The bear view continues to spread. Greg Peel at Australian financial news site FN Arena today rehashes the article by Mr Venkatesh I covered yesterday.
The IHT article from March 28 last year was significant in that the Asian Development Bank was then urging countries to appreciate their currencies in concert when the dollar falls, so as to minimise the additional disruptive effect of national economic rivalry in the region. I guess that contingency plans are indeed being formulated.
The point of my own coverage is not to add to the gloom-and-doom, but so that readers may make their own plans to survive and thrive in the coming changes. Some will do well. What is your strategy?
Tuesday, June 12, 2007
Monday, June 11, 2007
To sum up... from India
A chartered accountant from India today summarises the general bear case about USA trade deficits and the future of the dollar. Mr Venkatesh apportions some blame to Asian countries, for choosing to keep their currencies weak in order to sustain their trading advantage.
The article is well worth reading in full, in particular the comments on oil and the threat of trading crude in Euros rather than dollars. It is also worrying that...
On March 28, 2006, the Asian Development Bank is reported to have issued a memo, advising members to be ready for a collapse of the US dollar. [see the International Herald Tribune report here.]
Since end March 2006, the US Federal Reserve has stopped publishing the quantum of broad money [...] This is the worst possible signal that the US Federal Reserve could have sent to the world.
[The rise in commodity prices] has led to inflation across the globe. No wonder countries are forced to increase their interest rates to fight inflation. This has triggered an interest rate hike across continents and the US is finding it extremely difficult to sustain its current borrowing programme: it hardly has any elbow room to manoeuvre.
The author says that the US can neither raise interest rates much further, because of the cost of servicing debt, nor lower them, because that may deny it fresh supplies of credit.
Either we are witnessing a global meltdown of the US dollar, or a controlled US dollar devaluation (read, revaluation of other currencies). If it is a global meltdown the global economy is doomed, if is an orderly devaluation, it is damned.
The article is well worth reading in full, in particular the comments on oil and the threat of trading crude in Euros rather than dollars. It is also worrying that...
On March 28, 2006, the Asian Development Bank is reported to have issued a memo, advising members to be ready for a collapse of the US dollar. [see the International Herald Tribune report here.]
Since end March 2006, the US Federal Reserve has stopped publishing the quantum of broad money [...] This is the worst possible signal that the US Federal Reserve could have sent to the world.
[The rise in commodity prices] has led to inflation across the globe. No wonder countries are forced to increase their interest rates to fight inflation. This has triggered an interest rate hike across continents and the US is finding it extremely difficult to sustain its current borrowing programme: it hardly has any elbow room to manoeuvre.
The author says that the US can neither raise interest rates much further, because of the cost of servicing debt, nor lower them, because that may deny it fresh supplies of credit.
Either we are witnessing a global meltdown of the US dollar, or a controlled US dollar devaluation (read, revaluation of other currencies). If it is a global meltdown the global economy is doomed, if is an orderly devaluation, it is damned.
Sunday, June 10, 2007
Dollar's rise only temporary
Chris Gaffney in Friday's Daily Pfennig comments on the recent rise in the dollar and puts it down to a sell-off in emerging market equities and some selling of gold to settle cash calls. He says the money is only "parked" in the dollar and will be off again soon:
The dollar will continue to trend down versus the currencies of economies that are better off.
As investors move away from riskier assets, the countries with strong balance sheets will begin to trade at a premium.
This refocusing on fundamentals suggests a return to sanity is on its way - initially not pleasant.
The dollar will continue to trend down versus the currencies of economies that are better off.
As investors move away from riskier assets, the countries with strong balance sheets will begin to trade at a premium.
This refocusing on fundamentals suggests a return to sanity is on its way - initially not pleasant.
US Commerce Department figures: the good news is bad news
The US Commerce Department reported on Friday a narrowing of the trade deficit in April.
What is remarkable is the positive spin on the story. When you look at the figures, exports increased by $0.25 billion, but imports fell $3.6 billion. So 94% of the improvement is simply down to reduced demand for imports. This could be interpreted as a sign that Americans are tightening their belts, rather than improving their trade.
And how do we factor the dollar's exchange rate into these import and export figures? How do the numbers actually translate into quantities of physical goods?
Also, it's still a deficit, and at $58.5 billion in one month, divided by the USA's estimated (CIA, July 2007) population of 301 million, that's $194 bucks worse off per head. Or, given the average US household size (2.59), it's $6,037 per household per year. AAA statistics show you could run a small sedan on what you're losing to overseas trade.
What is remarkable is the positive spin on the story. When you look at the figures, exports increased by $0.25 billion, but imports fell $3.6 billion. So 94% of the improvement is simply down to reduced demand for imports. This could be interpreted as a sign that Americans are tightening their belts, rather than improving their trade.
And how do we factor the dollar's exchange rate into these import and export figures? How do the numbers actually translate into quantities of physical goods?
Also, it's still a deficit, and at $58.5 billion in one month, divided by the USA's estimated (CIA, July 2007) population of 301 million, that's $194 bucks worse off per head. Or, given the average US household size (2.59), it's $6,037 per household per year. AAA statistics show you could run a small sedan on what you're losing to overseas trade.
Is the bear view becoming more generally accepted?
Friday's CNBC echoes familiar themes: Leburn of Weiss Capital Management tips high-dividend stocks in financially strong companies (as per Peter Schiff's book); David Tice favours cash (see Marc Faber recently), maybe with precious metals to protect against the dollar's decline; the stockmarket looks volatile (maybe kept up for a time by inflation).
US dollar needs to fall; intellectual property needs protection
An interesting report from China Daily yesterday. The American Chamber of Commerce there is asking for less pressure to revalue the renminbi and more for structural reforms in China.
The value of the renminbi is not the answer to everything. If the Chinese yuan rises against the dollar, then Chinese imports will cost more, and America might well cut back; but US industrial exports could be slow to grow because of eroded manufacturing capacity. And a weaker dollar would mean foreigners could bid more for US products (including foodstuffs), so creating price inflation in the US while production lags behind demand.
And there is also the question of just how much the dollar would have to drop to make US products globally competitive anyway. What you could see is Chinese light industrial manufacturers suffer a contraction, losing business to countries that have even lower wage costs, such as Vietnam. When the dust has settled, America's balance of trade crisis could simply have widened from US-China to US-Far East.
So it's not so much the renminbi that has to rise, but the dollar to fall.
Also interesting to see intellectual property rights come to the fore. As America sees her economic strength sapped, she must worry about the scruples of her competitors. If "might makes right", patents and copyright may not be the pension she was hoping for. I did discuss this a while ago (May 23), and think it's an issue to follow.
The value of the renminbi is not the answer to everything. If the Chinese yuan rises against the dollar, then Chinese imports will cost more, and America might well cut back; but US industrial exports could be slow to grow because of eroded manufacturing capacity. And a weaker dollar would mean foreigners could bid more for US products (including foodstuffs), so creating price inflation in the US while production lags behind demand.
And there is also the question of just how much the dollar would have to drop to make US products globally competitive anyway. What you could see is Chinese light industrial manufacturers suffer a contraction, losing business to countries that have even lower wage costs, such as Vietnam. When the dust has settled, America's balance of trade crisis could simply have widened from US-China to US-Far East.
So it's not so much the renminbi that has to rise, but the dollar to fall.
Also interesting to see intellectual property rights come to the fore. As America sees her economic strength sapped, she must worry about the scruples of her competitors. If "might makes right", patents and copyright may not be the pension she was hoping for. I did discuss this a while ago (May 23), and think it's an issue to follow.
When gold may not be safe
Marc Faber has commented recently that there are bubbles everywhere, including commodities. Although gold has intrinsic worth, its price is still going to be affected by the laws of supply and demand. It has risen very quickly over the past couple of years, but if you believe those experts who tell us that our inflation has been fuelled by credit, then if and when a "credit crunch" comes, the scramble to disinvest in order to pay creditors and get ready cash may well mean a temporary drop in the gold price, too.
I think gold bugs are looking to the longer future, when governments desperate to get out of a slump may choose to print currency and so devalue it against precious metals, which they can't multiply at will. Meanwhile, if you follow Dr Faber, you may consider waiting with your cash at the station instead of boarding any of the asset trains, as he puts it.
I think gold bugs are looking to the longer future, when governments desperate to get out of a slump may choose to print currency and so devalue it against precious metals, which they can't multiply at will. Meanwhile, if you follow Dr Faber, you may consider waiting with your cash at the station instead of boarding any of the asset trains, as he puts it.
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