Whither the dollar?

21 April 2006

These days the greenback is fairing well despite some serious fundamental problems therewith. There has been some moderate decline against some major European currencies but there have been no shocks. Nevertheless, it is not a time for complacency. The IMF is calling for... no.... rather is urging that the dollar depreciate significantly in order to resolve global imbalances. This is a extremely controversial and troubling subject but the IMF has come 'out of the closet', so to speak to say what it really believes is the best course for resolving a very serious economic problem.

Global growth has been robust but so have the imbalances and they are being exacerbated by an overpriced dollar. The dollars pre-emminece is both the engine of global growth and its poison pill. One clear sign of a problem with the dollar is the significant rise in commodity prices. With oil topping $74 a barrel, silver and gold and cooper hitting record prices, something is happening in global markets. As usual the real story is usually not discussed in major financial publications, it can be surmised, but never clearly stated. Many investors are hedging their bets against even higher prices because of the situation with the dollar, some of the drive up in these prices is because of instability in regions where these resources are extracted and of course there is the age old problem of manipulation. This is probably the truest in the gold and silver markets. Nevertheless, the result is same, higher prices against the US dollar. This leads us to a important question. Is the dollar demise being reflected in these important commodity markets even though the decline is far less marked in relation to currencies under control of the world's Central Banks? One cannot answer this question other than to look at the results of these massive global imbalances. The rise of commodity prices is certainly one way the dollars demise would be reflected, first of all this is where the smarter money is. Those who know what is happening in the world of economics and understand the laws of supply and demand as they relate to both the dollar and commodities are apparently making their move. That move is one which is hedging their bets in favor of tangibles, not paper.

The good news is that according the the Treasury Department (whose figures in the past have proved as reliable as the shifting sands of the desert) recorded excellent net inflows in the US to fund our trade gap. Also, US treasuries have been picked up briskly by Hedge Funds. However these entities are as transparent as 10 feet of brick so simply put, we can't really know if some or even most of these purchases were simply the Fed buying back treasuries that the US issued in order to hide a serious crisis. We can't check the Fed either because... ooops.. they decided to stop publishing M3. How convenient.

I just don't think anything is beyond this administration to keep up the facade of its crumbling economic empire. Consider; the dow ran up triple digits on news that GM the worlds largest automaker posted a loss of well... $323 million. Folks that is a lot of money to lose and while the company has narrowed its losses somewhat, once again we are stuck with believing their accountants. This is not at all comforting given that their books are under an SEC probe. The smoke and mirrors of the major headlines of financial news publications are beating a drum of good news. Do I believe it? Frankly no.

Incomes are declining for American families according to the FED. While things are far from looking bad on the surface a quick peek under the economic rug reveals some rather unsightly things. Rising real unemployment as seen in filers for unemployment (not in the BLS's monthly 'science fiction' work) says a great deal. There is a real economic toll out there. For those of you who are still in comfortable jobs and only see the occasional economic pain as you drive past sections of poverty on your way to work, I say open your eyes. Homelessness is not decreasing, it is increasing in most of our major cities so much so that many municipalities have tried to ship them out. Jobs are simply not there and while some retailers do hire from time to time, you find the best jobs are gone long before the job advert hits the newspaper. I know, I see it. Globalization is making mince meat of the middle class and even taking a few upper middle class folks with it as many white collar jobs are shipped to India where wages are much cheaper and benefits are almost non-existent. The big hit is going to be when (not if) the IMF's urgent suggestion becomes reality. That being a significant depreciation of the dollar. You think oil at $74 dollars is bad, what are you going to do when it hits $110 dollars a barrel? When you pull up those ubiquitous gas stations and have to shell out 4.75 a gallon? What are you going to do when there simply is not enough to meet our needs and we see a serious spike? Brace yourselves because that day is coming. Bush can go and try to steal all the oil he wants, he will not be successful in the long term, our military is shot, spent and if we are not careful¹, it will be destroyed by Bush's bird-brained strategic maladroitness.

The IMF is concerned about credit derivatives and their liquidity in case of a crisis. EU regulators are being told to prepare for a crisis. The EU just simulated a financial meltdown to see how they would react. The Bond market is developing a new bank to hedge problems that can arise out of government securities (i.e, Uncle Sam's front men bolt or are blown out of the markets). Ford posts a 1.2 billion loss in a single quarter. Folks, rose colored glasses are not going to put food on the table when this system starts to really come apart. Who is making money? Folks like google who produce nothing. The information thieves and financial scamsters are making money in our criminal economy. But the hard working joe is getting the shaft. OK... do I have to draw you a picture?

So hang on, this is going to be a watershed year.

Mark S. Watson

Home