DU Economists: How long before our currency collapses?

I heard about this last week. No follow-ups though. Something about Russia going to the EURO.

I've heard. And so many of our companies are foreign owned.

against most currencies now.

The Russian central bank is no longer supporting it.

It'll have ups and downs, but at the moment there is no future for it as the reserve currency.

The Euro is a better bet.

last week. The dollar was worth $.85 against the Euro just a week or so ago. Now it's $.7797.

Russia knows we supported the Chechnian terrorists. China is getting extra oil from Saudi Arabia and we aren't. If they cut off the oil, the empire collapses. If they stop supporting the dollar, they loose money, but they get rid of the empire.

Quiet a temptation for them isn't it.

We are much too vulnerable, financially speaking, and the world hates us. It's just a matter of time as far as I'm concerned.

They are probably weighing the cost/benefit of destroying our economy as we type.

the treasury has some bond auctions coming up in the next few weeks, and how well those bonds sell should give an indication of how interested the rest of the world is in supporting our economy/debt/dollar.

story at Newsday:

newsday

I'd like to hold a bet against the dollar for the next 4 months. Can anyone point me to the best instruments to do this?

I don't trust hedge funds because of the layers of risk they carry.

What I'm hoping for is an index I can short or buy puts against or a bucket of currencies which exclude the dollar. (not sure I want Chinese yuan in the bucket -- I'm still pondering how instrumental they are regarding treasury pricing and at what point they'll stop holding down their yuan against the dollar)

I'm willing to do due diligence on this, so just tell me the general places to look. Most grateful thanks for any help!

open a swiss bank account and store you money in euros.
just think about if you would have done that when the euro first came out and was worth less then the dollar.

I would love advice on this, please. My portfolio includes holdings in the Prudent Bear fund, the Franklin Hard Currencies, and several gold stock funds, but on another web site I read that some gold stock companies are hedged against gold, and that such companies are to be avoided. Now I'm confused, because I thought I was well prepared for the collapse of the U.S. Dollar. How does one assess which are the best ways to "invest in gold." Is it not the gold stocks?

Generally, any opinions about funds that are inversely correlated with the dollar?

Thanks!
Mike

I went for a lower risk approach to getting a good chunk of my portfolio out of dollars.

I realize that when you buy overseas bonds, you still incur interest rate risk. So when you're concerned about the good chance of rising interest rates, you want to be in shorter maturities.

I think this fund does it for me BEGBX.

Here's an article that helped me find it. http://registeredrep.com/mag/finance_article_8/

Then I did my own research (The nice thing about keeping a couple of full-service broker accounts open is they are willing to email you their research).

I am not an investment advisor. Your investment needs may be different than mine.

Let me know what you think, OK? I have an open mind about this. The nice thing about BEGBX is the low transaction costs, so I can skip to a better hedge against the dollar if I get pointed a different way.

I appreciate that very much and am keeping a list of these good ideas.

Bill Gross, who runs the Pimco Fund Family, also has been talking a lot about foreign bonds, particularly the German Bund. Gross has written some excellent commentaries which are posted and available for free at the pimco website. Among other things, he believes that the inflation figures being released regarding U.S. inflation are inaccurate, claiming inflation is lower than it truly is. Although I do hold TIPS (inflation protected securities) this would affect their valuation to the downside.

Yesterday, I noticed that some Eastern European stock funds have been performing very well, as have some Latin American funds.

Read this (wrapup for tuesday):

http://www.financialsense.com/Market/wrapup.htm

"When the price inflation is distorted and falsely reported low, many consequences happen in effect. The grandest effect is to exaggerate economic growth (GDP). The Personal Consumption Expenditure (PCE) index used to build the “Deflator” in the Gross Domestic Product calculation seems to low-ball systemic price inflation even more than the CPI does for consumers!!! This is important, especially if you wish to promote a distorted picture of GDP with a motive to sell Treasury bonds or to seek political office. Any claim that the adjusted GDP is “real GDP” is simply Orwellian in its basis in truth. The end result is that perhaps half of reported GDP growth is a fiction. Many shams can easily be identified. They are invisible to those whose bloodlines are powered either by vested interest in the financial sector or by politically driven pumps.

Gross Domestic Product calculations are powered by several forces. Under-stated price inflation provides the greatest lift. Chain weighting compounds the understatement error. The adjusted GDP is amplified by hedonic methods, whose absurd lift in information technology spending creates an artificial world of accounting and reporting to the public. As computer speeds increase, so do the hedonic multipliers.

The CPI is kept low by ignoring numerous rising prices, such as property taxes, town usage fees (water, sewer, sanitation), professional services (doctor, dental, lawyer), home services (carpentry, plumbing, electrical, roofing), college tuition, restaurant meals, sports club fees, and more. In my view, the CPI has become little more than a measure intended to exploit the trend of falling imported finished product prices, in order to keep cost of living raises down in USGovt pensions of various types. As the USDollar shot skyward in the last decade, the CPI marched relentlessly toward zero. The backfire in politically inspired statistics comes when the Asian currencies break loose and rise with force. Such an event might be in progress now, as political pressure upon Japan and Europe can now subside after the presidential elections. The euro currency just made a multi-year high, as the Japanese yen currency just made a seven-month high. Foreign producers have begun to pass along higher costs, soon to be seen in finished product prices.

The CPI is intended to measure price inflation for consumers. The PCE index is intended to remove on a broader basis the systemic price inflation working throughout the entire US Economy. Distortions to under-state are perhaps worse in the PCE-related deflator for GDP statistics. Let us take a closer look."

...and much more

I love financialsense.com.

One of Paul Krugman's big complaints, which I believe is justified, is that Wall Street gurus and the media that touts them has been cheerleading this economy, grossly overstating its health. It's getting harder and harder to watch and listen to glowing financial reports with a straight face.

I'm not an investment advisor but my father is and I want him to take a look at this. Thank you for the tip!

It has a Morningstar rating of Four, which is strong. Nice five year average return (7.34%). I like the fact that they carry 20% cash--that would suggest they are cautious in how they run the fund and don't feel compelled to overinvest in markets if they are not confident about returns. Their top ten holdings appear to be very diversified--I especially like the focus on Germany and Japan (Bill Gross has been hot on German bonds for quite a while). The overall bond quality is very high--concentrated in triple and double A. The bonds are medium in duration, which I've been told is a safe place to be right now (as opposed to long duration). The other thing I look at is turnover rate in the portfolio: 112% is a figure I like because it implies (to me at least) that the portfolio is actively managed but not overmanaged.

I've never gone the gold route. But I'm tempted.

Owning the metal itself seems like the safest thing to me. I just don't trust the certificates. If a Prechter-like sudden collapse occurred, I wonder what the chance is a certificate holder would get screwed and find out the gold company really was playing some kind of game and didn't have the gold.

That's why if I went with gold, it would be in a bank safe deposit box.

and frightening. I appreciate what you are saying about gold. Gold is probably a smart thing to have but it's probably wise not to overdo it.

FYI, I did some research into the top performing gold funds and they tend to have large holdings in the same companies (generally). I seen Newmont, Placer Dome, Anglogold Ashanti over and over.

Just to give the contrarian view, I also came across a story from The Street.com by Dan Fitzpatrick, who writes that although he is bullish on gold, "I'm not sure that the outcome will afect the price of gold that much." Economists abroad are taking a starker position about the dollar and do believe there is a clear link, and that it hinges on the widespread sentiment that a Bush administration will continue to spend without restraint. One view is that the administration will not defend the U.S. currency because a lower dollar will help exports.

One view is that the administration will not defend the U.S. currency because a lower dollar will help exports.

From my inexpert point of view, I don't think the administration wants to allow the dollar to fall. A few reasons:

- it would make oil and other critical imports even more expensive and hurt our businesses, potentially causing investor disatisfaction on Wall Street
- we need to finance the war and the tax cut. The federal budget relies on the sale of treasuries and my understanding is devaluation of the dollar would cause us to have to pay even higher rates to our investors (the chinese, japanese, european and saudi purchasers).

But the administration must finance the deficit. They don't have the Soc Security surplus any more. They have to sell the treasuries. And to do that, they're going to have to raise the yields. Raising yields is what actually might do the damage to the dollar via inflation.

So their management of the dollar is actually a balance between "defending it" to keep the economy rolling vs. the need to finance our federal debt.

That's my rudimentary understanding of the situation. I'd be happy if anyone corrects me on this. I'm not an economist.

Maybe I'm confused, but I thought for the Fed to defend the dollar, this would require them to abandon their policy of moderation with respect to monetary policy and raise rates precipitously, which would have a domino effect on the U.S. economy. Or maybe I'm mistaken, and there is some other way to support the U.S. dollar.

I suppose the Fed could do this, but it seems that it would cause enormous pain to debt-straddled, mortgage paying consumers.

Just thinking aloud, if home owners should begin in masse to default on their mortages, this could have extraordinary consequences all through the system, including the banking system--no?

If the Fed raises rates too quickly or too high it will slow the economy and bring on a recession.

If the Fed keeps rates low, we risk inflation and a falling dollar.

You're also correct that massive mortgage defaults could trigger a banking system crisis. But that scenario would require the Fed to raise rates dramatically. It wouldn't happen as a normal course of "soft landing the airplane". It would only happen if we had a larger triggering event or change in foreign creditor sentiment. I think.

rich assholes have to pay more to go on foreign vacations.

which happens in every instance of hyperinflation. when everyone panics and try's to remove there money and spend it before its worthless.

It's all little bits in the computer now, "faith based" currencies.

My guess would be not long now, but it depends on the actions of the
various parties that have been content to buy our paper so far. Things
will probably continue somewhat as they are, as long as they are willing
to do that.

It is notable that we had a "stable" regime for the last 6-8 months and
that that has not started to move again in the last two weeks. However
only the Looney of the currencies I watch is in new ground (for the
recent couple decades.)

The dollar has fallen a long way against the euro and the pound. It's scary.

suggest the Canadian Dollar as a good bet against the USD. We run a budget surplus, trade surplus, and pay down national debt every year. Our job market is running smoothly and we're swimming in oil.

seem to pan out. The US economic hegemony just keeps going on and on -- without any real ramifications. Why the world keeps putting up with us is beyond me -- but they do seem to.

If King George II keeps adding it at $400 billion a year, it may reach the GDP by the time he leaves office though - if he leaves office.

The US debt is now about 325% of GDP. (Sorry, can't link it right now) Of course the stated debt ignores all the other liabilities Uncle Sam has, including SS and Medicare, among others, which totals about $30 trillion.

and one day there may be a sudden and big market reaction. (I lived in Mexico during 50% overnight devaluations and that is a very interesting experience.) Watch the trend in oil pricing too. If this keeps rising precipitously, it will be beneficial for many user countries to price have oil priced in euros.

The euro was worth, what, 0.75 of a dollar when first created and now the dollar is worth about 0.77 of the euro.

I would call that a spectacular collapse in just four years.

Hell, a plate of spaghetti for two people in London this summer was $75. A T-shirt was $40. I didn't buy any souvenirs. Thankfully their museums are free and open to the public!

In Amsterdam my driver said he no longer accepts dollars because, "They are toilet tissue."

So the dollar has already collapsed. I think it's just a question of how much further it can possibly go before hitting bottom. I would hope it is at the bottom now.

The trade deficit is still growing and showing no signs of slowing even against the Euro region that doesn't have a currency peg. Now, if East Asia were to ever drop the hammer, it's likely the dollar could be displaced by the Euro as the worlds's currency standard. So it's a good bet that the Euro has a lot more room to rise.

My perception is that most currency trading is done with a very short time horizon, which explains why the long term trends tend not to be reflected in the price -- it's like a game of chicken.

This has been done for the very good political and economic reason that they have been keen to encourage the influx of American capital and jobs to allow their countries to build a powerful industrial base. The problem is that a country such as China which operates a dollar peg has to create one yuan for every dollar it buys. It is one of the primary reasons why the Chinese economy has tended to overheat. The government in Bejiing has started to grow concerned that this process is generating inflationary pressures in their economy. There are signs that they wish to mitigate this risk by moving the yuan to a peg that includes a basket of currencies including the Euro and Yen as well as the US dollar. When that occurs they will be less keen to buy US government T bills etc. The result will be a massive dollar devaluation and a big surge in US inflation.

http://quote.bloomberg.com/apps/news?pid=10000006&sid=aUvefNEBitKc&refer=home

On edit - The attached article suggest that private foreign buyers have more or less given up on the dollar. It has become more and more dependent on overseas central banks to prop it up. This gives some foreign governments quite a hold over the US administration.

http://www.investors.com/breakingnews.asp?journalid=23864706&brk=1

My wife went out and bought shoes for my kids next four or five years. She figures that in a short while those twenty dollar shoes will be three hundred bucks a pair.

The Asian central bank recycleing of dollars into Treasury Bonds is the most important economic trade in tne world. It is also bizzare. They take our dollars and lend them back to us. The bizzare part is that they do it knowing that they will get paid back in cheaper dollars. While the average return on the long bonds they have bought over the last 2 years while this has been going on big time is in the low 4% range the dollar has lost many times that.

Additionally all that buying of Treasury bonds makes interest rates low. Low so that we can continue to borrow madly. The whole thing goes so against every supposed rule of economics. They key is that they are making a bad trade because they don't care about profit or loss. The very foundation of market economic theory, that economic actors will work for thir own self interest is not working and thus the markets are not working. They are being manipulated.

World economics can now be said to be a totally monetary phenomenon. The supply of money worldwide is rising at a breakneck pace and a huge portion of that is going into financial assets, ie. stocks bonds and other credit instruments. What we have ongoing is an economic experiment on a grand scale.

However it turns out just don't fall for the arguement that we have
free markets.

By the way, you and every American is the beneficiary of the system as it is to the extent that the collective 'we' are so rich. Bemoan the system as it is if you like but know there is NO fundamental alternative to it that doesn't spell massive dislocation, default and depression.

The era of defacto American world hegemony is contingent upon, and in fact perhaps the result of, the US engineered and dominated financial system.

WHere is the dollar going? My bet is the dollar index, now around 84, down from its peak of 120 is headed towards 50 over the next few years. The result will be inflation. How much remains to be seen but it will cost more for everything. And remember every dollar you earn will be worth less. In other words most of us get poorer. THe only question is if the stock market can inflate along with or even more than general prices.

You'll note that now stocks rally when the dollar falls. That relationhip played out perfectly this week. Every serious economic policymaker and player knows the dollar has to fall. History, till now says a falling currency is bad for equities. They are trying to rewite history and maybe they will succeed. After all they have the worlds central bankers on their side along with a huge propoganca machine in place to teach people that everything is just fine.

Between the increase in the stock market and the decline of the USD? Between the increase in oil prices and the decline of the USD? Are they being "pegged"?

I think China is tolerant of the current situation because we are not easily replaced as an export market. I'm sure that right now they looking at alternatives and will gradually unhinge themselves from the once-mighty USD. They will peg the renmimbi to a "basket" of foreign currencies. Not long after that oil will be similarly re-pegged.

Our corporate masters here in the US will try to manage it all by keeping the stock market inflated, even if it looks like the seventies all over again. The difference is that oil plummeted in the 80s whereas it will continue to soar now. I can't see how they'll be able to keep it all together. I expect a significant and serious decline in our standard of living over the next few generations....

The relationship between the value of the dollar and the price of oil is particularly complex. Whilst the long term decline in the USD has been one factor in the oil market, it is increasing demand from China and India pressing on a limited supply of crude has been the major driver underlying the increase in the value of this commodity. The process has been exacerbated by the impact of the war in Iraq, uncertainty in Venezuela, civil strife in Nigeria, hurricanes in the Gulf of Mexico, limited refining capacity and a shortage of tanker ships.

For the American consumer increases in the cost of oil is generally bad news. They are going to end up paying more to drive their cars or to heat their homes. The impact on the position of the US as a world power is far less clear cut. As long as the oil is priced and paid for in dollars then high prices might even benefit the USA. It would prop up demand for the currency and would be a way of eating away at that large dollar trade surplus that countries such as China and Japan have built up in recent years. Higher energy costs might also erode some of the wage cost advantages that Asian economies currently enjoy, particularly where goods have to be transported long distances to their export markets. It is interesting to note that the weakening in the value of the dollar that occurred last week coincided with a sharp drop in the price of oil. I believe that this relationship lies at the very heart of the geopolitical struggle taking place at the moment. William Engdahl's book 'A Century of War: Anglo-American Oil Politics and the New World Order' covers the subject in some depth. The attached link will give you some idea of his theories

http://www.currentconcerns.ch/archive/2003/04/20030409.php

..not necessarily macroeconomics, but of course they are both intertwined. My analysis suggests that events surrounding Iran will have an impact on the dollar's fall. Given China's recent (& large) oil and gas deals with Tehran, and the eventual emergence of a euro-denomiated international oil "Bourse" (exchange market), I think the necoconservative response to these developments will impact whether the dollar cotinues futher controlled devaluation, or a precipitious drop and associated economic dislocations. Either way I see significant changes on the horizen...

Please see the article below for details:


'The Real Reasons Why Iran is the Next Target:
The Emerging Euro-denominated International Oil Marker'
http://globalresearch.ca/articles/CLA410A.html

The Iranians are about to commit an "offense" far greater than Saddam Hussein's conversion to the euro of Iraq’s oil exports in the fall of 2000. Numerous articles have revealed Pentagon planning for operations against Iran as early as 2005. While the publicly stated reasons will be over Iran's nuclear ambitions, there are unspoken macroeconomic drivers explaining the Real Reasons regarding the 2nd stage of petrodollar warfare - Iran's upcoming euro-based oil Bourse.

In 2005-2006, The Tehran government has a developed a plan to begin competing with New York's NYMEX and London's IPE with respect to international oil trades - using a euro-denominated international oil-trading mechanism. This means that without some form of US intervention, the euro is going to establish a firm foothold in the international oil trade. Given U.S. debt levels and the stated neoconservative project for U.S. global domination, Tehran's objective constitutes an obvious encroachment on U.S. dollar supremacy in the international oil market.

(more)

I think there is a correlation. However like all intermarket relationships it may not persist. I'm just saying there seems to be a direct correlation now.

The huge $500 billion trade deficit is as I said ending up in the central banks of the exporting nations and the Asians especially are using those dollars to buy our treasury bonds. They send us stuff. We send them paper, ie. dollars, then they send the dollars back to us in the form of a loan. (Buying our bonds is a loan)

Thus they are also lending us the money to run huge budget deficits. It's a beautiful thing really. Us worrywarts thought two years ago that the twin deficits, trade and budget would be a big problem and instead it has morphed into a self perpetuating cycle. The kicker being that all that foreign purchasing of our bonds keeps interest rates low, so we can borrow ever more and buy more of their stuff and on and on. Well for now anyway.

None of which explains why the weaker dollar should make stocks go up. Well just for now it seems to.

Dollar weakness may be playing a part in oils rise, as most commodities are rising. Partly due to higher demand as the flood of money, dollars as well as most currencies, increases, which as moneterists held makes prices rise. However in addition one must consider supply. It is quite likely that we are at or near the peak of oil supply. There is little cushion right oow on the supply side as demand continues to rise. Thus higher prices.