It’s Official: The World Is Now 100pc Bearish On The Dollar
$100 Oil. $850 Gold. Federal Reserve Easing. China mentions diversifying, loosening the peg, letting the yuan rise. Dollar tied firmly to whipping post:
Potential Wolfe Wave-type reversal mentioned in previous post has failed spectacularly.
Are we headed for $150 oil, $1200 gold and $2.00/euro? I don’t believe so. Note that a falling dollar would be the market’s natural method of correcting the ills of a massive trade deficit and a spendthrift government. (Here’s where I get to link to my diagram from over a year ago).
I still think the impending debt-deflation from an imploding mortgage market will outstrip the Fed’s ability to inflate us out of this crisis by once again rapidly expanding the money supply.
I would like to point out that, equity-wise, neither a catastrophically falling dollar nor a catastrophically rising dollar is a positive thing. We are on a tightrope here.
Even though I’ve discussed the potential for a falling dollar for years, I currently lean in the direction of a dollar bottom and rise because that’s now the extreme contrarian viewpoint, and I’m, well… me.
Dinosaur Trader said,
November 8, 2007 @ 9:35 pm
Will,
I mentioned on my blog tonight that every talking head was out today saying that the falling dollar isn’t a really big deal as long as you’re not buying goods from other countries.
But doesn’t the falling dollar have other ramifications that aren’t pleasant? I really don’t know, as I know nothing about economics.
Thanks,
-DT
Will said,
November 9, 2007 @ 10:05 am
DT- My education in economics is like my education in programming or in auto maintenance and repair– pure seat of the pants and originally out of necessity or passion. I believe it gives me some practical insight, but is subject to gaping holes in theoretical knowledge!
If we had the option of just spending our dollars domestically, it probably wouldn’t be that big a deal, but I’d like to point out that Not Buying Goods From Other Countries is no longer an option. Remember that lady who set out to spend a year without buying anything made in China? It’s not possible. There are a very large number of things we need and use every day which are no longer manufactured in the U.S. From shoes up to TVs. The only way to not buy foreign goods would be to boycott clothing, electronics (my TV, one of my monitors, and my cellphone are all Samsung, for instance)… most food (Chinese catfish and crawfish have completely overrun the Louisiana producers, even in Louisiana), etc etc. In other words, we’d have to go to pure protectionism and suffer the consequences. It’s just not possible. We’re not that kind of people.
However, if the market were not manipulated, these products would eventually become more expensive to the point of demand/ incentive for domestic production, perish the thought.
If The Free Market were allowed to work, and currencies were allowed to float, a rising and falling dollar would be a natural reaction to trade imbalances (i.e. supply and demand), and would tend to correct those imbalances. For instance, our demand for Japanese goods would cause them to appreciate (or, our dollars to fall) until a Camry was, say, $50,000. At some point demand would slow, and the imbalance would correct, naturally, via the market. No government manipulation (”intervention”) needed.
Instead, China and, to a lesser extent, Japan have kept dollars high (relative to their currencies) by inflating (printing more of) their own currencies and using the dollar inflows to buy U.S. Treasuries. Hence China’s ownership of approximately 1.5 trillion dollars’ worth of our treasuries, built up over just a few years (very spooky) as they’ve had to continually accelerate their purchases to keep the dollar from falling against the yuan.
This artificial demand for treasuries also explains why the yields stayed so low all the way through the last Fed raising cycle.
But the market always wins out, and no country has ever been able to manipulate a currency pair (like yuan/dollar) for very long. China will fail. At some point they won’t be able to buy enough dollars to keep the yuan from rising.
By fixing the price, they are creating artificial demand for the lower-priced item, and price-fixing, whether it’s Nixon with commodities or China with currencies, always fails, and the longer it goes on, the more catastrophic the failure. This is why screaming for Congress to fix the price of gasoline is ALWAYS a bad idea, but it sounds warm and fuzzy. They call their representative’s office from the speakerphone in the Hummer which they use for individual urban transportation, and they demand that he do something about gas prices. What a piece of work!
When China fails to be able to manipulate our currency any further, the dollar could fall 10, 20, 30 percent overnight. Countries who are our “friends” (Saudi Arabia, etc) who do their best to keep dollar assets, would be forced to bail out so the falling dollars wouldn’t collapse their economies. They’d have to sell dollars and buy euros, or whatever. And the dollar would fall further.
The effect of a rapidly falling dollar would show up first in commodities. That’s where we suddenly get $1500/ounce gold and $175/barrel oil. And $50,000 Camrys and $7.00/gallon gasoline and $80/pair Keds and $400/pair Nikes.
The crisis is that the huge leap would happen all at once, since the Free Market was not allowed to adjust naturally and prevent the imbalance from ever reaching this magnitude.
Sorry for the long-winded reply (I always seem to do that once I start typing!), but whereas a slightly falling dollar is a natural response, a collapsing dollar would cause our economy to seize, and could lead to the exact same thing as a too-rapidly rising dollar, that is, another Great Depression.
Thanks for the visit DT! Appreciate your input!
Good to Go Pile . . . « Trading for the Masses said,
November 9, 2007 @ 12:41 pm
[…] It’s Official: The World Is Now 100pc Bearish On The Dollar […]
LP said,
November 10, 2007 @ 6:16 pm
Wow….you really put some though into it. Just a bit.
I agree with you. All these free trade agreements etc are anything but free for us. We have managed to destroy not only our manufacturing for political gain. But we will soon see that we have destroyed out intellectual capital as well. I’ve been noticing a trend among the younger generation. No one wants to be an engineer. What’s also alarming is that the Asian (Indians included) no longer want to come to America to get their masters and PHDs. In addition the majority that come here are also leaving to go back. This is now becoming a big problem. Many of our coolest inventions and discoveries have been on the backs of foreigners be it Einstein or who ever. If America is no longer the premier intellectual safe haven, what’s going to happen?
Also, when something is invented in this country it really spreads to the whole world. Be it for greed (outsourcing etc) or simple profits. What’s going to happen when new drugs are discovered in red tape Europe or poorly regulated markets like India and China. Will they reach this part of the world?
We’ve got some deeper core issues that are eroding this country. When we are rich it seems to shelter us from our problems. But when we start losing our money, what’s going to happen?
While I am not for protectionism, we need to institute a true free market and free trade policy here. Why are Chinese products taxed so low in the US while American products taxed so highly in China? I’m not picking on China. This goes for Wine and Cheese from France, products from my homeland India, Tahitian Pearls etc. Pick a product and a country, we are most likely getting screwed every where. Except maybe the UAE. The tiny county in which we have the largest surplus. Keep in mind the UAE is about the size or Rhode Island. We need new leadership that will take up the challenge head on. And thus I’ll end this comment with a VOTE for RON PAUL.
Will said,
November 11, 2007 @ 3:05 pm
LP- I think you’ve hit a crucial point there- “free trade” isn’t free at all if it allows disparate taxes and especially if it doesn’t include the requirement of freely-floating currencies between the countries involved; many of these agreements have indeed put us at a disadvantage
Sarah said,
November 11, 2007 @ 8:56 pm
so what would be the best thing to do when the stockmarket reaches a triangle????;)
Will said,
November 12, 2007 @ 9:35 pm
Ah yes, the elusive triangle. I’d say that makes it time for a Sonic Cookie Dough blast! Thanks for stopping by Sarah!