US $

[Cool Dood]

Out of curiosity, can some of you explain the reasons why you think the US dollar is headed for a steep decline? I've noticed quite a few posters here who seem to hold that belief.

 

[MasterBlaster]

US dollar decline predictions are based on the big imbalnce in the balance of trade. The so called trade deficit.

One day China and Japan may either get tired of holding all those dollars or want their money back to fund their own needs (eg. retirements in Japan).

That's when the S**t hits the fan and the dollar goes down perhaps gradually or as I suspect real fast.

clearly the status quo is unsustainable

The other concern is that as US bugget deficits go through the roof that Congress will not have the fortitude to make the proper cuts. One possible outcome is that rather than make cuts the central bank just starts printing money to inflate our way out of the budget deficit. This possible outcome has strong indications of a very weak dollar.

 

[laurence]

Can't speak for everybody, but a lot of countries hold a lot of $$ due to our huge debt/deficit.  We get a little slack on this because the U.S. dollar has been treated as a "World Currency", but that can only go so far.  Plus, Euro is competing for that role.  

Lot's of other points to be made, but one bone to throw out for the conspiracy nuts in all of us, mebe it will lose value because the gubmit wants it to...?  Hey, if you owe a million dollars and work a govt. job with garanteed colas, you are praying for inflation!  So, inflation hits, national debt shrinks in half over ten years, get some extra gravy with SS payments lagging true inflation....

 

[Nords]

Out of curiosity, can some of you explain the reasons why you think the US dollar is headed for a steep decline? I've noticed quite a few posters here who seem to hold that belief.

Hang on a minute while I check to see if the Treasury is printing the money fast enough to keep up with the federal deficit...

 

[tryan]

Yup, trade deficit and national debt being funded outside the country are the two biggest reasons.

Also doesn't help the feds print 5% more money each year just to keep the economy well greased. An artifical 5% inflation rate that never seems to materialize due to currency lost/destroyed.

 

[Maximillion]

Bush Fcyyd Up.

it is a Train Wreck about to happen

I am a Graduate Economist, same school as Myron Scholes, Nobel Prize winner.

 

[laurence]

You went to the same school as some one who won the Nobel Prize, did you become his equal through osmosis? Besides, his work was on valuing derivatives, not exactly the center of international macroeconomic theory. Now his graduate work was at the University of Chicago, and that is something to be proud of, if that is your alma mater, one of the preeminent schools of economic thought. Now correct me if I'm wrong, but I believe the Chicago school of thought was more free market, isn't the west coast (UCLA et al) more Keynsian in nature?

Perhaps you can expound on your opinion beyond Bush f***ed up, and edify this poor B.S. in Economics.

 

[GTM]

Out of curiosity, can some of you explain the reasons why you think the US dollar is headed for a steep decline? I've noticed quite a few posters here who seem to hold that belief.

I think another question should be "What are you doing about it'? of what are you doing to protect yourself from it? should the dollar decline.

 

[Bruce]

Invest in foreign securities in which will increase in value relative to the dollar. 8)

Not only do you get the price appreciation of the asset (hopefully) you get more dollars when you sell the asset and transfer its value back into dollars. 8)

 

[Nords]

I am a Graduate Economist, same school as Myron Scholes, Nobel Prize winner.

I knew that name sounded familiar, and not in a warm & fuzzy way.

Do you mean this Myron Scholes? Did you learn the same type of economics as this excerpt?
"In 2005, Scholes was implicated in the case of Long-Term Capital Holdings v. United States, where he attempted to invest funds from his company, Long-Term Capital Holdings, in an illegal tax shelter in order to avoid having to pay taxes on profits from company investments. It was found that Scholes and his partners were not eligible for $106 million in tax deductions they had claimed. Additionally, they were fined more than $40 million by the IRS."

 

[Lusitan]

"What are you doing about it'? of what are you doing to protect yourself from it? should the dollar decline.

For the past few years I've been gradually increasing my international stock position through Vanguard index funds (they have several int'l funds) and currently int'l is about 25% of my equity portion in my asset allocation.

My wife and I also bought real estate in Europe in a euro country - although that wasn't done because of dollar considerations, rather, just because she is from there and all her family is there and we plan to live there eventually. But even if it wasn't done intentionally, it's an investment in € instead of $.

Precious metals are an area that I haven't gotten into yet, and I'm not sure if I will anytime soon. My reluctance is partly based on the huge spike in the cost of gold over the past few years and wanting to make sure my inner market-timer that I've been repressing isn't chasing after past gains. Vanguard closing their Precious Metals fund a while back also hasn't made it convenient, and so it'll take more research on my end to find an avenue to invest in gold.

I probably spend extra time thinking about the dollar tanking because part of our plan for ER includes moving to Europe ... but I'm also bearish on the dollar and the U.S. economy in general. Only time will tell. Meanwhile I'm learning from those with more knowledge in this area and trying to hedge my bets ...

 

[wabmester]

I know this is a bit oversimplified, but aren't interest rates one of the big factors (so far unmentioned in this thread)?   Recently, the dollar has dropped relative to other currencies when we dropped our rates, and guess what happened to our currency when we raised interest rates?    Yup, it got stronger.

Other nations don't seem to be concerned about our current account deficit, but they like our rates....

 

[Focu$ed]

I agree with all the reasons given. I believe that part of the reason the Euro was created was because other countries realized that the dollar had structural problems due to our trade imbalance and Federal budget deficit etc. and were not comfortable with the dollar as the only world reserve currency. As we continue to expand the money supply, at an increasingly alarming rate to pay for government programs, wars, etc. our trade partners are faced with handing over their valuable goods (particularly oil) in exchange for dollars that we create out of thin air. How nice for us that, unlike them, we have the ability to simply print up more money at will to pay for things. If they convert all our dollars into their own curriencies, they are injecting a sea of inflation into their own economies. Instead they recirculate dollars into other dollar denominated assets like US Treasuries or invest in US businesses. They have put up with the dollar because they had no alternative and they needed the US to buy their "stuff." Now, however, countries like China and India are building up a middle class of potential consumers who are making higher wages and developing a taste for Western luxuries. Before long they will be buying more of their own stuff, and will be less dependent on the US consumer, who is pretty much in debt up to his eyeballs and losing his purchasing power anyway.

 

[Lusitan]

I know this is a bit oversimplified, but aren't interest rates one of the big factors (so far unmentioned in this thread)?

Well, I think you're right that interest rates are one of the big factors. But keep in mind that short-term interest rates have been rising in the U.S. for the past couple years, and during that time the dollar has only more or less held its own versus the euro (which, I believe, had held interest rates steady during that period).

Before the U.S. rate increases began, starting around 2002, the dollar tanked relative to the euro (around 2000, $1 ~ €1.20 ... now $1 ~ €0.82 ... just pulling these from memory but they're in the ballpark).

And now the question is what will happen if/when the U.S. stops raising interest rates, but keeps cranking out massive trade deficits? The U.S. just seems to be spending itself into oblivion, with money it doesn't have. And now India/China are finally getting their economic act together ...

 

[kramer]

No, I see no reason for the US $ to increase or decrease relative to other currencies.

And if it was true that this was truly predictable, the market would have already taken that into effect. If folks know the direction of the dollar, then they can make a fortune on derivatives. The US $ is almost exactly where it was immediately after the Euro was allowed to float against the US $ in 1999 (within ~3 cents).

The reason the trade deficit is high is because the American economy is doing so well compared to other developed economies, and because the US does not have a huge demographic problem coming down the pipe (which helps long term growth prospects).

When Japan decides to build a Honda plant in Kentucky and employ American workers, all that continuous stream of investment money as the factory and cars get built gets counted as part of the 'trade deficit'. Foreigners must sell huge net amounts of goods and services to Americans in order to fund their investments in US assets. When the US economy stops its amazing growth relative to other developed nations (in history, I am not sure if there has ever been this large of a differential over a 5 year period, but I am not sure), the trade deficit, unfortunately, will decrease. The country with the largest trade surplus, Germany, is an economic basket case with ~12% unemployment and moribund growth. Few companies (including German multinationals) want to invest unnecessarily in German assets because of rigid labor laws and high costs.

In fact, although Americans buy fewer assets outside of the country than foreigner buy American assets, the net investment income earned is almost identical -- because investments outside of the US are riskier and thus require a higher cost of capital, and so the US investors get better rates of return.

The US has been running trade deficits for over 30 years, I believe.

And just for clarification -- the budget deficit, on the other hand, is not good and is a genuine long term problem.

Kramer

 

[brewer12345]

I will freely admit that I always did better in microeconomics than macroeconomics classes when I was pursuing my economics degree. Having said that, the huge trade imbalance and feddle gummint deficit make me queasy, to say the least. I also see a lot of the slack productive resources around the world being not-so-slack anymore (Canada just announced the lowest unemployment rate since 1975!), so the US can't rely on foreign production capacity to keep a rein on inflation. So I think the Fed will be forced to keep raising rates to stave off domestic inflation and maintain the relative attractiveness of our currency. Eventually they will overdo it and squash the economy.

I also think that our constant need to keep putting our dollars into other natio's coffers will increase the purchases of Merkin assets by furriners. This has already caused some resentment (Dubai Ports World), but that's nothing new (anyone remember the outcry when the Japanese bought Rockefeller Center?). But if we keep borrowing heavily and at some poit we refuse to allow the purchase of domestic companies, property, etc. by furriners, they will stop playing the game. Watch the USD dive when that happens.

How have I hedged? I bought some GIM, which is a pile of shortish term foreign sovereigns, unhedged. I bought some PCRDX, since commodities will go up if the USD falls. I bought some EFA, although I have some doubts about the big multinationals in the index not getting whacked by a USD collapse. I also have been emphasizing individual equities that own or control some kind of real asset (EGLE, STON, etc.).

 

[tryan]

"What are you doing about it'? of what are you doing to protect yourself from it? should the dollar decline.

Asked my schwab rep the same question a couple years ago and he put me in EWC. Been a nice ride .... devalued dollar or not.

 

[Nords]

(anyone remember the outcry when the Japanese bought Rockefeller Center?). 

Boy, do I ever. As well as the Pebble Beach Golf Club and most of the state of Hawaii.

We relieved the Japanese of billions of dollars and then bought it all back for pennies.

Who's next? Step right up!

 

[camberiu]

Because they are printing money like mad!!! Between August 1987, when Greenspan became Fed Chairman, and November 2005, the monetary base rose from $233.5 billion to $782.5 billion, a 235% total increase or 6.8% at an annual rate. The M3 measure of money supply rose during the same period from $3.62 trillion to over $10 trillion, a 179% increase or 5.8% at an annual rate.

 

[HFWR]

Too lazy to look it up, but how much did the economy/GDP increase over that time period?

 

[camberiu]

The data I have shows an average anual GDP growth of less than 3% for the same period.

 

[Gone4Good]

The data I have shows an average anual GDP growth of less than 3% for the same period.

3% is the compound annual growth rate for "Real" GDP.

Nominal GDP grew from $4.8 Trillion in 1987 to 12.5 Trillion in 2005 for a compound annual growth rate of 5.5%.