Begun These Currency Wars Have
[graph sourced from www.kitco.com]
Sorry, but I just couldn't but help paraphrase Yoda on this one.
I was looking at a graph recently which I hope to post soon. It traces the price of gold in both US (USD) and Australian dollars (AUD). Until about the first week of September 2004 both the lines moved broadly in parallel. Since that time they have scissored away from each other.Gold had risen sharply in USD and fallen, ever so slightly, in AUD. Last night the US dollar fell another $0.75 against the Australian. There seems a likely chance that the US dollar has finally begun to collapse, and this may lead to a number of consequences:
1. The Currency Wars - the US needs to correct its trade deficit and a very significant depreciation in the US dollar is necessary to achieve this. Countries that don't have floating currencies (name starts with "Peoples Rep...") will need to repeg or float their currencies. Otherwise they may find tariff or embargo retaliation against their goods. The overall picture is much more complicated than this however. Without the US dollar as the world's reference currency, countries will have difficulty pegging their currency against a reliable measure. The Euro and gold are possible candidates to replace the USD. The repegging of the world's currencies against a new reference standard is likely to be an acrimonious affair.
2. Flight of capital - if the US dollar is falling everything else valed in US dollars is also falling (unless it is rising to the same extent or more in nominal dollars, i.e. gold). Holding assets in the United States means losing money equivalent to the decline in the currency. Investors will start to balk at future US denominated losses and move capital elsewhere.
3. Rising Interest Rates - as the US dollar falls the cost of imports rises; imports like oil and manufactured goods. This in turn fuels inflation. A key method for controlling inflation is to increase interest rates. This also helps stem the flight of capital, and the depreciation of the currency. Note that rising interest rates may be the United States' key export to the rest of the world in 2005.
4. Asset Bubble Implosions - POP! Yep, the US has them, and half the economies in the Western World. The equity ones we have seen before, the housing ones, well they are flat out spectacular. Ever wondered what those $600,000 inner city apartments will be worth at 15% p.a. interest rates and 15% unemployment, with banks unwilling to lend more than 50% of the purchase price?
5. Recession - rising interest rates tend to cause recessions. The 1970's is a good example of the economic effects of being in an upward cycle. Except that....
6. Depression - you didnt have historical record levels of household indebtedness throughout many Western economies as we currently have in the US, Australia and many oither places. As interest rates rise and unemployment increases these asset bubbles will burst. The level of wealth destruction will be unparalleled, and I include 1929-1932 in that analysis. Although, I believe that it is the closest comparison to what we will witness in the near future.
I was talking to a colleague recently who had just visited their share broker. One of the largest and most respected in the country. The broker's advice, don't hold more than 15% in equities. Now if you havent worked it out already they are paid to sell equities! Their bearish advice actually costs them money, a lot of money. I will finish with a second hand quote from the Chief Economist of that particular firm:"The Reserve Bank is sitting on a timebomb it can't defuse. Interest rates only have to rise 50 basis points and it's all over, and they know it."
US Dollar Collapse 2004
Sorry, but I just couldn't but help paraphrase Yoda on this one.
I was looking at a graph recently which I hope to post soon. It traces the price of gold in both US (USD) and Australian dollars (AUD). Until about the first week of September 2004 both the lines moved broadly in parallel. Since that time they have scissored away from each other.Gold had risen sharply in USD and fallen, ever so slightly, in AUD. Last night the US dollar fell another $0.75 against the Australian. There seems a likely chance that the US dollar has finally begun to collapse, and this may lead to a number of consequences:
1. The Currency Wars - the US needs to correct its trade deficit and a very significant depreciation in the US dollar is necessary to achieve this. Countries that don't have floating currencies (name starts with "Peoples Rep...") will need to repeg or float their currencies. Otherwise they may find tariff or embargo retaliation against their goods. The overall picture is much more complicated than this however. Without the US dollar as the world's reference currency, countries will have difficulty pegging their currency against a reliable measure. The Euro and gold are possible candidates to replace the USD. The repegging of the world's currencies against a new reference standard is likely to be an acrimonious affair.
2. Flight of capital - if the US dollar is falling everything else valed in US dollars is also falling (unless it is rising to the same extent or more in nominal dollars, i.e. gold). Holding assets in the United States means losing money equivalent to the decline in the currency. Investors will start to balk at future US denominated losses and move capital elsewhere.
3. Rising Interest Rates - as the US dollar falls the cost of imports rises; imports like oil and manufactured goods. This in turn fuels inflation. A key method for controlling inflation is to increase interest rates. This also helps stem the flight of capital, and the depreciation of the currency. Note that rising interest rates may be the United States' key export to the rest of the world in 2005.
4. Asset Bubble Implosions - POP! Yep, the US has them, and half the economies in the Western World. The equity ones we have seen before, the housing ones, well they are flat out spectacular. Ever wondered what those $600,000 inner city apartments will be worth at 15% p.a. interest rates and 15% unemployment, with banks unwilling to lend more than 50% of the purchase price?
5. Recession - rising interest rates tend to cause recessions. The 1970's is a good example of the economic effects of being in an upward cycle. Except that....
6. Depression - you didnt have historical record levels of household indebtedness throughout many Western economies as we currently have in the US, Australia and many oither places. As interest rates rise and unemployment increases these asset bubbles will burst. The level of wealth destruction will be unparalleled, and I include 1929-1932 in that analysis. Although, I believe that it is the closest comparison to what we will witness in the near future.
I was talking to a colleague recently who had just visited their share broker. One of the largest and most respected in the country. The broker's advice, don't hold more than 15% in equities. Now if you havent worked it out already they are paid to sell equities! Their bearish advice actually costs them money, a lot of money. I will finish with a second hand quote from the Chief Economist of that particular firm:"The Reserve Bank is sitting on a timebomb it can't defuse. Interest rates only have to rise 50 basis points and it's all over, and they know it."
US Dollar Collapse 2004
posted by Peter at 1:08 am
3 Comments:
REALITY TIME
I must admit I was rather taken aback when I read this yesterday. Not the comment, it is spot on, but the fact that it came from the mouth of "Bubbles".
"Given the size of the US current account deficit, a diminished appetite for adding to dollar balances must occur at some point"
Alan Greenspan, as reported in The Sun Herald 21/11/2004
THE AVALANCHE
Great article from The Times Online explaining some of the background and context to the coming Currency Wars:
"the world exchange crisis is being treated as
everybody’s problem and therefore nobody’s"
http://www.timesonline.co.uk/article/0,,1052-1369393,00.html
PREGNANT SKY
In Sydney, around this time of year, you get a certain type of day. It' overcast, temperature in the low 30's C, and a stillness is in the air. You know the sky just wants to rain, but it can't. I call this a "Pregnant Sky".
On the world economic stage we now have our Pregnant Sky. The fundamentals of the Anglosphere economies are deeply unsound; asset price bubbles are combined with record government and consumer debt.
The fall in the US dollar is symptomatic of that nation's twin deficits and poor fundamentals. What we are beginning to see now is a struggle between the world's currencies as to who will "wear the pain". Unfortunately no one country would or could bare this adjustment alone.
Somewhere during these currency wars the world's equity markets will tank. This will possibly become the tombstone date(s) for the beginning of The Great Recession.
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