Dollar Woes
Brent Tantillo • October 19, 2009 • Uncategorized
Just as the stock market climbs past the 10,000 mark last week, the American dollar continues to lose steam against our biggest trading partners, with Bloomberg reporting that the dollar and the Canadian Loonie will be in parity soon. This means that your investments just aren’t worth as much, but at least your credit card debt is losing value too.
Some of the hullabaloo about the dollar is much ado about nothing, as the great sage of Wall Street, Alan Abelson reveals in one of his columns in Barron’s:
A hyperventilating piece in a British paper, the Independent, purports to have uncovered a secret plot involving Arab oil producers, the likes of Saudi Arabia, Abu Dhabi, Kuwait and Qatar, in cahoots with China, Japan, Russia and France, to ditch the ailing greenback as the currency of oil trading.
That immediately touched off another bout of vertigo for a woozy dollar and helped stoke fresh demand for gold, which was already off and flying to new all-time highs. The story claimed that secret confabs have been held by finance ministers and central-bank governors in Russia, China, Japan and Brazil aimed at replacing the dollar with a basket of currencies — including the yen, the yuan, the euro and gold.
Just about all of the presumed schemers were quick to deny any meeting, much less involvement in such a plot. The first official denial of a market rumor more often than not means it’s true. So we reflexively assumed that, in this instance, where the denial was so universal and emphatic, the story was probably on the money. But after a bit of mulling, we began to have our doubts.
For openers, from the standpoint of substance, the article was like a slice of Swiss cheese, but with more holes. It neglected to say when the antidollar conspirators held their meetings or cite any source beyond a rather vague reference to Chinese bankers in Hong Kong and Gulf Arabs.
Nor does it suggest what their motive was in spilling the beans to the reporter. An eagerness to share the startling disclosure with the world; in other words, a kind of informational altruism? Somehow, that doesn’t square with any bankers or oil sheiks we’ve run into. Or — perish the thought — could they just conceivably have been short the dollar and long gold?
In any case, according to the Independent, the scheme is not to dump the buck until 2018. Which gives all of us plenty of time to trade our sadly debased dollars for yen, yuan, euros, etc.
What endowed the story with a certain plausibility is that foreign holders of large dollar assets, China, in particular, have been muttering their displeasure at providing the wherewithal for our insatiable urge to spend more than we earn, while the value of their massive dollar reserves — which weigh in around $2 trillion for China — steadily shrivels.
But one has to wonder whether China isn’t grumping out loud about our financial fecklessness in part to direct attention away from how tenuous is its own grasp on economic recovery. Most conspicuously, exports — which for years have powered its extraordinary growth — are suffering a serious nose dive; they’re off 23% from a year earlier in the latest reported month, while China’s trade surplus shrank by an awesome 45% compared with the like “08 month.
And we imagine there’s a lot of rue in China’s realization that, despite a trillion-dollar-plus budget deficit and unbridled spending, the U.S. remains an irreplaceable market for the rest of the world, especially China. So the rest of the world, especially China, would really feel the pain of any move to knock the dollar off its pedestal.
But some of the concern about the dollar is warranted. First, it encourages Americans to continue to debt, especially the federal government. As the dollar weakens in value, the value of the federal deficit falls, thereby making it easier for Washington to continue its spending spree. Second, the weak dollar means the costs for foreign exports will rise, and with Americans buying so many of our consumer goods from overseas, it’s bound to mean costs will be on the rise, and with gold at record highs, inflation may be around the corner. (This blog posting from Globsyn Business School explains further the pros and cons of weak and strong dollar policy.)
The truth about the dollar’s woes is that the best way to fix them is to get our nation moving again. A nation’s currency, in many respects, is a natural reflection of what the market believes about the health of its economy. And right now America is still stick. Once our economy gains steam, then so will the dollar.
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