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Bully Pulpit

The term "bully pulpit" stems from President Theodore Roosevelt's reference to the White House as a "bully pulpit," meaning a terrific platform from which to persuasively advocate an agenda. Roosevelt often used the word "bully" as an adjective meaning superb/wonderful. The Bully Pulpit features news, reasoned discourse, opinion and some humor.

Sunday, December 30, 2007

Exactly Why Is The Dollar Sucking?

I'm no economist, but I can see this: the Euro and the Pound is pummeling the Dollar, the residential real estate market in the worst shape that I can remember (since I've been a homeowner), and even Canada's Loonie is edging out our One. I regularly drive by houses for sale that have been reduced by $100K+ ... and, to date, still have a Prudential sign in the yard. (For more depressing entertainment, just visit http://www.xe.com while keeping in mind that America is the world's 'superpower.')

Precious metals suddenly look like 'reasonable' investments (see the Forbes story below). In the past, 'buy gold' advice seemed to come from either old folks who hid money in their mattresses, fringy conservative websites, or guys with three dozen firearms and more than one fire-proof vault in their basements.

LONDON (Thomson Financial): Gold was steady in early trade near the one-month high it hit yesterday, supported by renewed weakness in the US dollar and as geopolitical tensions sparked safe haven buying.
The precious metal hit its highest level since late November yesterday in the wake of the assassination of Pakistani opposition leader and former prime minister Benazir Bhutto.
The move fuelled buying of the precious metal, as fears abounded political unrest and violence in the region could spread. Gold is often seen by investors as a 'safe' asset which can be relied on to hold its value in times of economic or political instability.

So naturally, I (a fairly average American who tries to invest and spend at least fairly responsibly) am starting to get a bit worried. I wonder if everyone is? Am I just paranoid? Something tells me no.


Blogger Steve Brenneis said...

I am not an economist, either (though I lack less than a semester for a degree in it), but here is how I see it:

The dollar is not based on any tangible commodity. The US consumer market is largely based on purchase of foreign goods (yes, I know Toyota and Sony have factories here, but the companies themselves are still Japanese). So, the value of the dollar overseas is based mostly on the intangible of confidence in American consumers' spending power. Here at home, the value of the dollar is based, in large part, on our ability to borrow against future wealth. Our ability to borrow is based on a balance between consumption and survival. There is a certain minimum amount of spending power required to see to our basic needs: food, clothing, shelter. The difference between that and the amount of wealth we are able to generate represents the available consumption that actually creates the value of the dollar here and overseas. As that buffer shrinks, confidence in our ability to spend shrinks with it, devaluing the dollar.

It would be tempting to blame our society's obsession with instant gratification for a decline in that confidence and the resulting inflation of prices and devaluation of the currency. However, despite what Jimmy Carter and his minions tried to tell us, American consumers, on the whole, are pretty savvy when it comes to their own debt-to-income ratios. The problem really stems from the fact that we have an entire cadre of people in the various arms of government who are very happy to help us with decreasing that consumption reserve. Between the Republicans and their imperial adventurism and the Democrats and their government-as-mommy largesse, Americans now spend roughly half of their income on supporting the government.

In order to mask the huge dent in our consumption ability created by the fiscal irresponsibility of our government, the Federal Reserve has created a nifty little gambit in which they play with the money supply and interest rates in order to keep the cash flow reasonably constant. Moving money creates the appearance of wealth. So the value of the dollar now becomes tied to its ability to move. This gambit, though, is based on the illusion that cash flow is not a zero-sum game. The Fed defers enough of the losers to make it appear that everything is net gain. Eventually, though, the piper will come calling.

Nothing makes this more apparent than the so-called housing bubble of the last couple of years. Alan Greenspan rightly surmised that it had the very real possibility of taking the dollar with it when it collapsed. In a fit of utter Marxian stupidity, the government decided to make it possible for people who had no business borrowing mortgage-sized amounts of money to do so. In other words, they used up more of the overall consumption buffer to allow people with already small buffers to make them even smaller. The piper appears to have come calling this summer, when one of the institutions that specialized in capitalizing these marginal loans fell flat on its face. Right now, the smirking chimp in the White House, has come up with a plan to bail out the bankers and leave the borrowers dangling on their own petards. In other words, he wants to take another chunk out of the consumption pool to repay his buddies while dropping more consumers into the camouflaged pot of zero-sum losers. The incompetent nincompoop may actually succeed in utterly collapsing the sham economy that he and his buddy, Slick Willy built over the last 15 years.

So with borrowing reaching critical mass, our net importer status, and with mistrust of our imperial ambitions rising around the world, the decline of the international value of the dollar is quite a bit more ominous than its impact on how many cuckoo clocks you can bring home from the Black Forest. It hits us right in the old consumption buffer and creates a positive feedback loop that is pretty frightening.

A currency that is based solely on confidence can sustain quite a few shocks, but when it collapses, it has no bottom. Commodities will always have worth. A commodity-based currency does have a bottom. Its collapse will surely be painful, but rarely fatal.

Moves to buy gold are ultimately based on the notion that someone, somewhere will have the sense to found their currency on it in the event of a macro-scale collapse. Unfortunately, you are probably about three years too late to actually make a profit on gold. That is, if you do not believe in a coming collapse. If you believe that a collapse is in the near term and that it is unavoidable, gold is relatively cheap at the moment. The risk you face is similar to that faced by people who dove into gold in 1980 and 1981. Carter had come as close to destroying the economy as any President in living memory and gold was headed for the roof. After Reagan came in and subdued the business cycle and convinced the Fed to restore balance their cash flow gambit, the consumer economy roared and the bottom fell out of gold prices. Gold is probably a pretty decent hedge at the moment, though, as long as you pay attention.

If we elect more of the same next year (i.e. any of the Democrats and most of the Republicans), I believe we will see a major economic collapse some time in the next ten years. Ron Paul is obviously the best choice for avoiding that, but someone like Duncan Hunter or Fred Thompson could potentially, with luck and a cooperative Congress, hold it in abeyance for a few more years. Whoever it is will have to work to substantively reduce the government debt burden as well as restoring trade confidence around the world.

Monday, December 31, 2007 11:37:00 AM  
Blogger Strother said...

Interesting thoughts. I think I understand what you're saying here.

However, I do think that most of our economic problems lie in the fact that, unless you're in health care or education, most of us basically work each day to market or sell tangible goods that laborers in other countries manufacture. We hardly build any consumer goods anymore ... except buildings and houses and some cars and trucks that most don't want. We're mainly salesmen, importers and/or re-badgers/branders. Further, we don't save worth a damn but buy every new piece of technology that comes down the pike, like we all need it. Then, when money's tight and people aren't buying things they don't need, it's hell to pay.

Then we have our saving grace for the last decade, real estate values ... but now, just look at all the houses on the market. We're lending to people that can't even handle rent because we desperately need more buyers. So, as far as building new homes for potential buyers is concerned, I think our builders and contractors have covered it for now ... unless we open up the borders and let more consumers in.

I'll stop this craziness now. I'm starting to scare myself.

Monday, December 31, 2007 1:16:00 PM  
Blogger Andy W. Rogers said...

Strother opines: "We hardly build any consumer goods anymore ... except buildings and houses and some cars and trucks that most don't want."

If I'm not mistaken, all Toyotas sold in the U.S. are made here in America, so we can build a car and a truck that people like. :-)

Tuesday, January 01, 2008 8:46:00 PM  
Blogger Steve Brenneis said...

Andy said:

If I'm not mistaken, all Toyotas sold in the U.S. are made here in America, so we can build a car and a truck that people like.

We don't build any cars that people like. The Japanese build cars that people like. Because they happen to build some of them here (and final assembly is all that is done here, by the way), they are no less Japanese. Yes, some Americans benefit from jobs at these factories and in the distribution networks, but the cash flow is a net export.

Wednesday, January 02, 2008 3:56:00 PM  

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