Wednesday, December 17, 2008

Is the Party Over for U.S. Dollar? Probably!

Earlier this month I asked the question of when the artificial strength of the U.S. dollar was coming to an end. We may be seeing the initial move toward that happening, as it seems deleveraging, which propped the dollar up, may be winding down.

The only question for the dollar, has been how long the deleveraging would take to unwind, as the complexity of the funds involved made it impossible to know. It seems the majority of that has happened now, and the dollar is responding in a predictable manner.

With U.S. obligations now in the trillions of dollars, the absolute necessity of a strong U.S. dollar is crucial to the successful implementation of the misguided bailouts and simulus package, but that isn't going to happen any time soon.

Some were hoping the deleveraging would last longer, giving the dollar a longer period to remain strong, but that isn't going to be the case. Most analysts believe that not only is downward pressure coming short term, but it should last for some time as well.

Today the greenback dropped to a 13-year low against the yen, and fell to its largest one-day loss against the euro, as currencies responded to the slashing of the benchmark interest rates to a range of zero to 0.25 percent, which is the lowest among major economies in the world.

While there are those looking to what Japan did as a blueprint for the U.S., that's a huge mistake for a couple of reasons.

First, the Japanese economy hasn't come near to recovering from its performance when they instituted a similar strategy as set forth by president-elect Obama. He wants to build up the infrastructure of the nation to create jobs.

Just that alone is an unfortunate idea, as it in reality crushed the Japanese economy.

But that's not the only reason it's foolish and misguided. The second reason is the difference between Japanese and American investors.

In Japan, people were willing to invest in the bonds issued by the government because of the huge savings available, as well as the willingness of local investors to fund the debt. Americans can't do that, as they basically have no savings, which makes that a mute point.

So who will fund U.S. debt with the low interest rate and the government talking pursuing quantitative easing (buying Treasuries), that will put more downward pressure on the U.S. dollar.

In the end, the government should have listened to the many voices saying they should let the market sort out the mess, as it's the best mechanism available to do that.

Now that they've decided to enter fully into the fray, they've done far more harm to the U.S. dollar, the economy, as well as the American people.

Essentially everything they've done has backfired and been impotent. It will continue to remain that way no matter how much money they throw at the problem. We're all going to suffer because of their inability to leave things alone and resist intervening.

We're going to be in for a significant bear market concerning the dollar for some time to come. It's only just beginning.

2 comments:

Anonymous said...

Good insight. However, I must tell you that it is a moot point, not a mute point. http://languagerules.wordpress.com/2006/09/25/moot-point-not-mute-point/

jacker said...

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