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Speculate on Demise of Dollar at Your Own Risk...



October 08, 2009 – Comments (11) | RELATED TICKERS: GLD , USO , PBW

...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. 

11 Comments – Post Your Own

#1) On October 08, 2009 at 5:30 PM, 1315623493 wrote:

Dollar fears are overblown. It is in no one's interest, including China, to see the dollar's value fluctuate wildly, especially by an announcement of a move from dollar priced commodities. Gold bubble is in the works. 

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#2) On October 08, 2009 at 6:27 PM, Chromantix (89.76) wrote:

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.

Isn't the current national debt topping $11,000,000,000,000? Please explain how many generations you predict it will take to pay this off.I know I'm in the minority, but whether Republican, Democrat, Libertarian, or Alien: I don't think the government should be borrowing anything for a long, long time.  


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#3) On October 08, 2009 at 7:19 PM, StopLaughing (< 20) wrote:

Note: Obama's reform of healthcare is very inflationary. Medical costs will rise rapidly while quality of care declines.

Further, needlessly raising the cost of oil and coal to promote wind/solar electricity is unwise. Wind and solar primarily compete against natural gas which is cheap and the US has an ocean of it. Solar is not cost competitive, and in the wrong geographic locations (for the most part). Most new alternative energy jobs will go to China not the US.

However, most important is that the Obama adminstration has a weak $ strategy. They in concert with China are delibertly weakening the $. The Chinese currency is pegged to the $ and every time the $ dips the Chinese gain differential advantage over the Yen and Euro in exporting.

All the Chinese talk about the $ is to drive it lower so they can export more easily. A weak $ does not hurt their exports to the US since it is already pegged low. They hedge to offset any losses to their $ holdings. They do not care if the $ goes lower as long as they are on the right side of the trend.

One other point, the deficits do matter, especially large unsustainable ones. We are at a point where raising taxes may not raise revenues but a higher percentage of taxes will have to go to pay larger interest payments, which will rise dramatically as interest rates rise with inflation.

That means inflation, higher taxes on the middle class and eventually cutting governement programs while unemployment stays high.

The $ will get weaker if the Adminstration keeps adding to the size of governement.

There is absolutely nothing that the Administration or current Congress are spending money on that could be considered a prudent much less a wise investment that would yield a positive net present value.

They are adding to the cost of doing business in America. They are not increasing the productivity. They are raising the cost of health insurance for all American businesses while raising taxes.

The so called weaker countries with stronger currencies save a lot and have a lot less debt. That is why their currencies are stronger. The strength of your currency is a rough measure of the health of your economy.

Guess how strong the actual economy will be in the next year. A weak $, deficits and inflation will raise the price of everything tangible. Cap and trade will raise the cost of everything including producing in America.

A really brilliant long term strategy.  

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#4) On October 08, 2009 at 10:31 PM, jesusfreakinco (28.19) wrote:

I commend you for the blog.  You are taking an untenable position.  I disagree wholeheartedly with many of your conclusions, but appreciate a 'go' at the other side of the fence.  It makes us all stronger and smarter to read contra-opinions.

Fool on!


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#5) On October 08, 2009 at 11:14 PM, booyahh (< 20) wrote:

In 1945 our debt/GDP ratio was 120%. Today it is around 80% (11 Trillion debt divided by 14 trillion GDP).

Throughout the 1950's the highest tax bracket was 91%, and throughout the 1960s the highest tax bracket was 77%. And we still paid off the debt bit by bit, because we had real growth, thanks to the investments FDR, Truman and Eisenhower made. Such as social security, rural electrification, and the interstate highway system.

Suck it up like your grandparents did, and you'll end up as the new Great Generation. It's been done before.

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#6) On October 08, 2009 at 11:48 PM, kirkydu (91.13) wrote:

Well man, I'm not laughing, but let's be real.  The actions of government from 2002-2006, which were to basically encourage financial tom foolery that got us nothing, brought us to this point, which is not good.  Even that theft, which it was, will not collapse the dollar.  Which is the point I am making. 

There are too many other factors at play than some moderate debt- it is moderate compared to GDP folks, do your homework and put down the rhetoric pipe- to sink the currency.  Will it be lower than ten years ago?  Sure.  Are we on the way to being a banana republic?  Not by a long shot.  Instead of being THE economic power on the planet, we will be An economic power among a couple dozen, and really top five for the rest of this century and likely longer.

If we enact something close to the bill in the Senate for healthcare, and an energy policy that weans us off foreign dependence and allows us to further preserve our reserves, we will be fine.  Besides, didn't you see the Milton Bradley commercial, family game night is back.  That's good for society.

BTW, realize something about me, I am a Jim Rogers guy.  I believe that commodity scarcity will drive those prices up over time.  However, we (and China) just outsmarted the whole world.  Do you realize we just tethered ourselves to the fasted growing economies in the world via our bonds, particularly China, and untethered from the slow growth Europeans (economically at least).  I'm not saying that there was a grand conspiracy to create a massive recession, however, the high unemployment sure does make it easier to move into other industry.  And, it is clear we have been trying to tie to China since the 1970s.  If I had to guess, I'd say this was all supposed to happen, just be less severe, and by the way, enrich the family trusts of a few prominent families.

It'll all work out, it'll just take a few extra years because they allowed more theft than they meant.  That's right, they did it.

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#7) On October 09, 2009 at 8:30 AM, cthomas1017 (98.70) wrote:

I can't figure out if this is a brilliant analysis or not.  You kinda lost me at "that the debt is not that big of a deal if we tap the breaks in the next few years".  The metaphor I would like to prestent is two teams playing each other in the last game of the season, each having lost all their games.  At the end of the game, the home team's crowd is cheering, "1-2-3-4, at least we're off the basement floor!"

Were your argument US-centric, I could agree with your conclusions.  But if all currencies are debased and the US dollar just less so, then the magnitude of the worldwide global depression will be of such monumental proportions that a global, horrific war is inevitable.

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#8) On October 09, 2009 at 9:25 AM, kirkydu (91.13) wrote:

My next blog sometime next week will be titled "The Great Recession Conspiracy" and it is U.S.-centric.

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#9) On October 09, 2009 at 9:26 AM, PdoBear (25.28) wrote:

"Throughout the 1950's the highest tax bracket was 91%, and throughout the 1960s the highest tax bracket was 77%. And we still paid off the debt bit by bit, because we had real growth, thanks to the investments FDR, Truman and Eisenhower made. Such as social security, rural electrification, and the interstate highway system."

See, Booyah is forgetting something. The pay-in-to-pay-out ratio on Social Security. It has gone from 16 to 1 down to almost 2 to 1. It's a false analogy. In addition, we won't see that kind of growth. The infrastructure is built. This is a developed country now. Do you really think the US population will grow at the same rate as in the past? Not if people are crying about potential global warming it won't. Plus, cap and trade will punish the US, not our competitors. Europe doesn't count; it's not much competition.

The era of growth is over for America.

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#10) On October 09, 2009 at 11:20 AM, kirkydu (91.13) wrote:

"The era of growth is over for America."

You are wrong sir.  American growth is just stalled.  As the rest of the world grows, with our dollar settled in its current range we will start to produce sometime in the next several years at levels not seen in a long time.  While the next decade will be a time of transition, the several decades after that will be a time of great prosperity.  So while you make your short term trades, don't forget to plow the proceeds into productive long term investments, because those will make the most money over the rest of your lifetime.   

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#11) On October 09, 2009 at 11:36 AM, bigpeach (29.30) wrote:

A call for a moderate outcome on CAPS. Good for you.

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