Dollar Ends Year Weaker

The Wall Street Journal reports this morning that the dollar ended the year lower against other major currencies.

The dollar is lower early Monday in New York, a fitting path for the greenback on the final day of trading of 2007, a year that saw the dollar fall against virtually all its rivals.

Poor U.S. housing data last week and generally weaker global stock markets overnight have pushed the dollar to a two-week low of 111.73 yen against the yen early Monday as investors become averse to risk.

The dollar is also lower against sterling and a bit weaker versus the euro as it continues a weakening trend that began last week on persistent worries of a U.S. recession.

"It appears that disappointing U.S. economic data have caused the weakening trajectory (in the dollar) to reassert itself," said Stephen Malyon, currency strategist at Scotia Capital in Toronto.

Trading volume has been thin Monday with many global stock markets closed or open for only a half-day ahead of the New Year holiday Tuesday.

Impending Destruction of the US Economy

An eye-opening look at the state of our financial health today.

Impending Destruction of the US Economy

by Dr. Paul Craig Roberts


Hubris and arrogance are too ensconced in Washington for policymakers to be aware of the economic policy trap in which they have placed the US economy. If the subprime mortgage meltdown is half as bad as predicted, low US interest rates will be required in order to contain the crisis. But if the dollar’s plight is half as bad as predicted, high US interest rates will be required if foreigners are to continue to hold dollars and to finance US budget and trade deficits.

Which will Washington sacrifice, the domestic financial system and over-extended homeowners or its ability to finance deficits?

The answer seems obvious. Everything will be sacrificed in order to protect Washington’s ability to borrow abroad. Without the ability to borrow abroad, Washington cannot conduct its wars of aggression, and Americans cannot continue to consume $800 billion dollars more each year than the economy produces.

A few years ago the euro was worth 85 cents. Today it is worth $1.48. This is an enormous decline in the exchange value of the US dollar. Foreigners who finance the US budget and trade deficits have experienced a huge drop in the value of their dollar holdings. The interest rate on US Treasury bonds does not come close to compensating foreigners for the decline in the value of the dollar against other traded currencies. Investment returns from real estate and equities do not offset the losses from the decline in the dollar’s value.

China holds over one trillion dollars, and Japan almost one trillion, in dollar-denominated assets. Other countries have lesser but still substantial amounts. As the US dollar is the reserve currency, the entire world’s investment portfolio is over-weighted in dollars.

No country wants to hold a depreciating asset, and no country wants to acquire more depreciating assets. In order to reassure itself, Wall Street claims that foreign countries are locked into accumulating dollars in order to protect the value of their existing dollar holdings. But this is utter nonsense. The US dollar has lost 60% of its value during the current administration. Obviously, countries are not locked into accumulating dollars.

The reason the dollar has not completely collapsed is that there is no clear alternative as reserve currency. The euro is a currency without a country. It is the monetary unit of the European Union, but the countries of Europe have not surrendered their sovereignty to the EU. Moreover, the UK, a member of the EU, retains the British pound. The fact that a currency as politically exposed as the euro can rise in value so rapidly against the US dollar is powerful evidence of the weakness of the US dollar.

Japan and China have willingly accumulated dollars as the counterpart of their penetration and capture of US domestic markets. Japan and China have viewed the productive capacity and wealth created in their domestic economies by the success of their exports as compensation for the decline in the value of their dollar holdings. However, both countries have seen the writing on the wall, ignored by Washington and American economists: By offshoring production for US markets, the US has no prospect of closing its trade deficit. The offshored production of US firms counts as imports when it returns to the US to be marketed. The more US production moves abroad, the less there is to export and the higher imports rise.

Japan and China, indeed, the entire world, realize that they cannot continue forever to give Americans real goods and services in exchange for depreciating paper dollars. China is endeavoring to turn its development inward and to rely on its potentially huge domestic market. Japan is pinning hopes on participating in Asia’s economic development.

The dollar’s decline has resulted from foreigners accumulating new dollars at a lower rate. They still accumulate dollars, but fewer. As new dollars are still being produced at high rates, their value has dropped.

If foreigners were to stop accumulating new dollars, the dollar’s value would plummet. If foreigners were to reduce their existing holdings of dollars, superpower America would instantly disappear.

Foreigners have continued to accumulate dollars in the expectation that sooner or later Washington would address its trade and budget deficits. However, now these deficits seem to have passed the point of no return.

The sharp decline in the dollar has not closed the trade deficit by increasing exports and decreasing imports. Offshoring prevents the possibility of exports reducing the trade deficit, and Americans are now dependent on imports (including offshored production) for which there are no longer any domestically produced alternatives. The US trade deficit will close when foreigners cease to finance it.

The budget deficit cannot be closed by taxation without driving up unemployment and poverty. American median family incomes have experienced no real increase during the 21st century. Moreover, if the huge bonuses paid to CEOs for offshoring their corporations’ production and to Wall Street for marketing subprime derivatives are removed from the income figures, Americans have experienced a decline in real income. Some studies, such as the Economic Mobility Project, find long-term declines in the real median incomes of some US population groups and a decline in upward mobility.

The situation may be even more dire. Recent work by Susan Houseman concludes that US statistical data systems, which were set in place prior to the development of offshoring, are counting some foreign production as part of US productivity and GDP growth, thus overstating the actual performance of the US economy.

The falling dollar has pushed oil to $100 a barrel, which in turn will drive up other prices. The falling dollar means that the imports and offshored production on which Americans are dependent will rise in price. This is not a formula to produce a rise in US real incomes.

In the 21st century, the US economy has been driven by consumers going deeper in debt. Consumption fueled by increases in indebtedness received its greatest boost from Fed chairman Alan Greenspan’s low interest rate policy. Greenspan covered up the adverse effects of offshoring on the US economy by engineering a housing boom. The boom created employment in construction and financial firms and pushed up home prices, thus creating equity for consumers to spend to keep consumer demand growing.

This source of US economic growth is exhausted and imploding. The full consequences of the housing bust remain to be realized. American consumers lack discretionary income and can pay higher taxes only by reducing their consumption. The service industries, which have provided the only source of new jobs in the 21st century, are already experiencing falling demand. A tax increase would cause widespread distress.

As John Maynard Keynes and his followers made clear, a tax increase on a recessionary economy is a recipe for falling tax revenues as well as economic hardship.

Superpower America is a ship of fools in denial of their plight. While offshoring kills American economic prospects, “free market economists” sing its praises. While war imposes enormous costs on a bankrupt country, neoconservatives call for more war, and Republicans and Democrats appropriate war funds which can only be obtained by borrowing abroad.

By focusing America on war in the Middle East, the purpose of which is to guarantee Israel’s territorial expansion, the executive and legislative branches, along with the media, have let slip the last opportunities the US had to put its financial house in order. We have arrived at the point where it is no longer bold to say that nothing now can be done. Unless the rest of the world decides to underwrite our economic rescue, the chips will fall where they may.

Dr. Roberts was Assistant Secretary of the US Treasury for Economic Policy in the Reagan administration. He is credited with curing stagflation and eliminating “Phillips curve” trade-offs between employment and inflation, an achievement now on the verge of being lost by the worst economic mismanagement in US history.

The Disappearing Dollar

Wall Street is cheering the latest hint of a new interest rate cut by Fed chief Ben Bernanke. Stocks are up! If you are like me, Wall Street gains hardly impact my day-to-day existence as I don't have a million bucks tucked away in stocks. The downside, of course, to a new rate cut is that the dollar will continue to tumble.

The dollar slid against the European single currency on Friday after US Federal Reserve chief Ben Bernanke stoked expectations of another reduction in US borrowing costs, analysts said.

In early European trading, the euro rose to 1.4752 dollars from 1.4742 late on Thursday in New York. At the end of last week, the euro had hit a record 1.4967 dollars.

Dollar Drops to New Low

How low will it go?

The dollar hit a new low against the euro in thin trading Friday as speculation continued that the American credit crisis will lead to another cut in interest rates in the U.S.

The 13-nation European currency spiked early to hit $1.4966, breaking the previous record of $1.4873, set the day before.

Abandoning the Dollar

The dollar has recently been in the news of late and the news is not good. While reading about the woes of the falling dollar, I came across this article which I thought that I would share with you.

Seven Countries Considering Abandoning the US Dollar

by Jessica Hupp

It’s no secret that the dollar is on a downward spiral. Its value is dropping, and the Fed isn’t doing a whole lot to change that. As a result, a number of countries are considering a shift away from the dollar to preserve their assets. These are seven of the countries currently considering a move from the dollar, and how they’ll have an effect on its value and the US economy.

1. Saudi Arabia: The Telegraph reports that for the first time, Saudi Arabia has refused to cut interest rates along with the US Federal Reserve. This is seen as a signal that a break from the dollar currency peg is imminent. The kingdom is taking “appropriate measures” to protect itself from letting the dollar cause problems for their own economy. They’re concerned about the threat of inflation and don’t want to deal with “recessionary conditions” in the US. Hans Redeker of BNP Paribas believes this creates a “very dangerous situation for the dollar,” as Saudi Arabia alone has management of $800 billion. Experts fear that a break from the dollar in Saudi Arabia could set off a “stampede” from the dollar in the Middle East, a region that manages $3,500 billion.

2. South Korea: In 2005, Korea announced its intention to shift its investments to currencies of countries other than the US. Although they’re simply making plans to diversify for the future, that doesn’t mean a large dollar drop isn’t in the works. There are whispers that the Bank of Korea is planning on selling $1 billion US bonds in the near future, after a $100 million sale this past August.

3. China: After already dropping the dollar peg in 2005, China has more trouble up its sleeve. Currently, China is threatening a “nuclear option” of huge dollar liquidation in response to possible trade sanctions intended to force a yuan revaluation. Although China “doesn’t want any undesirable phenomenon in the global financial order,” their large sum of US dollars does serve as a “bargaining chip.” As we’ve noted in the past, China has the power to take the wind out of the dollar.

4. Venezuela: Venezuela holds little loyalty to the dollar. In fact, they’ve shown overt disapproval, choosing to establish barter deals for oil. These barter deals, established under Hugo Chavez, allow Venezuela to trade oil with 12 Latin American countries and Cuba without using the dollar, shorting the US its usual subsidy. Chavez is not shy about this decision, and has publicly encouraged others to adopt similar arrangements. In 2000, Chavez recommended to OPEC that they “take advantage of high-tech electronic barter and bi-lateral exchanges of its oil with its developing country customers,” or in other words, stop using the dollar, or even the euro, for oil transactions. In September, Chavez instructed Venezuela’s state oil company Petroleos de Venezuela SA to change its dollar investments to euros and other currencies in order to mitigate risk.

5. Sudan: Sudan is, once again, planning to convert its dollar holdings to the euro and other currencies. Additionally, they’ve recommended to commercial banks, government departments, and private businesses to do the same. In 1997, the Central Bank of Sudan made a similar recommendation in reaction to US sactions from former President Clinton, but the implementation failed. This time around, 31 Sudanese companies have become subject to sanctions, preventing them from doing trade or financial transactions with the US. Officially, the sanctions are reported to have little effect, but there are indications that the economy is suffering due to these restrictions. A decision to move Sudan away from the dollar is intended to allow the country to work around these sanctions as well as any implemented in the future. However, a Khartoum committee recently concluded that proposals for a reduced dependence on the dollar are “not feasible.” Regardless, it is clear that Sudan’s intent is to attempt a break from the dollar in the future.

6. Iran: Iran is perhaps the most likely candidate for an imminent abandonment of the dollar. Recently, Iran requested that its shipments to Japan be traded for yen instead of dollars. Further, Iran has plans in the works to create an open commodity exchange called the Iran Oil Bourse. This exchange would make it possible to trade oil and gas in non-dollar currencies, the euro in particular. Athough the oil bourse has missed at least three of its announced opening dates, it serves to make clear Iran’s intentions for the dollar. As of October 2007, Iran receives non-dollar currencies for 85% of its oil exports, and has plans to move the remaining 15% to currencies like the United Arab Emirates dirham.

7. Russia: Iran is not alone in its desire to establish an alternative to trading oil and other commodities in dollars. In 2006, Russian President Vladmir Putin expressed interest in establishing a Russian stock exchange which would allow “oil, gas, and other goods to be paid for in Roubles.” Russia’s intentions are no secret–in the past, they’ve made it clear that they’re wary of holding too many dollar reserves. In 2004, Russian central bank First Deputy Chairmain Alexei Ulyukayev remarked, “Most of our reserves are in dollars, and that’s a cause for concern.” He went on to explain that, after considering the dollar’s rate against the euro, Russia is “discussing the possibility of changing the reserve structure.” Then in 2005, Russia put an end to its dollar peg, opting instead to move towards a euro alignment. They’ve discussed pricing oil in euros, a move that could provide a large shift away from the dollar and towards the euro, as Russia is the world’s second-largest oil exporter.

What does this all mean?

Countries are growing weary of losing money on the falling dollar. Many of them want to protect their financial interests, and a number of them want to end the US oversight that comes with using the dollar. Although it’s not clear how many of these countries will actually follow through on an abandonment of the dollar, it is clear that its status as a world currency is in trouble.

Obviously, an abandonment of the dollar is bad news for the currency. Simply put, as demand lessens, its value drops. Additionally, the revenue generated from the use of the dollar will be sorely missed if it’s lost. The dollar’s status as a cheaply-produced US export is a vital part of our economy. Losing this status could rock the financial lives of both Americans and the worldwide economy.

The Falling Dollar

I have read with much interest about the falling dollar. As with everything, there are always two sides with different perspectives on what this means to the economy. Let's take a look.

On one hand, there is the belief that the declining dollar can be a good thing for the overall economy. Mark Zandi, chief economist at Moody's Economy.com is one of those who see the benefits of a weaker dollar. He says "After the pluses and minuses are all netted out, I think the lower-valued dollar is good for the economy. The growth we're getting from trade is helping to cushion the blow to the economy from housing." Others state that American exports will inevitably rise and with that increased jobs for manufacturing employees.

On the other hand, there is the feeling that a decline in the dollar is not healthy for the economy. They base this on the belief that a falling dollar will not significantly effect the out of control trade deficit. The argument goes that the two main components of trade imbalance- oil and imports from China- which combined account for about 80% of the trade imbalance, are not really affected by the swinging dollar. Peter Morici, an economics professor at the University of Maryland's business school, states "If you can't adjust imports of oil, and most are priced in dollars, and you can't adjust currencies against Chinese yuan, which is pegged to the dollar, depreciating the dollar does not get you where you want to go."

Most of the articles that I read on this subject always deal with the issue from either a trade or business standpoint. The trade deficit will/will not improve..big corporations will benefit ...but my question is- what about the effects on people like me? No, I am not a CEO or a trade magnet. I am just an average guy who sees a declining dollar meaning that the value of what little assets I have lose worth in real value. I see a country that has decimated its own industrial base to the point where there is a fraction of items that were once produced here. As a result of that, I see our stores flooded with 'cheap' imports that will rise in prices.

Maybe I'm a bit gloomy about this issue but I can't really find a silver lining that is good for me.