Posts Tagged ‘u.s. dollar collapse’

Is the U.S. Dollar Decline Good For The American Economy?

October 20th, 2009 Comments off

As the  American dollar slides inexorably downward  in value relative to other major currencies, there are those heralding this  development as marvellous news. Many of these cheerleaders can be found within the camp of the Federal Reserve and U.S. Treasury, despite their public protestations that they are true believers in a strong U.S. greenback. But away from the T.V. cameras and open microphones, these guardians of American finance and economics believe that a weak dollar means an improved balance of payments. American exports are helped by being cheaper for overseas customers, while imports become more expensive, dampening the American appetite for goods originating from foreign sources.

Actually, a balanced dollar is good for the American and global economy, but a weak dollar in the long-term is not such good news. True, American exports become cheaper, initially. However, commodities and value add derived from overseas sources comprise a large component of American exports, so in the long-term a weak dollar does not provide a permanent advantage in terms of cost-competitiveness.

More important than exports, the center of gravity of the American economy is foreign-sourced oil and natural gas. With more than two thirds of American oil consumption based on imports, a collapsing dollar will raise energy prices in the United States to a level that is not sustainable for many consumers. Now, Messrs Geithner, Bernanke and Summers; tell me how this benefits the U.S. economy?


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The U.S. Dollar is on the Endangered Species List

October 9th, 2009 Comments off

The conspicuous decline in the American dollar these last few days, coinciding with the rise in gold prices to well above a thousand dollars per ounce, is apparently another nail being driven into the greenback’s monetary coffin. As I noted in an earlier post, the U.S. dollar is being used increasingly as the currency of choice in the carry trade. Just look at the current ratio of yen to dollar, a clear marker of fundamental weakness.

It is apparent to me and many others that the U.S. dollar is now living on borrowed time as the world’s predominant reserve currency. The Chinese, the Russians, the Gulf State Arab countries, the Europeans, even the United Nations, are all talking openly about the need for a new global reserve currency mechanism. When the dethronement of the American dollar as the world’s reserve currency occurs can only be guessed ; it could happen 5 years down the line, perhaps longer, but even more likely much sooner than anyone can imagine.

The rhetoric emanating from the mouth of U.S. Treasury Secretary Geithner on the Obama administration’s commitment to a strong dollar is beyond meaninglessness. Nobody takes anything Geithner says on behalf of a supposed strong dollar policy seriously. The die is cast. It is only a question of when and how the reign of the American greenback as the universal global currency is terminated.

America’s Wretched Current Account Balance Points to U.S. Dollar Collapse

June 11th, 2009 Comments off
With a growing chorus of financial cheerleaders proclaiming that “green shoots” are sprouting, pointing to a bottoming out of the U.S. recession, the latest trade figures from the U.S. Commerce Department reveal contrary indicators. American exports are continuing their decline; imports are also plummeting, but not as sharply as exports, contributing to a widening trade gap. In essence, the report on April’s imports and exports describes an American economy that is in continuing decline, in the context of a synchronized global recession that shows no signs of abating.
In April, the U.S. trade deficit widened to $29.2 billion. Some will maintain that this figure is not so bad, since in the period before the onset of the Global Economic Crisis, the United States had even larger monthly trade gaps. Those who play down the significance of April’s trade numbers miss the most essential point. It is a combination of both the interest payments to foreign buyers of U.S. Treasury securities and the trade deficit that defines the nation’s current account deficit. With a fiscal imbalance at an unprecedented number once thought in the realm of science fiction, adding a substantial annual trade deficit at a time when America is experiencing its worst economic and financial crisis since the Great Depression jeopardizes the prospects of any sustained recovery.

The United States is already projected to have a Federal budgetary deficit of $1.8 trillion in 2009, a figure that I believe will ultimately exceed $2 trillion, or approximately 15% of America’s GDP. As is well recognized, the U.S. will have to borrow much of that deficit from overseas, resulting in ballooning payments to foreign holders of U.S. government debt instruments. Similarly, when the U.S. imports far more than it exports, the nation must pay for the resulting trade deficit with dollars. So here we have a perfect fiscal storm; quantitative easing by the Federal Reserve, massive overseas borrowing by the Federal government to pay its basic operating expenses, and massive borrowing or printing of dollars to pay for imports not covered by the net value of America’s exports.

It appears that the trade deficit for 2009 will likely exceed $300 billion. When added to a multi-trillion dollar U.S. government deficit, a figure not even inclusive of state, county and municipal deficits, the result is a fiscal imbalance that is unsustainable. In short, the current account deficit is exploding, when one aggregates the quantum leap in interest payments the U.S. taxpayers will be compelled to make to overseas creditors in addition to financing the widening trade imbalance.

Typically, a nation that is experiencing a major gap in exports versus imports that is beyond fiscal prudence will have no recourse but to facilitate the devaluation of its currency. The rationale is quite simple; a cheaper currency means your consumers will buy fewer imported goods, while the nation’s exports become cheaper. In normal fiscal times, that might be a prudent course to follow. However, as strong market forces are already weakening the U.S. dollar, any policy response designed to further depreciate the value of America’s currency will destroy much of the value of U.S. Treasuries held by sovereign creditors, in particular China. Yet, the U.S. trade imbalance combined with other economic and financial forces will inevitably devalue the dollar, which in turn will lead to heightened tensions between the United States and its primary foreign creditors.

It just may be that April’s trade figures are a leading indicator of a pending catastrophic collapse in the value of the U.S. dollar, a fiscal calamity that will add immeasurably to the financial and economic woes of the United States and the global economy. Green shoots? More like black clouds, at least to this observer.



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