fed can't print Yen and use them to buy back dollars, (any more than the Fed can mine gold and use that to buy back dollars) so when people sell dollars for Yen the effect on the dollar is the same. It goes down.
Re: "Right now, there is a strong tendency to convert foreign currencies into USD." A year ago, people were saying "right now, there is a strong tendency for investors to value tech stocks at high prices." The problem is that "strong tendencies" change.
The problem with looking for change in the "strong tendencies" of investors is that these are very, very, very long term trends. A stock market bubble takes 20 years to cycle. By the time 20 years of nothing but rising stock prices have gone by it reaches the point where everyone can label the obvious "strong tendency". But the problem is that stock market bubbles (and currency bubbles) do have limited lives.
Our currency has bubbled and popped before, and it will bubble and pop again, but I believe it's never popped from this high a level. The right way to measure this would be something like balance of payments deficit divided by GDP. I'm sure a few minutes on the St. Louis Fed Reserve web page will give numbers for it.
The reason these systems go through bubbles is because they have positive feedback. Investors buying tech stocks drives the prices of tech stocks up, and that makes everyone see tech stocks as very safe places to keep their money. Similarly, foreigners buying US dollars keeps the dollar's price up (in the face of huge balance of payments deficit), but as long as foreigners keep buying dollars the situation continues.
The problem only gets out of control when an actual "bubble" is created. That is, in order to have a tech stock crash you have to have the value of tech stocks get fundamentally out of whack. With tech stocks it was easy to see that they were forming a bubble because the historical P/E, P/S, and P/B values were way out of line. Under that circumstance, you can predict that the system will eventually return to its long term average. Of course you don't know when.
That the US dollar is out of adjustment should be fairly clear to anyone who uses it while travelling outside the country, or even anyone who buys foreign goods with it. These imports are way too cheap.
The expensive dollar has not been a good thing for our country. If our dollar were cheaper, imports wouldn't be nearly as cheap, and our domestic manufacturers and workers would be doing better.
But recently we've been able to avoid paying the pain (i.e. unemployment rate) of having an expensive dollar because the stock market bubble gave everyone jobs. Unfortunately, with the collapse of tech stocks the unemployment rate went up.
The government's response to the rise in unemployment is to lower interest rates, but that also has the effect of making foreigners less well rewarded for holding our currency. In addition, it promotes fear that we will later have inflation.
If the US economy is healthier than the rest of the world this doesn't matter so much because the other countries will be doing the same thing. The problem happens when the US is in recession while the rest of the world is in a boom. Under that circumstance, foreigners will tend to dump dollars (because of differences in the interest rates, inflation fears, and investment opportunities), and that will crash the dollar at a time when the Fed is unable to defend the dollar with higher interest rates.
Faced with this situation, the Fed will be forced (as it always eventually is) to defend the dollar with high interest rates. Don't say this can't happen. I remember very vividly the high teen interest rates of the late 70s / early 80s. (I just don't remember exactly how high they went or exactly which year it was.)
It takes quite some time for the whole system to unwind. The last time it started more or less with the French refusing to hold US dollars instead of gold. I'm thinking that was around 1972. The system blew up on us by a few years after that.
In other words, it's not that I'm predicting that the dollar is going to fall off a cliff on Thursday. What I'm saying is that we are walking around in cliff territory, and we are likely to fall off of it sometime in the next 5 years. The reason it takes so long is because human investors take a certain time to realize that the situation has changed.
Osama bin Laden's attack was probably intended, at least partly, to contribute to a crash in the dollar. In fact, that happened to a small extent in the first few days afterwards. I'll be interested to see the Al Qaeda documents on the economy if they ever get released.
-- Carl
P.S. Eventually I'll get around to scaling the balance of payment figures to the GDP figures. I just don't feel like doing it right now. It is that scaling that tells you how bad the problem is, or that it is a non problem. But the simple fact that the balance of payments have shifted from very small numbers that switch back between positive and negative, to very large numbers that are entirely negative should be a clue. At the very least we are in a new and entirely different situation here. Sort of reminds you of the concept of "stocks are at a permanent high plateau", doesn't it. |
