The US Dollar: On the Edge of the Abyss

[Albert0373]

The US Dollar: On the Edge of the Abyss


By Sam Kirtley Printer Friendly Version
Jul 17 2007 9:42AM


www.gold-prices.biz

We are literally about half a point from seeing the US Dollar break its single most important support level. Here, eighty is the magic number, watch the USD fall below 80 and you have witnessed the beginning of the end of the dollar and the dawn of a terrific run in gold prices that will take the yellow metal to an all time high in a surprisingly short period of time.

Over the last year, as the chart below demonstrates, we have watched the dying dollar make lower lows and lower highs. The USD occasionally makes a pathetic attempt to break its 200dma, but that has only happened a couple of times over the last year. Indeed, the USD has not been above its 200 day moving average since the 50dma crashed down through the 200dma in early April 2006.

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The US Dollar: On the Edge of the Abyss

The USD has fallen over two points in the last fortnight or so, and this rate of decline will continue if it breaks the support level at 80. When the USD was testing this support at the beginning of 2005, it went on a terrific run to 92.63 but somehow we do not think that the dollar will be able to pull another rabbit out the hat as it did then. More and more investors are coming around to the fact that the USD is dead and people do not want to hold this rapidly devaluing paper anymore. When the USD breaks 80, the whole world will see a big sell signal and this influx of people dumping dollars will send the greenback down into the abyss and its anyone’s guess how far it can fall, but it will fall…a lot.

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The US Dollar - On the Edge of the Abyss

However there is one fan of the USD, a fan that will try and keep the dollar up or at least “manage” its invertible collapse. That of course is the US Government. Armed with Ben Bernanke’s Plunge Protection Team, you can bet you bottom dollar (although shortly it might not be worth much) that they will do everything possible to make sure their currency does not have a full blown crash. They would rather that USD gradually floated down in a way that would benefit US exporters. Trying to manipulate the market is a dangerous game, as no person, company or government is bigger than the market and eventually the market will fight back and win.

In fact the more an entity tries to suppress something, whether this be the financial market or something as simple as an idea, the more drastically the suppressed force will fight back. Therefore all the Plunge Protection Team are doing by trying to prop up the dollar or the stock market is delaying the invertible and making the backlash reaction all the more dramatic. You can try to push the bad times back, but this will just make the bad times worse when they eventually come around.

It is crucial to remember that the United States on America is not the only government with an interest in which way the dollar goes. With their hands on over $1.2 trillion dollar bills, the Chinese Government must also be watching the USD like hawks having lost $100 billion of value in less than a year. The government in China is very concerned at keeping “social unrest” at a minimum so how do you think the Chinese people will react if the USD continues declining further and further down bringing their foreign currency reserves closer and closer to worthlessness. China must be looking to transfer their dollars into something that retains its value or perhaps even increases in value, after all isn’t that what investments are supposed to do?

China will look to get out of dollars and into anything that isn’t falling as fast as the USD. The private equity group Blackstone, made the biggest US IPO of the year recently and Beijing swiftly swooped in and bought a 9.9% stake in the company, using $3 billion of its foreign exchange reserves. It is likely that we will see more examples like this of China buying companies, commodities and whatever they can to get out of the dollar. Gold and silver bullion or the mining companies in the precious metals industry are obvious candidates for a piece of China’s USD pie as they move up and as the greenback moves down so they are the most logical hedge against a declining dollar.

If China and other countries holding large USD reserves shift even a small proportion of their dollars into the precious metals, it will have massive effect on gold prices and silver prices. Governments aside, individuals around the world will be looking to trade any dollars they have for a piece of gold or some gold stocks rapidly increasing in value.

So do we think the USD will break 80 in the next few days?

No. The PPT will probably buy it back up a couple of points but then it will drift down again to test the eighty level and will probably break it in the coming months. However now is the time to buy gold and silver and gold stocks and silver stocks.

[Svenwulf]

very nice article, albert. allow me to add this re-post:

Zimbabwe: Best Performing Stock Market in 2007?
By John Paul Koning

Posted on 4/10/2007

CNBC and other stock market tabloids are notorious for making simplistic linkages between the stock market and gross domestic product (GDP). They tell us that any event that stimulates GDP growth inevitably drives stock prices up, and any event that hurts GDP growth pushes stocks down.

Since the largest share of GDP is consumption, consumer demand becomes the all-important figure driving growth. When the consumer gets too excited, the Fed must step in to cool them down with interest-rate hikes. When the consumer isn't spending, Fed interest-rate cuts stimulate demand.

The tragedy currently occurring in Zimbabwe completely contradicts this sort of logic. Zimbabwe is in the middle of an economic disintegration, with GDP declining for the seventh consecutive year, half what it was in 2000. Ever since President Mugabe's disastrous land-reform campaign (an entire article in itself (http://www.mises.org/story/1048)), the country's farming, tourism, and gold sectors have collapsed. Unemployment is said to be near 80%.
Yet something odd is happening.

The Zimbabwe Stock Exchange (the ZSE) is the best performing stock exchange in the world, the key Zimbabwe Industrials Index up some 595% since the beginning of the year and 12,000% over twelve months. This jump in share prices is far in excess of increases in consumer prices. While the country is crumbling, the Zimbabwean share speculator is keeping up much better than the typical Zimbabwean on the street.

CNBC logic fails to explain the coincidence of a rising ZSE and collapsing GDP because it entirely ignores the monetary side of the economy. At this point Austrian economics makes its contribution to our story. According to Austrian Business Cycle Theory (ABCT), the peak-trough-peak pattern that economies demonstrate is not their natural state, but one created by excess growth in money supply and credit. New money is not simply parachuted to everyone equally and at the same time — it is sluiced into the economy at certain initial "entry points." From these entry points, a number of initial goods are bought by recipients of new money causing a rise in price for these initial goods relative to other goods.
Because entrepreneurs react to this observed but unjustified change in the structure of prices by investing their capital, misallocation occurs. As money-supply growth continues and prices become more contorted, more and more ventures are undertaken that would not be undertaken in a regime without money-supply growth. When, for whatever the reason, money supply finally contracts, the artificial strength in prices that encouraged unprofitable ventures is removed, prices collapse, and large numbers of ventures go bankrupt. Thus we have the recession part of the business cycle, the simultaneous failure of many firms at the same time.

If, as the Austrian theory states, money enters the economy at certain points, it is likely that a nation's stock market will become a prime beneficiary of any monetary expansion. Fresh money enters the economy first through banks and other financial entities who may invest it in shares, or lend it to others who buy shares. Thus stock prices rise relative to prices of things like food and clothes and will outperform as long as this monetary process is allowed to continue.

This is what we are seeing in Zimbabwe. With the country suffering from Mugabe's catastrophic policies, increasingly the only means for the government to fund itself has been money-supply growth. This has only exacerbated the economy's problems. The flood of new money that authorities have created has caused the existing value of money in circulation to plummet, i.e., the prices of all sorts of goods to explode, some rising more than others.

As prices become more misaligned, basic decision-making abilities of normal Zimbabweans are impaired and the day-to-day functioning of the economy deteriorates. Perversely, all of this has forced the government to issue even more currency to make up for budget shortfalls and to buy support. At last measure, the country's consumer price index was rising (i.e., the purchasing power of currency declining), at a rate of 1,729% a year.

The ZSE is growing some three times faster than consumer prices. This relative outperformance versus general prices is a result of stocks being a chief entry point for the flood of newly created money. Keep Zimbabwean dollars in your pocket, and they've already lost a chunk of their value by the next day. Putting money in the bank, where rates are pithy, is not much better. Investing in government bonds is the equivalent of financial suicide. Converting wealth into foreign currency is difficult; hard currency is scarce, and strict rules limit exchangeability.

As for capital improvements, there is little incentive on the part of companies to invest in their already-losing enterprises since economic prospects look so bleak. Very few havens exist for people to hide their wealth from the evils created by Mugabe's policies. Like compressed air looking for an exit, money is pouring into shares of ZSE-listed firms like banker Old Mutual, hotel group Meikles Africa, and mobile phone firm Econet Wireless. It is the only place to go. Thus the 12,000% year over year increase in the Zimbabwe Industrials.

Our Zimbabwe example, though extreme, demonstrates how changes in stock prices can be driven by monetary conditions, and not changes in GDP. New money gets spent or invested. In Zimbabwe's case, because there are no alternatives, it is stocks that are benefiting.
This sort of thinking can be applied to the stock markets in the Western world too. Though western central banks have not been printing nearly as fast as their Zimbabwe counterpart, they do have a long history of increasing the money supply. It forces one to ask how much of the growth in Western stock markets over the preceding twenty-five years has been created by a vastly increasing money supply, and how much is due to actual wealth creation. Perhaps stock prices have increased faster than goods prices for the last twenty-five years because, as in Zimbabwe, Western stock markets have become one of the principal entry points for newly printed currency.

[Svenwulf]

brought back to my attention courtesy of the following-

Zimbabwe debates nationalization, Mugabe future


By Cris Chinaka 1 hour, 18 minutes ago

HARARE (Reuters) - Zimbabwe's parliament opens a new session this week to debate radical plans to nationalize foreign firms and a law empowering the house to name President Robert Mugabe's likely successor without a national vote.
Mugabe, the southern African state's sole ruler since independence from Britain in 1980, will on Tuesday officially open the last session of the House of Assembly and the upper Senate ahead of general polls due by next March.
Political analysts say the proposed legislation before the chambers, including the constitutional bill seeking to combine parliamentary and presidential elections and the economic empowerment bill, could increase uncertainties about Zimbabwe's future.
"On the economic side, we are looking at a government that is, in word and in deed, continuing with radical policies, which in respect of the farm seizures, badly hurt the economy," said Eldred Masunungure, a political science professor at the University of Zimbabwe.
"The nationalization of foreign firms may have a similar impact if it is handled as badly as the land redistribution program," he added.
Masunungure said the Constitutional Amendment Bill consolidating the electoral calendar, with clauses giving parliament power to elect a new president if a vacancy occurred between elections, could give Mugabe an avenue to retire after the 2008 polls with room to influence who will succeed him.
"I know that the concept of a dignified exit for Mugabe has been dismissed by some people, and that there those who believe he wants to hang onto power for life, but I think Mugabe also knows that his future depends on creating enough space to maneuver," he said.
"To me that bill gives him space for some exit, but then politics is not a clinical game with predictable results."
POLITICS OF PATRONAGE
Mugabe, 83, is seeking re-election in 2008 and analysts say he is sure to use the empowerment law to enrich supporters and consolidate ranks before those elections.
Leading economic consultant John Robertson said the black economic empowerment and a nationalization drive, which the government hopes will start October, would further damage an economy already hit by Mugabe's other controversial policies.
Mugabe plans to transfer control of all companies, including foreign banks and some mining operations, to locals under the black empowerment bill.
Mugabe's ruling ZANU-PF party dominates parliament and is expected to pass the bill before September.
"This is going to be another exercise in cronyism, grabbing companies or shares and giving them to the party faithful," he said.
"The country needs policies that will attract more foreign investment, and all that is happening at the moment is such that it's making the situation worse," Robertson said.
Analysts say Mugabe's government has compounded the Zimbabwe economic crisis in the last three weeks with a price blitz that has led to empty shop shelves in a country which suffers from the world's highest inflation rate.
Mugabe ordered consumer prices slashed by half last month after the cost of some foodstuffs had risen threefold, further squeezing urban workers living with severe water and power cuts, burst sewer pipes and a suffocating political environment.
Once the breadbasket of the region, Zimbabwe has endured a punishing recession that has squeezed consumers with rocketing inflation, left four out of five people without jobs and resulted in shortages of foreign currency, food and fuel.
Mugabe says the economy has been sabotaged by his Western foes and branded company executives "serpents" drafted by former colonial power Britain to help topple him by raising prices, cutting production and stashing foreign earnings abroad.

[Albert0373]

Dollar Hits New Lows Vs. Euro, Pound
Monday July 23, 11:48 am ET

LONDON (AP) -- The U.S. dollar sank to new lows against the euro and British pound Monday and was mixed against other currencies in European trading. Gold prices fell.

The euro traded at $1.3816, down from $1.3822 late Friday in New York. It reached $1.3846 in Asian trading Monday, an all-time high. Later, in midday trading in New York, the euro fetched $1.3814.

The British pound traded at $2.0593, up from $2.0549 late Friday. Earlier in the day, the pound rose as high as $2.0603, a fresh 26-year high against the dollar.

Other dollar rates in Europe, compared with late Friday, included 121.28 Japanese yen, up from 121.24; 1.2048 Swiss francs, up from 1.2013; and 1.0431 Canadian dollars, down from 1.0479.

In midday New York trading, the dollar bought 121.37 yen and 1.2058 Swiss francs, while the pound was worth $2.0582.

Gold traded in London at $681.85 per troy ounce, down from $682.60 late Friday. In Zurich, gold traded at $680.90 per troy ounce, down from $681.35. In Hong Kong, gold rose $6.60 to close at $682.95.

Silver traded in London at $13.27 per troy ounce, down from $13.36.

Not trying to sound at all like Jack, considering less than 4% unemployment, single digit interest rates. I'd say we're doing pretty darn well. The strength of the $ v. other currencies is only 1 measure of financial strength. GDP (still strong), stock market in record territory- I'd say those are all pretty healthy signs.

[madcowdisease]

Not trying to sound at all like Jack, considering less than 4% unemployment, single digit interest rates. I'd say we're doing pretty darn well. The strength of the $ v. other currencies is only 1 measure of financial strength. GDP (still strong), stock market in record territory- I'd say those are all pretty healthy signs.

Couldn't the stock markets stength be a parallel of the declining dollar. Cheaper domestic goods means more exports and GNP as well as those converting their currency to dollars to buy on our exchanges can literally buy more shares with a weakening dollar.

I'm not convinced a weak currency is such a good thing in this consumer driven economy.

[stargazer]

It's been a month... Looks like it held right above 80, but just barely ----- before going up a little 8)

[Albert0373]

Dollar Hits All-Time Low Against Euro


Article Tools Sponsored By
By THE ASSOCIATED PRESS
Published: September 12, 2007

Filed at 11:55 a.m. ET

LONDON (AP) -- The U.S. dollar hit a record low against the euro and was lower most against other major currencies in European trading Wednesday. Gold rose.

The euro hit an all-time high against the U.S. dollar on Wednesday, climbing as high as $1.3882 amid speculation that the Federal Reserve will soon cut interest rates before falling back. The previous record of $1.3852 was reached in July.

The euro was quoted at $1.3882, up from $1.3832 late Tuesday in New York. Later, in midday trading in New York, the euro fetched $1.3895.

Other dollar rates in Europe, compared with late Tuesday, included 114.23 Japanese yen, down from 114.30; 1.1843 Swiss francs, down from 1.1893; and 1.0378 Canadian dollars, down from 1.0424.

The British pound was quoted at $2.0298, down from $2.0317.

In midday New York trading, the dollar bought 114.25 yen and 1.1850 Swiss francs, while the pound was worth $2.0307.

Gold traded in London at $708.70 per troy ounce, up from $705.65 late Tuesday. In Zurich, gold traded at $705.20 bid per troy ounce, up from $703.90. Gold rose 20 cents in Hong Kong to $704.85.

Silver traded in London at $12.56, down from $12.60

[madcowdisease]

Look out below.

I may be the only person in America hoping the Fed does not cut. We are becoming relatively poorer to the rest of the world, and I don't see how our economy can continue its path of yore where we've enjoyed cheap foreign goods thanks to a strong greenback.

[aiki14]

Look out below.

I may be the only person in America hoping the Fed does not cut. We are becoming relatively poorer to the rest of the world, and I don't see how our economy can continue its path of yore where we've enjoyed cheap foreign goods thanks to a strong greenback.

As a traveler I have felt the sting of being in the UK and renting a car, in pounds, and in Australia and New Zealand in their dollars. It's like paying an extra 10-15% on everything, and then getting hit with petrol costs. If this keeps up I'll end up with a Holden instead of the Lotus the next time I am in Cardiff.
Still I want the fed to cut because I am better off with a market upturn than a strong dollar comparatively.

[onlinesuccess]

I too have felt the sting of the weak dollar verses the euro. I import, on a monthly basis, 10,000 - 15,000 USDollars of goods from both Spain and Denmark. Only three short years ago I was at a much better cost of goods sold, as now the exchange is against me at 1.37 euro to 1.00 USDollar. I have to purchase more in bulk to keep my costs down, thus tying up more capital that is better spent in investments. Oh well!

Certainly makes the euro and eurobonds look attractive for a safe spot during this period...

[Albert0373]

How far, and how fast, will the dollar fall?
Sep 13th 2007 | LONDON AND WASHINGTON, DC
From The Economist print edition
Satoshi Kambayashi

FOR several years, the darkest scenarios for the world economy have involved a dollar crash. The script was simple. America’s dependence on foreign capital was a dangerous vulnerability. At some point foreign investors would refuse to pile up ever more dollar assets. If investors were spooked, say by a crisis in American financial markets, they might ditch dollars fast. The greenback would plunge. A tumbling currency would prevent the Fed from cutting interest rates, deepening and spreading the economic pain.

Well, the financial shock has hit but where is the stampede out of dollars? The greenback has fallen, to be sure, particularly since it has become clear that the Federal Reserve is likely to cut interest rates on September 18th, and particularly against the yen and the euro—the dollar hit an all-time low of $1.39 per euro on Wednesday September 12th and its decline continued on Thursday.

But the decline, so far, has hardly been a panicked rout. Although the dollar has plumbed historical depths against an index of important currencies, it has fallen by less than 1.5% since the financial turmoil hit in early August. Measured against a broader group of currencies that includes all America’s main trading partners, the dollar is little changed from where it was before August’s tumult began.

As the first signs of trouble emerged, the dollar even rose. To some analysts this confirmed the dollar’s status as a haven in troubled times. More likely, it was the consequence of unwinding leveraged bets elsewhere. Whatever the reason, the dollar’s initial buoyancy did not last. In recent weeks the greenback has slowly fallen and the likely path of interest rates suggests there is more weakness to come.

Recent gloomy job statistics suggested that the economy was weakening well before the credit turmoil hit, and all but sealed the case for a cut in short-term interest rates on September 18th, certainly of a quarter point, perhaps by as much as half a percentage point. With the European Central Bank hinting strongly that euro-zone interest rates might rise again this year, it is no surprise that the dollar has hit new lows against the euro.

Its path against the yen is harder to foresee. Japan’s economy, too, seems to be in a spot of bother making it much less likely that the Bank of Japan will raise interest rates in a hurry. That suggests the carry-trade (selling borrowed yen to invest elsewhere) will remain attractive, limiting the yen’s rise.

For true dollar pessimists, these cyclical considerations are only part of the story. Far more important, they argue, is the risk that the private investors and central banks that have been funding America’s gaping current-account deficit become permanently less keen on dollar assets. Ken Rogoff, an economist at Harvard University, and a dollar bear, argues that America’s image as a great financial centre has been tarnished by the subprime mess. The “mystique” that has allowed America to borrow lavishly and cheaply has suffered a blow. The result, he argues, must be a lower dollar and higher interest rates in America relative to the rest of the world.

Indeed, the complex structured-debt products that investors now shun have been an important source of financing for America’s current-account deficit. In 2006 foreign investors, on net, bought some $400 billion of corporate-issued debt (including mortgage-backed securities not guaranteed by the government-sponsored housing giants Fannie Mae and Freddie Mac). That is the equivalent of around half the current-account deficit.

It is hard to know what share of this debt was asset-backed, let alone mortgage-backed but the numbers are big enough that foreign flight from the mortgage-backed market, if not countered by eager buying of other types of American assets, could cause trouble for the dollar.

The lesson of the past few weeks, however, is that this is unlikely to happen all of a sudden. And if private investors fret, central banks may well pick up the slack. China, in particular, has little to gain from a dollar crash. With domestic inflation now at a ten-year high, China’s politicians may be willing to let the yuan rise somewhat faster against the dollar. But they are unlikely to add to a rout, not least because that would make their exports much less competitive in America.

Another argument against a sudden crash is that the dollar is already quite cheap. In real effective terms, it has slowly fallen by some 20% since its recent peak in 2002. That decline is already helping to shrink America’s external deficit. Add in the probability of sharply slower domestic demand in America, and the current-account deficit could shrink a fair bit over the coming months. A smaller need for foreign funds would itself put a floor under the dollar. All told, the doom-mongers’ script may play out in reverse. Instead of a financial crisis prompting a dollar crash, it may accelerate the unwinding of the imbalances that had the worrywarts so unnerved in the first place.


http://www.economist.com/daily/news/displaystory.cfm?story_id=9804272&top_story=1

[Albert0373]

$0.93....new low since the Civil War

Dollar sets new record above $1.07 US as unemployment rate drops to 5.8 per cent

19 hours ago

OTTAWA - The Canadian dollar entered uncharted territory Friday after a monster employment report blew the roof off the upper limits for the loonie's potential.

With the economy pumping out 63,000 additional jobs in October and the unemployment rate plunging to 5.8 per cent - the best in 33 years - the dollar gained a full two cents in morning trading, peaking over $1.07 US.

The loonie, already soaring on high commodity prices, hit new records Friday, surging more than 1.9 cents to end the day at 107.04 cents US, its highest close on record. Earlier, the loonie traded as high as 107.3 cents US before cooling slightly as a new report showed U.S. employment also was healthy in October, gaining 166,000 jobs.

"That's a big move," said Bank of Montreal deputy chief economist Douglas Porter. "I think a reasonable near-term target now is $1.10, but there's no sign it's going to stop there."

http://canadianpress.google.com/article/ALeqM5hSPjtwINMoyVzOzvF2ivVPJMdsww

The dollar is only going to fall further against the Canadian dollar and the Euro, imo. The only way to stop it is to raise interest rates, which is something the Federal Reserve isn't interested in because they are too busy trying to please Wall St.

Someone did some research and compared it to the other currencies as well, past and current:

$1 USD = $0.95080 CAN (2002 -- 1USD = 1.56540 Canadian)
$1 USD = $0.69225 EURO ( 2002 --1USD = 1.02320 Euro)
$1 USD = $0.48262 British Pounds (2002 -- 1USD =0.64350 Pounds)
$1 USD = $1.08324 Australian Dollars (2002 -- 1USD = 1.80510 AUSD)
$1 USD = 24.6740 Russian Rubbles (2002 -- 1USD = 31.750 Rubbles)
$1 USD = 39.3250 Indian Ruppies (2002 -- 1USD = 48.4820 INR)
$1 USD = 114.6650 Japanese Yen (2002-- 1USD = 124.490 Japanese Yen)
$1 USD = 7.4820 Chinese NY (2002 -- 1USD = 8.2870 CNY)

[freakscene]

I would be interested in learning the members of the boards opinions of moving back to the gold standard.

is it possible ?

[Albert0373]

Supply-Side University, Fall Semester, Lesson #15

Memo To: SSU Students
From: Jude Wanniski
Re: Why Nixon Left Gold

One of our more skeptical students last week posed the question: "If a gold standard is so good, why did we leave it, and why are so few people now in favor of returning to it." The history is worth reviewing in our supply-side paradigm, which you will not find anywhere else. Some of it comes through in my book, The Way the World Works, but it is worthwhile to go over it now, fresh.

http://www.polyconomics.com/searchbase/01-08-99.html

________________________________________

Ron Paul actually supports going back to the Gold standard, found via theStreet.com:

http://www.thestreet.com/_yahoo/markets/commodities/10363490.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

________________________________________

And found this one page where a person gathered opinions on returning to the gold standard, one of which is:

Some critics say that for all the inflation containing benefits of returning to the gold standard, you create new problems, such as creating a rather inflexible system that might not be compatible with the current world economic system that is popular today. And also there's a difficulty of setting the gold price at any particular moment.

http://www.bullnotbull.com/archive/gold-standard.html

Interesting...

[netwrangler]

I would be interested in learning the members of the boards opinions of moving back to the gold standard.

is it possible ?FS, let me put this in a very personal perspective.

My [favorite] cousin Hannah cared for her Mom to the end. At one point, the MDs wanted to perform some invasive procedures. Hannah told me that my Aunt's response was, "To what end?" The procedures were not performed. My Aunt died in peace

All this as preface to the question: Should we be moving back to the gold standard?
The answer: To what end?

I'll leave it to economists far savvier than I am to explain the details of why the US returning to the gold standard is "a bad thing." I feel fairly sure the rationale is based on the "Global Economy" and the "globalization" of economic interactions.

My gut says that going back on the gold standard is a return to Merchantilism, which has not been a winning strategy for some time.

[Albert0373]

Great article:

Nor is there any end in sight to the sinking of the dollar. For, as foreigners demand more dollars for the oil and goods they sell us, the trade deficit will not fall. And as the U.S. government prints more and more dollars to cover the budget deficits that stretch out — with the coming retirement of the baby boomers — all the way to the horizon, the value of the dollar will fall. And as Ben Bernanke at the Fed tries to keep interest rates low, to keep the U.S. economy from sputtering out in the credit crunch, the value of the dollar will fall.

The chickens of free trade are coming home to roost.

http://news.yahoo.com/s/uc/20071102/cm_uc_crpbux/op_334275

[madcowdisease]

The principal factor in what may one day destroy this great nation is our rampant spending. We are a nation on life support and living off of credit. If we were to raise taxes to cover all of our expenses, commitments, and entitlements we'd put a stranglehold on business and if we continue down the path of mortgaging our future to the Chinese through printing money and massive bond sales we'll only drive our fiat currency in to the ground. Sorry to sound so pessimistic but things seem different this time. Here's an article on the situtation:

US deficit soaring to record half-trillion dollars as Bush leaves; sagging economy blamed


WASHINGTON (AP) -- The government's budget deficit will surge past a half-trillion dollars next year, according to gloomy new estimates, a record flood of red ink that promises to force the winner of the presidential race to dramatically alter his economic agenda.
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The deficit will hit $482 billion in the 2009 budget year that will be inherited by Democrat Barack Obama or Republican John McCain, the White House estimated Monday. That figure is sure to rise after adding the tens of billions of dollars in additional Iraq war funding it doesn't include, and the total could be higher yet if the economy fails to recover as the administration predicts.

The result: the biggest deficit ever in terms of dollars, though several were higher in the 1980s and early 1990s as a percentage of the overall economy.

Neither campaign is backing off campaign promises -- McCain to cut taxes and Obama to expand health and education programs -- in light of the bleaker new figures.

"We can't afford not to invest in some major initiatives such as health and energy and more tax cuts," said Obama economic adviser Jason Furman.

But Democrats controlling Congress suggest that may have to change once President Bush's successor takes office.

"Whoever becomes the next president will have a very, very sobering first week in office," said Senate Budget Committee Chairman Kent Conrad, D-N.D.

McCain promises to renew the full roster of Bush tax cuts enacted in 2001 and 2003 and add many more for businesses and upper income people who pay the alternative minimum tax. The Bush tax cuts expire at the end of 2010 and renewing them would soon cost well over $200 billion a year. Eliminating the alternative minimum at the same time would cost almost as much.

Obama would repeal tax cuts on wealthier taxpayers and investors but would leave most of the Bush tax cuts in place while seeking additional cuts for senior citizens, the middle class and the working poor. And he also wants lots of new spending for health care, education and many other federal programs.

"There's a total disconnect between today's report and what we're hearing on the campaign trail," said Robert Bixby of the Concord Coalition budget watchdog group.

The deficit situation confronting the next president is reminiscent of that which Bill Clinton faced in 1993. Under Wall Street pressure, Clinton abandoned promises of tax cuts and pushed a tax-heavy deficit reduction plan through a Democratic Congress.

The administration said the deficit was being driven to an all-time high by the sagging economy and the stimulus payments being made to 130 million households in an effort to keep the country from falling into a deep recession. But the numbers could go even higher if the economy performs worse than the White House predicts.

The budget office predicts the economy will grow at a rate of 1.6 percent this year and will rebound to a 2.2 percent growth rate next year. That's a half point higher than predicted by the widely cited "blue chip" consensus of business economists. The administration also sees inflation averaging 3.8 percent this year, but easing to 2.3 percent next year -- better than the 3 percent seen by the blue chip panel.

"The nation's economy has continued to expand and remains fundamentally resilient," said the budget office report.

A $482 billion deficit would easily surpass the record deficit of $413 billion set in 2004. The White House in February had forecast that next year's deficit would be $407 billion.

The deficit numbers for 2008 and 2009 represent about 3 percent of the size of the economy, which is the measure seen as most relevant by economists. By that measure, the 2008 and 2009 deficits would be smaller than the deficits of the 1980s and early 1990s that led Congress and earlier administrations to cobble together politically painful deficit-reduction packages.

Still, the new figures are so eye-popping in dollar terms that they may restrain the appetite of the next president to add to the deficit with expensive spending programs or new tax cuts. In fact, pressure may build to allow some tax cuts enacted in 2001 and 2003 to expire as scheduled, with Congress also feeling pressure to curb spending growth.

The administration actually underestimates the deficit since it leaves out about $80 billion in war costs. In a break from tradition -- and in violation of new mandates from Congress -- the White House did not include its full estimate of war costs.

On a slightly brighter note, the deficit for the 2008 budget year ending Sept. 30 will actually drop from an earlier projection of $410 billion to $389 billion, the report said.

McCain used the new 2009 estimates to slam both the Bush White House for its "profligate spending" and Democratic rival Obama, who has declined to endorse the goal of McCain -- and congressional Democrats -- to balance the budget.

"I have an unmatched record in fighting wasteful earmarks and unnecessary spending in the U.S. Senate, and I have the determination and experience to do the same as president," McCain said in a statement. McCain again called for a full plate of multi-trillion dollar tax cuts, though campaign adviser Douglas Holtz-Eakin said some modifications could be made to McCain's economic plan to try to reach balance.

Obama's campaign used the new numbers to assail McCain for embracing Bush's tax cuts. As for Obama's plans, campaign adviser Furman said the candidate would cut wasteful spending, close corporate loopholes and roll back the Bush tax cuts on upper brackets while still promising to make "health care affordable and putting a middle class tax cut in the pocket of 95 percent of workers and their families."

Monday's figures capped a remarkable deterioration in the United States' budgetary health under Bush's time in office.

He inherited a budget seen as producing endless huge surpluses after four straight years in positive territory. That stretch of surpluses represented a period when the country's finances had been bolstered by a 10-year period of uninterrupted economic growth, the longest expansion in U.S. history.

In his first year in office, helped by projections of continuing surpluses, Bush drove through a 10-year, $1.35 trillion package of tax cuts.

However, faulty estimates, a recession in March 2001 and government spending to fight the war on terrorism contributed to pushing the deficit to a record in dollar terms in 2004.

There had been progress since then, with a $161.5 billion deficit for 2007 representing the lowest amount of red ink since an imbalance of $159 billion in 2002.

White House budget office: http://www.whitehouse.gov/omb/
http://biz.yahoo.com/ap/080728/budget_deficit.html

Anyone have a play on all this? Gold perhaps? I am getting a bit anxious knowing full well that in order to maintain my current level of purchasing power I will need a minimum of a 16% return on my capital and a 16% raise as well to combat "real" inflation not the core bs Bernanke monitors.


The following seems appropriate given the former:

“A great civillization is not conquered from without until it has destroyed itself from within.” - Will Durant

[aiki14]

This was a good thread to reread, a few of our posters were spot on in their points of view.
I have been in some of the AUD/USD and NZD/USD currency baskets in the form of structured products and principal protected notes which coincidentally are maturing around the end of august. I am looking to see where to roll them and will be doing some DD on it. I am not nearly as bearish on the dollar versus these currencies as I was 13 months ago when I rolled them last time. I was considering a Swiss Franc versus Yen or GBP/JPY but am a little concerned about being locked in for 13 months (the notes have 13 month terms) on those positions.
I do think the powers that be are at least hinting about protecting the dollar, but the associated pain that comes with that protection is gonna be tough to move through in an election year. Can you imagine the feckless politicians calling for sacrifice from the electorate at this time? Or the insatiable American public tightening their belts a little further for a concept 99% of them don't understand.

[madcowdisease]

This was a good thread to reread, a few of our posters were spot on in their points of view.
I have been in some of the AUD/USD and NZD/USD currency baskets in the form of structured products and principal protected notes which coincidentally are maturing around the end of august. I am looking to see where to roll them and will be doing some DD on it. I am not nearly as bearish on the dollar versus these currencies as I was 13 months ago when I rolled them last time. I was considering a Swiss Franc versus Yen or GBP/JPY but am a little concerned about being locked in for 13 months (the notes have 13 month terms) on those positions.
I do think the powers that be are at least hinting about protecting the dollar, but the associated pain that comes with that protection is gonna be tough to move through in an election year. Can you imagine the feckless politicians calling for sacrifice from the electorate at this time? Or the insatiable American public tightening their belts a little further for a concept 99% of them don't understand.

I wouldn't consider TIPS anymore. The most recent report o them hinted that the government's estimates on inflation were way off. Maybe a version of this from a country with a stronger currency would give us the added protection against a weak dollar.

[madcowdisease]

Concerned about growth and inflation, Fed holds key interest rate at 2 percent


WASHINGTON (AP) -- Confronted by problems at every turn -- rising unemployment, shaky growth, credit troubles and creeping inflation -- the Federal Reserve left an important interest rate unchanged, taking a gamble that for now the best move was no move at all. The next direction for rates probably is up but that's not likely until next year.
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Fed Chairman Ben Bernanke and all but one of his central bank colleagues agreed Tuesday to leave its key rate alone at 2 percent for the second straight meeting.

In turn, the prime lending rate for millions of consumers and businesses remained at 5 percent. The prime rate applies to certain credit cards, home equity lines of credit and other lines.

"Although downside risks to growth remain, the upside risks to inflation are also of significant concern," the Fed said. Policymakers are faced with dueling problems: weak economic growth and advancing inflation. To treat one, risks aggravating the other. The Fed indicated Tuesday that each problem poses about equal risks to the economy.

It was welcome news to Wall Street, however, where stocks put in their best showing in months on relief that the Fed's assessment of the economy and inflation wasn't worse. The Dow Jones industrials closed up 331.62 points at 11,615.77, its biggest one-day point gain since April 1, when it kicked off the second quarter with a nearly 400 point rally.

Many economists believe the Fed will leave rates where they are at its next meeting on Sept. 16 and through the rest of this year. This would give the fragile economy and crippled housing market more time to heal.

The Fed may start boosting rates, now at four-year lows, early next year, economists predict. Some Wall Street investors, though, haven't ruled out a rate increase later this year to fend off inflation. Either way, most agree the Fed's next move will be up. Keeping rates at low levels for too long could worsen inflation.

"The inflation fight probably will have to wait until 2009," said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group. "Conditions at this point do not seem to dictate an immediate tightening."

Heightened concerns about inflation forced the Fed in June to halt a nearly yearlong series of rate reductions to shore up the wobbly economy. The campaign, which started last September, was one of the most aggressive in decades. The Fed slashed its key rate by 3.25 percentage points with the hope that lower rates would spur people and businesses to buy and invest more, energizing the economy.

A number of forces have blunted the Fed's bracing rate reductions, however. People are finding it harder to get credit to finance big-ticket purchases as banks have tightened up standards.

American consumers -- even armed with the government's tax rebates of up to $600 a person -- have turned more cautious. Falling home values and stock prices have eroded their net worth. On top of all that, high energy and food prices are whittling away at Americans' buying power.

To help, Democrats want a second stimulus package; the Bush administration, though, has been cool to what's been floated.

Bernanke's predecessor, Alan Greenspan called the current credit crisis a "once or twice a century event." Given the severity of the financial problems, the surprise is not that economic growth is slowing but that there is any growth at all, Greenspan wrote in an opinion piece in the Financial Times.

The Fed has taken a number of extraordinary steps to ease credit problems so that banks, investment houses and others will keep on lending.

Over time, those steps, along with the rate cuts, "should help promote moderate economic growth." Fed policymakers said.

But for now, the economy -- pounded by many negative forces -- is likely to be sluggish at best.

"Labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction and elevated energy prices are likely to weigh on economic growth over the next few quarters," the Fed warned.

The economy grew at a subpar 1.9 percent pace this spring -- even with the tax rebate checks. It shrank late last year.

And, the unemployment rate climbed to a four-year high of 5.7 percent in July as businesses clamped down on hiring. Nearly half a million jobs have disappeared so far this year. More losses are expected. The jobless rate could hit 6.5 percent by the middle of next year.

With employment deteriorating, hopes for a second-half rebound have largely fizzled.

"The Fed has got its hands full," said Stuart Hoffman, chief economist at PNC Financial Services Group.

On the inflation front, Fed policymakers said they expected improvements later this year and next year, but they acknowledged the outlook was difficult to predict.

Energy prices, which marched to a record high above $147 a barrel last month, have calmed down recently, giving the Fed more leeway to hold rates steady. Oil prices sank as low as $118 a barrel Tuesday.

"Inflation has been high," the Fed said. Consumer prices in June rose at the second-fastest pace in a quarter century. Those high prices are a double-edged sword: They can put another damper on growth as people have less money to spend on other things and they can force companies to raise prices for many other goods and services, spreading inflation.

One Fed member -- Richard Fisher, president of the Federal Reserve Bank of Dallas, wanted to raise rates Tuesday. Fisher, who has a reputation for being extra vigilant on inflation, was the sole opposition vote. It was the fifth time this year that he dissented.

New Fed board member Elizabeth Duke, who was just sworn in Tuesday before the meeting, voted with the majority.

I don't see how this bodes well for the dollar. Inflation is rampant yet the Fed stands pat. Is the ECB any closer to cutting rates on the Euro? It may not help the dollar with respect to nominal prices - afterall everyone from MT to P&G is raising prices - but perhaps the dollar will rise relative to other currencies if it appears the Euro is going to become cheaper in the near future which should help America's purchasing power which we have become accustomed to.

[madcowdisease]

Just when the charts indicated the dollar may have found a bottom here's more bad news:

The plummeting value of the U.S. dollar has made stark headlines over the past year as politicians and economists have debated the causes and consequences of the once-mighty greenback's fall from grace.

But the full impact of the sliding dollar didn't come home for Gregg Buchbinder, the chief executive of Emeco, a Pennsylvania manufacturer of high-end design furniture, until he made a business trip to Milan, Italy, this year. Making money off the weak dollar

At the city's annual furniture fair, his company's chairs -- some of which, such as a polished bar stool, go for $3,000 a pop -- were in demand. One reason: With the dollar down around 40% against the euro since 2002, Emeco's made-in-America chairs not only look good, but also are a good value for European shoppers. Who buys a $3,000 chair?

"Europeans always liked our products but said they were too expensive," Buchbinder recalls. "Now they are considered reasonably priced."

That's the good news. And the bad? Buchbinder shelled out more than $400 a night for a hotel room in Milan. With the weak dollar buying much less luxury than it used to, it's a problem faced by Americans traveling abroad.

From Wall Street to Main Street and all the way to the Champs-Élysées, Americans are reckoning with the impact of the declining dollar and what it means for their businesses and daily lives. So how will it affect you? The answer depends on who you are, how you make and spend your money, and, perhaps, to what extent your sense of self-worth is tied to your identity as an American. Map: See the dollar's slide

For U.S. companies, it could mean a sales boost for exports, because the cheap dollar makes their products cheaper. Foreign tourists on shopping sprees

For travelers and those with a craving for foreign luxury goods -- Gucci boots, perhaps, or a fancy German sports car -- expect higher prices. And if you have been getting stung by sticker shock at the gas pump or in the grocery store, you can partly blame the sickly dollar, because most commodities are traded in dollars.

Moreover, the weak dollar and other economic woes, such as the subprime-mortgage crisis, together convey a symbolic message to the world -- one that says "confidence in the U.S. economy has been eroded," notes Mauro Guillen, a professor of international management at the Wharton School in Philadelphia. That wasn't always the case. Since the end of World War II, Americans had always assumed the dollar would be strong and a dominant force in global trade and commerce.

But that was before the current economic mess. Now the national deficit is soaring, and the euro -- whose strength has taken many by surprise -- has risen to challenge the dollar's supremacy. Chart:How the dollar stacks up

As a net debtor nation, the U.S. lives beyond its means, buying and importing more goods from abroad than it sells, thereby creating a trade deficit, while the government spends more than it takes in, leaving a budget deficit.

That means the government is forced to borrow billions of dollars every day -- much of it from China and the central banks of other nations -- by issuing debt, such as U.S. Treasury notes, to help pay for the budget and current-account deficits.

The overall impact, economists say, is that the global market now takes a more cautious view of the relative strength of both the U.S. economy and the dollar itself.

Back at the euro's launch in 2002, the notion of a unified European Union currency "was a major experiment, and many were skeptical that it would work," explains Lawrence White, a professor of economics at New York University's Stern School of Business. "But it has worked very well," he says -- and its success has placed added pressure on the dollar.

To be sure, the dollar still has tremendous clout. Despite the euro's growing stature, the U.S. currency accounts for 86% of daily global currency transactions, as well as two-thirds of the world's central-bank currency reserves.

But there's no easy fix to strengthen it. Paul Horne, an international market economist and contributor to The European Institute's journal, European Affairs, says a solution would have to include changing fiscal policy to reduce U.S. dependency on borrowed foreign capital, raise the rate of savings and curtail private consumption.

Such measures, however, would be "politically unacceptable, especially at a time when the American consumer and his living standards are already hit by rising energy costs and a credit crunch," Horne says. The U.S. might also risk a serious recession, or worse, because the measures would probably involve sharply raising interest rates.

As a result, Horne's gloomy assessment is that "politicians of all stripes and consumers will have to settle for more inflation and a weaker dollar," he says.

In the meantime, businessmen such as New York real-estate developers David Kislin and Leo Tsimmer are revising their marketing strategies to attract more wealthy European buyers.

Kislin and Tsimmer, general partners in Sleepy Hudson, recently went to Italy with a road show to sell units in their latest New York building, a condominium project called Five Franklin Place, where units range from $2 million to $16 million. The pair previously hadn't considered marketing directly to Europeans, but buyers from outside the U.S. are now saying that because of the weak dollar, buying a New York condo means getting more for their money.

For these buyers, in addition to the building's unique architecture and design and luxury fittings, the weak dollar is a major attraction -- "the absolute economic icing on the cake," Kislin adds.

U.S. consumers, unfortunately, have fewer ways to capitalize on the dollar's weakness. For most, the best response is a defensive play: Those traveling abroad, for instance, might want to know that some hotels and car rental companies lock in dollar prices, letting you avoid exchange rate fluctuations. (You might also want to look beyond favorite European destinations to, say, Argentina or South Africa, where the dollar is still relatively strong.)

Meanwhile, for economists and policymakers, the lingering question is whether we should try to do anything about the anemic dollar at all.

Some argue that market forces will eventually bring the dollar back, as confidence in the U.S. financial system revives. After all, the Chinese aren't likely to cash in their dollars anytime soon, these people say, and the world still finds the U.S. a prime place to invest its money and buy stocks, despite the recent economic bumps.

Yet that might not hold true forever.

"There are limits," warns economist White. "If the dollar drips lower and at some point the Chinese and the Europeans say they don't want to hold dollars, and they all rush to cash them in, then it could be a very nasty situation."

That nasty situation, if it happened, could cause a global run on the dollar, with nations such as China trying to cash out of trillions of dollars held by its central bank. In turn, this might cause a rupture in the worldwide financial network and lead to major restructuring as central banks tilted toward the euro or another currency. Such dire implications are why many economists believe it is in China's best interest to continue to hold its dollars despite their sinking value.

[ZaNoob]

Oops, I posted this in the wrong thread. Old news but still very relevant.

http://www.youtube.com/watch?v=OS2fI2p9iVs

[madcowdisease]

Oops, I posted this in the wrong thread. Old news but still very relevant.

http://www.youtube.com/watch?v=OS2fI2p9iVs

Yep, old news in the sense that we here likely already knew this but I'm not sure the average American gives a damn. They want their cake and to eat it too. Seriously, why are we shocked America is in this state of despair? The national savings rate is -0.1%. I forget which comedian coined the phrase when describing American politics but he said "$#!t in, $#!t out". Why should we believe our politicians would be any different than the majority of Americans drowning in debt? America has one big credit card and Washington swipes it a couple hundred times a day. Eff it, I'm moving to Canada!