Demise of the dollar

[Lusitan]

My reason isn't to take advantage of forex changes as much as it is to cover the chance that the US isn't THE predominant world economic superpower over the next 5-6 decades.

Again, same reasoning here. It's not necessarily a short-dollar idea as much as a short-USA idea. But to at least some degree, they may be related, in my humble opinion.

 

[Bikerdude]

America may be reeling because of some stupid business practices. But America still has the heart, soul, tenacity and initiative that no other country can compete with. This will keep our country strong in the future, no doubt in my mind.

I agree. I don't think shorting America is a good idea partly because its very popular now and historically has been wrong. Our biggest threat IMO is our politicians.

 

[HFWR]

Our biggest threat IMO is our politicians.

Who magically keep re-electing themselves...

 

[Hobo]

Hobo - great point - however, for those of us living overseas in Europe being paid in dollars, it is a bit of a downer watching this.....

Tell me, I live in Indonesia.. and I am feeling the same pain! Misery loves company!

My reason isn't to take advantage of forex changes as much as it is to cover the chance that the US isn't THE predominant world economic superpower over the next 5-6 decades.

Let's think about this. First, the definition of gross domestic product is the value added to a product (ie, sales price - cost of raw material). In other words, the value of new products produced in a country. This is stuff that make a country richer and stronger.

The US produces about 30% of the world's gross national product and all the countries of the European Union produces another 35%. (China adds about 7%). You can check out the details at List of countries by GDP (nominal) - Wikipedia, the free encyclopedia

Now if we look at the total exports, it can be seen that the US, Germany, and China are all about equal List of countries by exports - Wikipedia, the free encyclopedia So the US is still very competitive in selling its products overseas.

Looking at the gross numbers, not just the hysteria of the last year, which country is going to topple the US? Nobody comes close to the economic power of the US, and just because we hit a bump in the road, isn't it a little like Chicken Little to say "The sky is falling?"

That is not to disregard things like our huge trade imbalance or our large national debt... those are worrisome issues. However, consider if the US did take an economic tumble. All of the developing countries that rely on the US as a consumer would suffer an even harder blow.

Simply put, if the US economy catches a cold, the rest of the world (except the EU) will be in the hospital with pneumonia! So if you are going to bet against the US, you better make sure your investments are going to places that do not rely on the health of the US economy for their own survival!

 

[WanderALot]

I think I understand where the pessimism about the US$ is coming from, increased spending, increased debt etc, but I don't see how the US is worst offender. As a percentage of GDP, the US debt is a lot lower than Japan and about the same or less than Europe's largest economies.

Additionally, both Europe and Japan have falling, aging populations. Demographics seems like it is one of the most predictable factors of a country's economy health. I don't see how Japan, with its almost 2xGDP debt, is going to be able to pay down its debt easier than the US can. This doesn't seem like it bodes really well for the Euro or the Yen long term.

It seems like there is no way the US can be as dominant as it has been over the next century, but that can't be expected with the growth of China and India. But I don't see the yuan or the rupee displacing the dollar anytime soon. Besides not being 'world' currencies, these countries (especially India) will have to go into a ton of debt to bring up their infrastructure and environment. Not to mention their upcoming demographic time-bombs towards the end of this century.

My [probably over-simplified] view.

 

[FUEGO]

Let's think about this. First, the definition of gross domestic product is the value added to a product (ie, sales price - cost of raw material). In other words, the value of new products produced in a country. This is stuff that make a country richer and stronger.

The US produces about 30% of the world's gross national product and all the countries of the European Union produces another 35%. (China adds about 7%). You can check out the details at List of countries by GDP (nominal) - Wikipedia, the free encyclopedia

Now if we look at the total exports, it can be seen that the US, Germany, and China are all about equal List of countries by exports - Wikipedia, the free encyclopedia So the US is still very competitive in selling its products overseas.

Looking at the gross numbers, not just the hysteria of the last year, which country is going to topple the US? Nobody comes close to the economic power of the US, and just because we hit a bump in the road, isn't it a little like Chicken Little to say "The sky is falling?"

That is not to disregard things like our huge trade imbalance or our large national debt... those are worrisome issues. However, consider if the US did take an economic tumble. All of the developing countries that rely on the US as a consumer would suffer an even harder blow.

Simply put, if the US economy catches a cold, the rest of the world (except the EU) will be in the hospital with pneumonia! So if you are going to bet against the US, you better make sure your investments are going to places that do not rely on the health of the US economy for their own survival!

The US may continue being the dominant economic superpower. It may not. I don't think it necessarily has to. I'm 29. I hope to be FIRE'd in 10 years or so. I may have a half century where I am living off my investments. I have no clue what will happen in the next 50-60 years.

One can learn as much as a student of history as a student of economics. Consider Spain and Portugal a few centuries ago or England more recently. Dominant or major economic world super powers of their times. Where are they today? They each represent between a fraction of a percent up to a few percent of total world GDP. Bit players. I don't see the US having quite as bad a fate in 50-60 years, but who knows? I certainly don't know (crystal ball is in the shop and all that).

I'm not a pessimist on the future of our country; I prefer to think I'm a realist. I don't invest based on some blind notion of nationalist superiority (we're number 1, we're number 1!). I spread the wealth around a little bit.

If the US remains the dominant superpower that it is, with a strong currency, I may lose out a little on investment returns. But I'll still be fairly wealthy (1/2 the portfolio is in the US after all). If the country goes to crap, and the dollar slowly dribbles into a secondary position in the world, I'll be filthy rich relative to my fellow countrymen. Either outcome I am willing to live with.

And my investing strategy has me buying the more relatively undervalued asset classes. Right now, I'm probably a little light on US investments given the relative outperformance of international investments. New money will be focused more on US investments. Should the dollar take off and international assets start to drop in value, I'll be back to investing new money in foreign assets.

 

[CCdaCE]

Hobo's #29 post and Fuego's #31 post are excellent posts, and something I've been pondering a lot for the past two weeks. "Should I have more International?" Thanks for the facts, links and cut-thru-the-crap realism. Now I'm off to backtest a 50/50 US/Int'l portfolio for the last ... 2 years?

-CC

 

[explanade]

Last year, the dollar was almost at $1.60 to the Euro in July. Then the crisis with Lehman in September and the dollar gained to around $1.30 by the end of the year.

Currency traders are making way more money with these moves than we ever will.


How do you store gold? Say the world goes to hell and you have some Krugerrands or bullion bars. Are you going to be able to buy food, fuel and ammo with 1 oz. coins or do you have to shave some of it off?

 

[Finance Dave]

I have 2 more Mondays....

Wow, that's awesome.

I don't get on the board very frequently, so congrats in advance!

Seriously....after you're FIRE'd for about 3 months, I'd like to see a few paragraphs about how you've enjoyed it...the softer side, not just financially...but your health, spirit, attitude, sleep habits, smile-on-face factor, etc.

Dave

 

[Finance Dave]

if the US did take an economic tumble. All of the developing countries that rely on the US as a consumer would suffer an even harder blow.

Good observation...but what if the growth in consumers in areas like India and China more than offset the reduced "consumerism" in the US?

 

[Hobo]

Good observation...but what if the growth in consumers in areas like India and China more than offset the reduced "consumerism" in the US?

I suggest you take a trip to China. The country has only emerged from dire poverty over the past 30 years. Today, the definition of poverty is anyone making over $1.25 per day! So if you hear that China has reduced its poverty rate, don't be too impressed. The middle class (defined as annual income of at least US$5,000) makes up only 10%-15% of the population.

The middle class of China are not buying flat screen TVs on an annual income of $5000 - and it will be a long time before they will be able to consume like the American consumer.

Yes, you will read and hear how China and India are economic powerhouses, but you must remember this statement is made relative to what these two countries were 20 or 30 years ago. It is an economic miracle that 10 percent of the population can increase its income from $1.25 per day to $2.50 per hour. However, they are still a long, long way from becoming true consumers as compared to the US and European consumer.

The idea that the consumer in China is going to be able to buy a majority of the products that China produces is voodoo economics.

 

[explanade]

I had heard that while the percentage of Chinese with incomes comparable to upper middle-class Americans is low, it could still amount to a couple of hundred million people?

Supposedly they're importing a fair amount of luxury goods including German cars.

And before the financial crisis hit at least, they were starting to become a significant percentage of tourists in places like Europe?

Yet if there really are that many Chinese with relatively high incomes, that hasn't come through in aggregate consumption numbers.

 

[Texas Proud]

My boss keeps talking about how the dollar is going to tank... and there are lots of talking heads saying this...

I ask... against what? It has to 'fall' against some other currency... which currency is going to get stronger? I just don't see a big decline...

But then he might say, the price go gold is going to go up with all the debt piling up... well, then the dollar is falling against 'goods'... that is inflation... but IMO I would see inflation everywhere... so again, the dollar is not 'tanking'... sure, your purchasing power is going to heck...

 

[samclem]

The number of people officially living in poverty (by PRC govt standards) actually tripled last year (new number of poor = 43 million. Link ). That's not because people are poorer, but because the govt raised the official poverty line . . . to 1100 yuan or $160 per year ( 44 cents per day) . I'm sure that people get a lot of "free" support from other sources, but these people are poor and won't be buying consumer goods beyond rice and blankets.

And, China's not just por at the bottom: The country has a per capita GDP of $6000. (US GDP/P is $47,000).

But, China has a lot of people, and they are moving up out of poverty. A dollar goes a long way in China, so households bringing in more than $6000 a year are considered to be living comfortably.

Projections are many but here's what the official Chinese Govtguessers think will happen:

That blue line represents those families that will be buying their first microwave oven, a small TV, a cheap computer, a small car, etc.

From the same link as above:

At the moment, China's consumer economy is about the size of Italy's, but in two years' time it is going to start adding an Italy every year," says Mr. Grant, noting that while the average Italian spends $11,511 on consumer goods each year to China's $543, the middle kingdom's enormous population makes up for the difference.

Total Italian consumer spending certainly doesn't match US spending, but adding the equivalent of that much consumer spending every year could go a long way to make up, on a worldwide basis, for declining demand in the US if our economy ebbs over the coming decades.

Originally posted by Hobo
Example:About a week ago, I meet two American girls (from South Dakota) in Bali, Indonesia. At age 24 and they had hand sewn samples of clothing to be manufactured in in bulk in Bali. This was the second year they were operating their "global business" and the new enterprise was turning a nice profit.

You don't find the Chinese young people in Indonesia doing business. Multiply this uniquely American trait by the hundreds of thousands of young people who are determined not to be dragged down by the bankrupt mega-banks and the corporations that started with a good idea when their great grandfather was a young man (ie, General Motors).

You don't see Chinese people in Indonesia looking for cheap production capabilities because they have cheaper production capabilities at home in China. And if the buyer for a retailer sees that clothing designed by those American girls, there's a good chance he'll have knock-offs made at lower price in China and you won't see those young ladies in town again next year.

 

[Hobo]

My boss keeps talking about how the dollar is going to tank... and there are lots of talking heads saying this...

I ask... against what? It has to 'fall' against some other currency... which currency is going to get stronger? I just don't see a big decline...

But then he might say, the price go gold is going to go up with all the debt piling up... well, then the dollar is falling against 'goods'... that is inflation... but IMO I would see inflation everywhere... so again, the dollar is not 'tanking'... sure, your purchasing power is going to heck...

The value of the dollar is a very difficult subject to get your arms around. The exchange rate is set by the FOREX, not by real purchasing power. I live in Indonesia and the dollar has fallen 25% since May. That's crazy. Why should a dollar be 25% weaker in 6 months? Suddenly the price of a HP ink cartridge is 25% cheaper to local people. Why? Because currency traders are speculating with the numbers. So if the dollar is going to tank, that is good luck for Indonesian people (but bad luck for me). But you can't tell me the actual value of the ink cartridge has changed anywhere!

Do you think gold is a hedge against inflation? I remember in 1980 when an ounce of gold hit $850 per ounce. Adjusted for inflation, in 2008, that same ounce of gold should be [SIZE=+1]$2193.25 [/SIZE]per ounce! So gold can be a terrible investment. Look at this chart.. does that look stable to you?

Another thing to consider... if you were a citizen of any other country in the world, let's say China or Russia, and you wanted to keep your money safe, where would you put it? Because China and Russia are unstable countries where the Government (sort of) controls the exchange rate of money, wouldn't you want your money in dollars? Think about that.

To almost everybody in the world, the US dollar is still the best place to keep your money because the US is rock solid stable. If you think the dollar is going to "tank", what logic can anybody possibly use to think the Chinese yuan or the Russian ruble or the EU euro is going to be stable?

We saw what happened when a year ago when the world markets crashed... everybody flocked to the US dollar and ran away from the other currencies. As much as the national debt is rising, and the unemployment rate is raising, the US government is not going to be torn apart by some revolution. Meanwhile, the movement toward democracy could bring down the Communist Chinese at any time; or if Russia tries to revert back to its old socialist ways; these governments could easily tumble.

Simply put, no country is nearly as stable as the United States and the US dollar.

 

[Trek]

The average well off Russian or wealthy Eastern European holds primarily Euros and/or GBP. The ultra wealthy will hold USD as well as the other two.

 

[Texas Proud]

The value of the dollar is a very difficult subject to get your arms around. The exchange rate is set by the FOREX, not by real purchasing power. I live in Indonesia and the dollar has fallen 25% since May. That's crazy. Why should a dollar be 25% weaker in 6 months? Suddenly the price of a HP ink cartridge is 25% cheaper to local people. Why? Because currency traders are speculating with the numbers. So if the dollar is going to tank, that is good luck for Indonesian people (but bad luck for me). But you can't tell me the actual value of the ink cartridge has changed anywhere!

Do you think gold is a hedge against inflation? I remember in 1980 when an ounce of gold hit $850 per ounce. Adjusted for inflation, in 2008, that same ounce of gold should be [SIZE=+1]$2193.25 [/SIZE]per ounce! So gold can be a terrible investment. Look at this chart.. does that look stable to you?

Another thing to consider... if you were a citizen of any other country in the world, let's say China or Russia, and you wanted to keep your money safe, where would you put it? Because China and Russia are unstable countries where the Government (sort of) controls the exchange rate of money, wouldn't you want your money in dollars? Think about that.

To almost everybody in the world, the US dollar is still the best place to keep your money because the US is rock solid stable. If you think the dollar is going to "tank", what logic can anybody possibly use to think the Chinese yuan or the Russian ruble or the EU euro is going to be stable?

We saw what happened when a year ago when the world markets crashed... everybody flocked to the US dollar and ran away from the other currencies. As much as the national debt is rising, and the unemployment rate is raising, the US government is not going to be torn apart by some revolution. Meanwhile, the movement toward democracy could bring down the Communist Chinese at any time; or if Russia tries to revert back to its old socialist ways; these governments could easily tumble.

Simply put, no country is nearly as stable as the United States and the US dollar.

First... I do not think the dollar is going to 'tank'.... my boss does.. and I ask him 'against what?'... it if tanks, it has to tank against something... so it has to be other currencies (which is usually what people talk about when mentioning a strong or weak dollar)... and like you say... if there is weakness in the dollar, there is not a lot of places with strength...

I have never thought gold was a good hedge for inflation... but it is a good place to hold money when everybody is running around thinking the sky is falling... it is an emotional play to make some trading profits... (now, I do not partake in this trading... just saying)... it is not a buy and hold investment...

 

[ziggy29]

Do you think gold is a hedge against inflation? I remember in 1980 when an ounce of gold hit $850 per ounce. Adjusted for inflation, in 2008, that same ounce of gold should be [SIZE=+1]$2193.25 [/SIZE]per ounce! So gold can be a terrible investment. Look at this chart.. does that look stable to you?

I don't think cherry picking data points by looking at the peak of a clear speculative bubble is useful.

If we plotted a long term graph of prices versus gold, you'd see much more correlation. Gold tends to beat inflation when people are *anticipating* higher inflation in the future and drop when the market expects lower inflation (or deflation). But over the long run it comes pretty close to matching inflation; in most periods when gold isn't near a peak or a trough it tends to have fairly constant purchasing power -- indicative of being a *long term* proxy for inflation as well as a short-term speculative play on the direction of inflation.

The fear of runaway hyperinflation in 1980 resulted in its absurd price. The markets didn't have much faith the cycle could be broken, but when the Volcker Fed broke it, gold plummeted closer to where it should have been as a long term proxy for inflation. It's a lot like the old saying about the stock market -- in the short term it's a voting machine; in the long term it's a weighing machine.

 

[Gone4Good]

If we plotted a long term graph of prices versus gold, you'd see much more correlation.

Not really. Here is the price of gold from 1983 "post bubble" to today against CPI . . .

For 20 years (from 1983 to 2003) the price of gold was basically flat. Only in the last six years has it rallied to reclaim its 1983 real price. With this kind of performance one can credibly ask whether the recent run up in prices isn't just another bubble. Certainly 20 years of flat price performance looks more convincing as a long-term trend than a six year spike.

Even if gold tracks inflation over "the long-term", that "long-term" appears too long to be of any practical use. And if I were buying it today, I'd worry that I'm already buying at a time when inflation fears are running high. Will I have to wait another 30 years before my inflation "hedge" pays off?

 

[Hobo]

The number of people officially living in poverty (by PRC govt standards) actually tripled last year (new number of poor = 43 million. Link ). That's not because people are poorer, but because the govt raised the official poverty line . . . to 1100 yuan or $160 per year ( 44 cents per day) . I'm sure that people get a lot of "free" support from other sources, but these people are poor and won't be buying consumer goods beyond rice and blankets.

And, China's not just por at the bottom: The country has a per capita GDP of $6000. (US GDP/P is $47,000).

But, China has a lot of people, and they are moving up out of poverty. A dollar goes a long way in China, so households bringing in more than $6000 a year are considered to be living comfortably.

Projections are many but here's what the official Chinese Govtguessers think will happen:

That blue line represents those families that will be buying their first microwave oven, a small TV, a cheap computer, a small car, etc.

May I respectfully suggest that anyone who believes, and is willing to invest in the idea that China will cut its poverty level from 90% to 10% in 15 years based on Chinese government data - is taking a big risk.

Remember, China's entire economy is growing because of cheap labor - just like Japan's economy in the 1970s. Once you loose the cheap labor, you loose 90% of your competitive advantage.

Or perhaps you can tell me how China is going to maintain it's inexpensive manufacturing capability at the same time that the 60% of the population grows to be upper middle class. Voodoo economics.

 

[samclem]

Or perhaps you can tell me how China is going to maintain it's inexpensive manufacturing capability at the same time that the 60% of the population grows to be upper middle class. Voodoo economics.

You raise some good points. But, since "upper middle class" in China tops out at less than $13K per household (and most Chinese women work, so that $13K represents the annual income from two+ people), I'd say they will still have a huge "cheap labor" competitive advantage over the developed world.

There will undoubtedly be some other formerly basket-case economies that emerge to offer competition to the PRC at the low end, but China will have the advantages of scale (a huge net of companies being under one set of regulations and a common language) and of having at least some infrastructure (roads, electricity) and a literate population. I do agree with you that the chart is overly optimistic: It's unlikely that within just 15 years the poor will go from 50% to 10 % and that the middle class (UMC and LMC) will represent 80% of the Chinese population. Maybe this could have worked out if the world economy had kept going as it was when that chart was built (2004), but things look less rosy right now.

The real interesting part will be watching the the old-line communist bitter-enders as this process unfolds. The Party leadership recognized economic reality and elected to ride the tiger of capitalism to allow China to grow. As the Chinese people get a taste of (work + initiative = money --> a better life for my family), they aren't going to be much interested in the wonders of the collective. If that turns bloody, then all bets are off about where the blue line on the chart goes.