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Bye, Bye U.S. Dollar?

by: David Bailey September 29, 2008 | about stocks: UDN / UUP    

David Bailey

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Haven’t you heard? The United States dollar is toast. That sucker is going DOWN.

Short interest rates are incredibly low, and no rational person thinks longer-term U.S. interest rates are headed anywhere but lower, given a looming, if not already-loomed recession. The American government is planning to borrow 5% of GDP on a single bailout package and that’s just one program added to an orgy of spending. The amount of dollar credit flowing out of central banks into the system worldwide is unprecedented. Gold is through the roof and the U.S. trade balance? Forget about it. It’s huge.

And we have been doing all this incredible stuff for at least a year now. So naturally, unquestionably, the U.S. dollar is finished - D to the O to the A. Cataclysmic inflation is moments away. Ron Paul’s face will be the only one we see on currency commonly used inside our borders within months. So long Kingsford, hickory chips and clean-burning propane. Hello dead, smoldering Presidents. Next summer, it’s “Grillin’ With Greenbacks”. Welcome to Weimar America. Enjoy the tangy, smoky, Fiat Flavor.

If you follow the financial pages, you have read this a minimum of a hundred times already, so surely you should have gotten the message by now. Everybody knows it.

Except, of course, that with all this unprecedented madness the dollar index is flat on the year, up 7% off its July lows.

But don’t get me wrong, here. Other than that one little inconvenient truth, the theory is ironclad. I mean it is bedrock solid. After all, the euro – the world’s next great reserve currency – okay the euro is down 8% off its highs but that’s not important. The point is that ours is now a multipolar world. Earth, she is a BRIC house. Mohamed El-Erian says it and he works for PIMCO.

PIMCO.

‘Nuff said.

And, again, other than the fact that three of the four BRIC currencies have fallen off the table (those being the ones that are actually traded in the marketplace), the theory is as beautiful as the Taj Mahal, as strong as a Russian oligarch and arguments against as scant as a Brazilian bikini.

It’s all about industrial production, you see. Note that the Japanese yen is up against the dollar about 4% this year. That may not seem like much, given the trade deficit between the two countries, and it is also 6-7% down from the highs,…making seem like even less, come to think of it. But the point is that the yen has been the strong currency of a massive industrial powerhouse for decades and in that time the people of the world have been using it…okay, mainly to buy investments denominated in other currencies, but that is not germane because of...um…hang on, I’ll get it…

China! That’s it! The dollar is down decidedly against the Chinese yuan, no counter-trend, end of story. We all know it. China will dominate the world and soon we will all be using Chinese yuan to buy everything from alphabet soup to bicycles to…well…china. Of course because of currency and capital controls, we will not only have to use our yuan to buy from China but also in China, since that’s the only place on the globe you can actually spend Chinese yuan.

Wow, the lines are going to be murder.

But the important thing, Ron Paul reminds us, is that saving in a strong currency protects the value of your assets from inflation. Now, it’s true that Chinese wholesale inflation is at ten percent, but I’m sure that’s an anomaly. And by “anomaly” obviously I mean: “decade-long, upward trend.” But Chinese consumer inflation is at 5% and the Chinese Communist Party would never manipulate consumer prices to keep the Chinese people from getting upset or intervene in the stock market or anything like that. And by “would never” obviously I mean, “definitely would,” but...

Gold! Today’s gold coins come in convenient denominations between $900 and $900 and are accepted at all Sharia-compliant financial institutions, third-world bazaars and survivalist training camps. Gold has been money for 5000 years. Yes, the trend has been towards the acceptance of book-entry debits and credits over the last 700 of those years, but why be trendy?

The point is that the U.S. dollar is finished. You can read it in all the papers.

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This article has 11 comments:

  •  
    Sep 29 11:11 AM
    Interesting. A strong dollar would make me happy. But, I have no idea where it's headed. It seems it should plummet, as you assert. But it's been rising lately and resumed it's rise after news on the "buy in" deal is all but signed. I guess it's a relative rise against the other major currencies. Nothing more. Those currencies are in trouble, too. I am a bit confused, but I guess I am in good company.
    Reply
  •  
    Sep 29 11:22 AM
    There is only one problem with this analysis: the facts. the dollar has screamed higher today and has now retraced almost 2/3 of what it lost since Sept 11. Currencies are about relative value and as bad as the US may seem, many other countries are worse off.
    Reply
  •  
    Sep 29 11:23 AM
    Bye, Bye Free Enterprise and hello to Government Capitalism and the U.S.'s capitulation to the Council of Foreign Relations (CFR) one world government.

    All the big boys are on board, led my the statists at Goldman. Took fifteen years for Robert Rubin's mission to be accomplished. When his Manchurian Candidate takes over Free Enterprise will be dead if it already isn't.

    The left/liberal will be surprised when they find out how they were used and I hope I survive my cancer to see the smugness wiped off of their arrogant faces. They will live on the handouts like the rest of us.
    Reply
  •  
    Sep 29 11:55 AM
    Summary of bailout plan (for computer geeks):

    while value($) > 0.0;
    print ($);
    end while;
    Reply
  •  
    Sep 29 12:51 PM
    Well Prudent, history is an interesting guide when it comes to a government selling it's people assets into long-term slavery. The entire economic model of 25 has failed. The government and the worst of the irresponsible in citizens and banks get a pass. The responsible are getting the shaft. They'll pay for awhile on the debt and inflation treadmill but at a point will provide the US government and foreign debt holders the finger.
    Reply
  •  
    Sep 29 03:14 PM
    Thanks all for your comments.

    To User 272333's comments: I just want to be clear here: The Fed is pushing out more dollars than anyone can imagine so, yes, the dollar should certainly be down.

    But here are the facts: Dollar Index in July: 72.

    Dollar Index today: 77.

    What positive happened for the Dollar Index between July and now?
    Reply
  •  
    Sep 29 06:43 PM
    At the risk of sounding like an idiot after you denounced the idea, I do think the dollar is headed for inflation -- but not, as some people expect, because of anything that has already happened.

    Rather, I think the Bush admin will now, with the failure of the bailout package, be forced to quite consciously inflate the currency. They have no other way to get rid of all that bad paper, all the mountains of debt, stretching as far as the eye can see. Congress understandably rejected their stupid "bailout" bill as a gift to the politicians' friends in the world of finance. Since the companies in question are actually insolvent -- not just low on cash -- the only way to help them is to either put money directly into their hands, or else buy them and use pure US government "capital" (ie., cash) to get them out of debt. Buying the bad assets is inflationary, of course, but it won't pass Congress and in any case I don't think it will work. There isn't enough money in the world to buy up all the bad paper out there.

    So I predict they will have to buy (nationalize) the failing banks, then create the money to save them out of thin air. The result will be massive inflation, I think.
    Reply
  •  
    Sep 30 08:20 AM
    The dollar should start its merry way to the downside after the Quarterly repatriation of foreign earnings being converted into US dollars.

    What changed in between July and now was the tremendous increase in sales of US Multinationals and subsequent conversion. I expect to see a reversal as global sales decrease due to Global weakness and Fed Intervention in the form of interest rate cuts and Big Bens' printing presses.

    The fact remains that the dollar's bounce reflected tremwndously oversold conditions and shorts had to cover.

    IMO, you've seen the rebound highs and while 80+ may be revisited, its strength is not sustainable.
    Reply
  •  
    Sep 30 11:09 AM
    I wonder if investors are buying dollar based assets, because as bad as things are they might be worse in Europe. The pound and the euro are flailing, that drives up the dollar index.

    As for inflation, I don't think that's much of a threat. Inflation is a money supply issue. Money is disappearing faster than it was created and into the same thin air.
    Reply
  •  
    Sep 30 12:42 PM
    Central bank intervention caused the dollar to bounce. It is just that simple. Foreign central banks put out a buy on the dollar.
    Reply
  •  
    Sep 30 10:52 PM
    what would the IMF say about us?
    Reply
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