Mr. Bill, several prominent people, i.e. Rubin and Volker, have recently warned about a potential dollar plummet. One of them, I don't remember which, said it was likely to occur in the next two years.
Bloomberg
What's your best guess of a dollar crash, i.e. Argentina style crash, in the next two years using a percentage for likelihood? What do you think would precipitate this? What would be the warning sign, if any?
PeakOil is You
The Last Days of the Dollar?
Re: The Last Days of the Dollar?
by seahorse2 » Wed 29 Nov 2006, 16:02:32
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Re: The Last Days of the Dollar?
by Denny » Wed 29 Nov 2006, 17:40:34
Would it not be a wise idea for the U.S. government to separate the social security funding and payouts from the government accounts?
By making up a separate, self-funded, arms length body to deal with social security and medicaid etc, they would not be faced with this big problem. The separate body could just use payroll premiums to fund its operations, separate from income taxes. And by being separate, people would not bitch about it so much, like they do now. Maybe its time to separate this important function from government and politics. Like the Federal reserve bank is at arms length. Many life insurance companies that have actuarial experience and claims administration experience could be fund administrators.
By making up a separate, self-funded, arms length body to deal with social security and medicaid etc, they would not be faced with this big problem. The separate body could just use payroll premiums to fund its operations, separate from income taxes. And by being separate, people would not bitch about it so much, like they do now. Maybe its time to separate this important function from government and politics. Like the Federal reserve bank is at arms length. Many life insurance companies that have actuarial experience and claims administration experience could be fund administrators.
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Re: The Last Days of the Dollar?
by MrBill » Thu 30 Nov 2006, 05:24:02
$this->bbcode_second_pass_quote('seahorse2', 'M')r. Bill, several prominent people, i.e. Rubin and Volker, have recently warned about a potential dollar plummet. One of them, I don't remember which, said it was likely to occur in the next two years.
Bloomberg
What's your best guess of a dollar crash, i.e. Argentina style crash, in the next two years using a percentage for likelihood? What do you think would precipitate this? What would be the warning sign, if any?
Bloomberg
What's your best guess of a dollar crash, i.e. Argentina style crash, in the next two years using a percentage for likelihood? What do you think would precipitate this? What would be the warning sign, if any?
Rubin and Volker obviously by virtue of their past and present positions have access to more detailed analysis than I have. I have often remarked that insights, or what passes for management in many cases, is just access to information. And the higher you are on the ladder the farther over the horizon you can see. At least the higher you are the more likely you are to see over the trees to see the forest. Not always, but in this case their positions give weight to their warnings.
From my point of view it is quite simple. As a European politician noted, "we all know what to do, we just do not know how to get re-elected if we do it?" Truer words were probably never spoken. I get a kick-out of these former politicians who come clean after they are out of a position to actually do something about the mess we (collectively) find ourselves in? Ironical, and a bit cowardly, too.
I blame the USA 100% for their budget deficits, debts and unfunded future liabilities. They have no one to blame but themselves. That is just poor government.
However, when it comes to the balance of payments and the rest of the current account deficit, including the trade deficit, America's trading partners are far from blameless.
The so-called Bretton Woods II unwritten, informal agreement that we have been operating under since (approximately) the Dot.con crash in 2000 is, as many pointed out already, just a system where America borrows money to buy stuff on credit. While OPEC and non-OPEC oil producers and Asian central banks are quite happy to lend the USA the money to buy that stuff, and to keep their own local currencies artificially weak to boost export lead growth. Hence the global imbalances we have seen building to unsustainable levels.
Had these countries let their currencies rise automatically in concert with their export earnings; had they developed their own local capital markets; had they stimulated growth in their own domestic economies; then they would have lent America less money in total; they would have bought less US treasuries; US interest rates would be higher and the value of US dollar denominated assets like houses would be lower; US savings rates would be higher; and the US trade and current account deficit would be lower than it is today. But they did not.
OPEC and non-OPEC producers as well as Asian central banks were quite happy to hitch a ride on America as The Consumer of Last Resort to boost their own export lead growth rates. This exacerbated current global imbalances. Plus the FED and the US government in an attempt to avoid a recession in the wake of the Dot.con crash and the aftermath of 9/11 turned on the money supply in an attempt to stimulate domestic demand in the USA. The result is larger US budget deficits and a current account deficit that consumes two-thirds of the world's net savings or about $1 trillion per year in 2006 and rising.
Obviously those holders of US debt are going to have to give back some of that faster growth, and gains from trade, in the form of lower returns on their US dollar purchases as the dollar corrects lower against those exporters' currencies, but those currencies should have been stronger in any case.
Any country experiencing a current account surplus needs to lend those funds abroad. Especially if they are also running a balanced budget or a budget surplus. Under such a scenario their local currencies should be appreciating on a trade weighted basis, while domestic interest rates should be falling towards zero real interest rates net of inflation. But that assumes the central bank and the government's treasury do not interfere in those capital market flows. However, they do in order to boost growth and create jobs.
So a dollar collapse is predicated on those OPEC and non-OPEC producers as well as Asian central bankers all of a sudden finding the courage to let their own currencies rise, not just against the dollar, but against one another, and accepting lower export lead growth as well as a loss on their foreign exchange reserves. Instead what many central banks have started to do is not dump US dollar holdings, but simply slow their increase by diversifying their foreign exchange reserves into euros, Sterling and gold.
But how deep are those markets? Will the ECB let the euro appreciate noticeably beyond $1.3000 or $1.4000? Or in otherwords to record levels against the yen and the yuan just so that Asian exports increase at the expense of European exporters? The Airbus argument noted above.
A stronger euro will make exports to Asia less competitive, at the same time that Asian exports become more competitive into Europe, a problem for manufacturers in Italy, that have their own growth, unemployment and fiscal problems. So really you shift the pain from American manufacturers to European manufacturers, which is a very familiar problem to UK exporters as the pound has relentlessly strengthened against the euro and gutted their manufacturing base.
Europe is already struggling with low to slow growth; high structural unemployment; debts and deficits in excess of Maastricht EMU limits for many members; and the burden on Germany to support the fiscal cheaters, like Italy, is growing; straining the entire euro project politically and financially. The EU project afterall is about shifting growth and jobs from the haves to the have nots in the form of regional transfer payments, handouts by Brussels, and the same core of countries consistantly paying more into the EU budget than they get out. How sustainable is that when the euro also strengthens another 25% making European exports less competitive and hurting Germany's growth and employment, who is afterall the main paymaster for the EU in the first place?
Anyone who is familar with the EU political process knows it is strangled by inertia. In Germany they are raising the age of retirement starting by one month per year, or from 65 to 67, over a period of 24 years until 2029. And that may yet be watered down by further compromises as certain sectors of the workforce argue that they should be excepted for example. The glacial pace of reform and not always forward. Plus that is only at the national level, and they still have Bundeslander and the EU wide political process that adds layers of red tape and slows growth as well as adding to the cost of doing business. A strong euro is the last thing they need at the moment.
Argentina. Argentina has not defaulted once, but many times.
$this->bbcode_second_pass_quote('', ' ')
Indeed, capital markets appear to have a remarkably short memory. Argentina has defaulted on its foreign debts five times in the past 175 years; Brazil seven times; and Venezuela nine times. A debtor can default no more than once, unless a creditor is willing to forgive and forget. Amnesia sometimes sets in remarkably quickly. The bad loans that Argentina inherited from the debt crisis of the 1980s were written down in 1992. Just three years later, Argentina was carrying more foreign debt, both in absolute terms and relative to the size of its GDP, than it had in 1991.
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IN 1902, after Venezuela defaulted on its sovereign debt, German, British and Italian gunboats blockaded the country's ports until the government paid up. In 1881, after the Ottoman empire failed to honour its obligations, European powers simply seized Ottoman customs houses and helped themselves to their due. The options available to more than 500,000 aggrieved creditors of the Republic of Argentina, which defaulted on bonds worth $81 billion in December 2001, were more limited. After much bluff and bluster, a large majority of them meekly surrendered their claims before a deadline on February 25th, in exchange for new bonds worth roughly 35 cents on the dollar.
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Russia's default in August 1998 deprived Argentina of such ready access to foreign capital (see chart 2). Then Brazil's devaluation five months later destroyed Argentina's competitiveness in foreign markets. The country was stuck with twin deficits, a trade gap and a budget gap, that foreigners were less and less willing to finance. To right itself, the Argentine economy needed to regain competitiveness. Since the exchange rate could not fall, prices and wages had to instead. As recession took hold, peso prices edged downwards, tax revenues faltered and Argentina's dollar debts grew harder to repay.
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In the end, Argentina defaulted on everyone. It stopped servicing its bonds, domestic and international; it cut wages and raided pension funds; it foisted its bad IOUs on to one side of the banks' balance sheets, then made a grab for the deposits on the other side, putting a freeze on withdrawals. It forcibly converted dollar deposits into pesos at one exchange rate; dollar loans at another. For the banks, this “asymmetric peso-ification” was every bit as painful as it sounds.
America cannot default in the same manner as Argentina or Russia simply due to their size, and the fact that the supranational organizations that stepped in to smooth out the fallout from the Tequilla and Asian crises get a lot their funding from the USA in the first place. The theory behind these bailouts or clean-ups after the fact were that in principle the world economy was essentially healthy, but the US and its partners wanted to avoid messy contagion or a meltdown in confidence. The system has been tested. Russia and Argentina were both in the magnitude of $100 to $200 billion, but were contained without any long-term damage. The sums involved in a US default would simply be much larger and there is no defacto lender of last resort. I do not expect China to step in and fill this role.
Therefore, rather than an Argentinia-style default a much slower and more painful period of adjustment and working off of those global imbalances. We know the US can consume two thirds of the world's savings, but I doubt it can consume 100%, and I know it cannot consume more than one hundred percent. So even growing at $1 trillion per year, plus accumulated interest, the US quickly approach a number between two thirds and 100% where they are simply not able to borrow anymore abroad. Then plugging the budget deficit will have to come from domestic savings at the expense of investment in the real economy or the stock market.
And in order to attract foreign investment to plug the current account deficit they will have to devalue the dollar enough to make US assets attractive, but not enough that the world loses confidence in the value of the dollar. This will have to be accompanied by real interest rates rising which will cut export lead growth elsewhere, and as US rates are a global benchmark, slow foreign growth as well. Take a 1990's Japanese slow to no growth for a decade scenario and then apply it to the rest of the world. I cannot see any country avoiding the fallout as either borrowers from international capital markets, exporters or producers? To a greater or lesser degree everyone will share the US' pain.
I think that former policy makers like Rubin and Volcker see this quite plainly, and I would not be surprised if it scares the living shi'ite out of them? To many this is a Made in America problem, but for the reasons I have given it is clearly a global problem.
On an individual level you can diversify out of the US dollar to protect your networth, and then re-invest in dollar assets when they become cheap enough. But on a macro-level that is simply not possible. As painful as the decade of recession and slow growth was for Japan, I actually see this as a prefered scenario for the USA at this point? Anything else would be trying to blow-up another bubble a la Greenspan in my opinion and only makes the eventual day of reckoning that much more painful - for everyone!
The organized state is a wonderful invention whereby everyone can live at someone else's expense.
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Re: The Last Days of the Dollar?
by Doly » Thu 30 Nov 2006, 10:52:01
$this->bbcode_second_pass_quote('MrBill', 'T')herefore, rather than an Argentinia-style default a much slower and more painful period of adjustment and working off of those global imbalances. We know the US can consume two thirds of the world's savings, but I doubt it can consume 100%, and I know it cannot consume more than one hundred percent. So even growing at $1 trillion per year, plus accumulated interest, the US quickly approach a number between two thirds and 100% where they are simply not able to borrow anymore abroad.
Wait a moment. Does this really means what it sounds like? That, of all the money that everybody in the rest of the world has to invest in foreign assets, two thirds of that money is getting loaned to the US?
$this->bbcode_second_pass_quote('MrBill', '
')Then plugging the budget deficit will have to come from domestic savings at the expense of investment in the real economy or the stock market.
But the US has no domestic savings one can speak of right now! Or do they?
$this->bbcode_second_pass_quote('MrBill', '
')And in order to attract foreign investment to plug the current account deficit they will have to devalue the dollar enough to make US assets attractive, but not enough that the world loses confidence in the value of the dollar.
Sounds like mission impossible to me. And what would happen if it is impossible, and the US is unable to attract foreign investment?
$this->bbcode_second_pass_quote('MrBill', '
')Take a 1990's Japanese slow to no growth for a decade scenario and then apply it to the rest of the world.
Do you mean that growth goes to hell for about a decade everywhere? Because, if I follow you right, it doesn't sound like the US is growing in the meantime.
$this->bbcode_second_pass_quote('MrBill', '
')As painful as the decade of recession and slow growth was for Japan, I actually see this as a prefered scenario for the USA at this point? Anything else would be trying to blow-up another bubble a la Greenspan in my opinion and only makes the eventual day of reckoning that much more painful - for everyone!
But isn't this the option that the US has been consistently avoiding so far? Assuming that they keep trying to avoid it and everything crashes spectacularly, how would you expect that to pan out?
