Speculate on Demise of Dollar at Your Own Risk...
October 08, 2009
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...And That Risk Might Be Higher Than You Think
The past week's speculation on the demise of the dollar has hit a frenzied pace. Articles pointing to "secret meetings" of nations, many of them American allies, of dethroning the dollar as the international reserve currency has spiked interest in dumping the dollar. The hot report is that several nations are conspiring to price oil in terms other than the dollar. I suppose this is probably true that some basket of currencies or special drawing rights (IMF) is being developed for trading commodities and doing various forms of international commerce. This concept actually makes sense as the emerging economies consume more as a percentage of the global output, and the United States is no longer near over half the world economy as it was about twenty years ago.
I doubt this all means the dollar will collapse, and if it does, that it will stay collapsed. What is more likely in my view is that the dollar settles in a long lasting range somewhere between the current levels and a level somewhat near where we spiked too late in 2008 to early 2009.
That the dollar is falling so far versus nations that have smaller populations, less stable governments, less peaceful populaces, inconsequential military force, depleting resources or few resources and limited productive capacity is frankly, astounding to me. While dollar bears thump their collective chests that U.S. debt is going to bury the nation, I can not help but agree with Ken Fisher and Nobelaureate Paul Krugman, that the debt is not that big of a deal if we tap the breaks in the next few years- and, as President Obama opines, reform healthcare and energy policy with a longer term vision.
On Fisher's point, I will point out this simple fact, if you can borrow for less than the return on the investment you make with that money, you should borrow as much as you can projecting out for a lifetime of production. The problem with the borrowing done under the previous Administration and Congress was that it did not go into investments with a positive return (as Krugman points out). That anybody truly thinks that the return on debt that the United States is incurring NOW, is going to not return better than the interest paid, demonstrates a fundamental lack of understanding of business. Clearly, the government could borrow for non-productive endeavors, as the U.S. government did from 2002-2006, however, nothing I have heard recently (I actually had nice opportunities in D.C. and S.F. this summer to talk to some higher-up muckity-mucks and ask a few pointed questions) makes me think that is now the case.
For the United States, a lifetime of production, now that we have four generations alive at a time, is about 80 years (read the Fourth Turning for even more insight on generational issues). So long as we don't burden our great-great-grandchildren with debt, and keep it to our grandchildren and great-grandchildren, and maintain a return on what we are borrowing, we are fine. If we don't use up our margin of safety, that is, our great-grandchildren's productive lives- we will in fact have a superboom sooner than most think. Though the boom is not yet quite visible, and I am in some disagreement with Fisher but in agreement with the Fool for reasons of the time frame for consumer retrenching, my public pronouncements to groups I speak to is that we will see large incremental improvements in the economy about three to seven years from now.
Regardless of a likely bright future, foreign investors are pouring more into gold anticipating (hoping for?) American collapse. Domestically, newsletters declaring hyper-inflation imminent in the U.S. (which I disputed about a month ago) and promoting the idea of buying gold bullion are flooding email boxes coast to coast. The falling dollar has inflated the price of many other commodities, particularly oil, even as there have been massive new finds this year, alternative energy development globally and record inventory. The dollar is dead, long live the dollar, is the cry of the day.
There are several key reasons why the dollar is much stronger than it is being given credit for today.
First and foremost, we are and will remain among the most stable nations on the planet for a very long time. Our government, for all of its imperfections, is better than most and in no danger of being overthrown. Our population, while it struggles with disturbing pockets of crime and silly political rhetoric, is by and large, peaceful and tolerant of each other.
Second, and only talked about in hushed tones, though Maria Caruso-Cabrera mentioned it on CNBC today, the United States has the strongest military in the world. With our borders and military, we are not going to be invaded anytime soon, even though we appear ready to scale back our world police role the next few years (which I note will save a billion here and a billion there).
Third, we are loaded with natural resources. Going back to the 1950s it has been the policy of the nation to not use those resources if possible, and be one of the last nations standing with several important resources. Reference ANWR and the massive gas "finds" that we've actually known about for decades. While the Rush Dumbos of the world can blame us not drill, drill, drilling on some hippie tree-hugging economically ignorant (non)fools, it is actually a policy that was developed under Eisenhower and serves us well. In a real emergency, we can turn on the spigots.
Fourth, we have an extremely gifted workforce that is transitioning (for I believe the third time since World War II) into again being the most productive in the world- by a lot- pushed in the right direction in part to the recent government actions to promote job training, education and fund various forward looking economic endeavors (we will see another slug of financing for that from the stimulus money next year).
Finally, as the economy recovers over the next several years- and it will- and return on debt becomes more apparent, the financial components underpinning the dollar will clearly firm. I just wonder when the market will realize that. If you are a speculator (guesser) posing as an investor, I will leave that to you.
So, while I still have some money in commodities and alternative energy investments (for the same reasons of Ted Turner and T. Boone Pickens), it seems to me that going against the crowd on the dollar might be a great thought very soon. Remember, today is over quickly and tomorrow lasts a long time. Tomorrow does not appear to be that far away in my opinion. And, for what it's worth, this fool, is for the first time in a decade seeing the light at the end of the tunnel.
