Dollar decline taking on "life of its own"

The trouble started yesterday when Pimco's Bill Gross said that America's precious AAA debt rating was in trouble.

The United States will face a downgrade in "at least three to four years, if that, but the market will recognize the problems before the rating services -- just like it did today," Gross told Reuters.

That admission, while obvious, forced the markets to recognize a trend that was already several months old.
Even Treasury Secretary Geithner had to speak up about the concern and call for cutting the federal deficit.
The dollar dropped to a 4-month low against the Euro, and an 8-week low against the yen. The primary reason?
The Fed's plan to monetize more debt.

“The Fed may expand its asset-purchase program, which would increase the supply of greenbacks in the market,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “This could undermine the value of the dollar and spur investors in the U.S. to put their funds overseas.”

Major players in the markets are getting nervous about all these dollars being created by the Fed.

“The main driver of dollar weakness is lack of confidence given U.S. monetary and fiscal policies,” said Montreal-based Laurent Desbois, president of Fjord Capital Inc., a currency fund manager with $800 million under management. “There’s a whole lot of liquidity.”
“The dollar’s weakness reflects growing concern about the fiscal sustainability of the policy response to the crisis,” Todd Elmer, a currency strategist at Citigroup Inc. in New York, wrote in a report today. “This provides for further dollar downside, which extends beyond the turn in the risk cycle.”

The administration of President Barack Obama will issue a record $3.25 trillion of debt in the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc.

The problem is that the dollar's decline is breaking critical technical levels and threatens to take on a "life of its own".

“The decline in the dollar has developed more a life of its own this week, extending to major currencies even as U.S. equities have flattened out,” Greg Gibbs, a foreign-exchange strategist at RBS in Sydney, wrote in a research note today. “The broader thematic is that simply the U.S. was and is pursuing a relatively easy monetary policy that tends to create inflation pressure.”

In direct response, the price of gold has hit two-month highs. In an even more important development, Treasuries are having their worst week since January and are also breaking key technical levels.

“We are testing key levels on the long end of the market,” said Hicham Hajhamou, a trader in New York at BNP Paribas, one of the 16 primary dealers that trade with the Federal Reserve. “There’s a lack of confidence in dollar assets and the bond market is repricing itself.”

This is, of course, an easily predictable outcome from excessive federal deficit spending and Fed monetization. Interest rates will rise and the dollar will fall. It will lower everyone's standard of living while choking off the recovery.
Anyone who thought otherwise is naive.

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If Bill Gross tells you so

take the other side!

Bill Gross usually makes statements like this when he wants to move the market. So, why does he want to move the market?

In the long term, though, of course printing is a big problem, although again, all of the fiat currencies are doing it, so the better bet is presumably, "stuff."

NDD investigative request

Bill Gross, unless I am mistaken, does run the world...

so I had an idea, of these super power elites can we take a series of statements, such as "the U.S. credit rating will be downgraded" and then take a look at bond, money markets, currency exchanges etc. and see the effect as well as their "prediction rates"?

I know Greenspam (on purpose), had to be absurdly careful in wording for it would affect markets...

and it seems Warren Buffet can move markets with words too.

But this is a very astute observation on Gross and it would be interesting to see a graph of this. (I'll help off line with any graphing if someone has the raw data).

One easy graph is the 10 year Treasury

within a day of Gross saying, a year or two ago, that the Treasury could move up to 8% in a few years, the sell-off took it to 5.31% iirc. That was the absolute high interest rate for the 10 year Treasury from that day to this.

I'll add to this comment once I find the graph.
Here it is:

Gross often "plays" the market

I totally agree that Gross "talks his book", in that he says one thing while doing the opposite. However, this is only true for short-term movements.
His comment was over the long-term, and over the long-term there isn't any other option.

The rating agencies will never downgrade America. Simple as that. To do so would undermine the fiat currency regime worldwide.
But the rating agencies have no credibility anyway, so the markets will do their work for them.

Also, your chart above is sort of old.

Re: "old chart"

I was looking for one dating close to when Gross made his "Treasuries will go to 8%" comment, with the immediate peak at 5.31%.

Totally agree, over the long term -- in fact over the next few decades -- I expect Treasury yields to move higher.

Never is a long time

It seems there is an array of not-so-great scenarios for the U.S. in between.

Hyperinflation - Stagflation - Capital flight

Either there is historical precedence for Bernanke's QE strategy (and we have an idea of the results) or there is no precedence and all bets are off

I believe Bernake is still being optimistic

And unreasonably so. As such- he's a good $100 Trillion short of providing the level of Keynesian stimulus he claims to believe in.

Which means this fall, we'll start with DEFLATION, then STAGFLATION, followed by Bernake wising up and overreacting throwing us into HYPERINFLATION.

And every stage of the way, the US Government will look like the kind of bumbling idiots international too-good-for-the-rest-of-us investors would rather avoid doing business with.

Executive compensation is inversely proportional to morality and ethics.

Maximum jobs, not maximum profits.


Now that they have offshore outsourced the jobs and we're looking at double digit unemployment, increasing throughout 2010...why not go the whole nice yards and turn the U.S. into a 3rd world nation.....

why in 10 years maybe, just maybe those 2.3 billion population countries like China and India will run out of workers and also look for cost savings and thus offshore outsource their jobs to the United States!

My the future is so bright!

Gary Dorsch asked

No one is asking who will purchase the $1-trillion of US Treasuries to be offered to the market by September. Once that colossal amount of paper is bought, who will purchase another $5-trillion of Treasury paper over the next four-years, as the US-government plunges deeper into insolvency. The Federal Reserve would be forced to print (monetize) vast quantities of US-dollars to pay the principal and interest on the national debt that is not covered by tax revenue.

Of course I would ask:
Where is ThinkFIrst when we need him? :o)

Who is ThinkFirst?

Is this someone who is an blogger/online? If so (I don't recall any pseudo persona by that id on EP) plain invite him over.

Inside joke

Not on EP (thank goodness) Plain don't want him here either .... unless a target to laugh and point at for ridicule.

Holds to the FED doctrine of printing endless amounts of money. Thinks the entire problem can be resolved if we only consumed more.

He's made an appearance

at Agent Orange. I will provide some gems

R U NUTS??? (0+ / 0-)
Have you ever even read an economics text book? Balancing the budget is the WORST possible thing we could do.

by ThinkFirst on Fri May 22, 2009 at 12:30:28 PM PDT

Has a way of making freinds and influencing people doesn't he?

and here.

True that (1+ / 0-)
And it wasn't even stimulus at all because most of it has not been spent and the tax rebates were just saved or used to pay down debt.
What we needed was a direct, massive stimulus to consumer demand directed at cars made in North America and foreclosed houses to clear the gluts of inventory from the market, just like Keynes said. .

lets not forget ... lovin' him some Keynes

This model of GDP growth was conceived by J.M. Keynes 73 years ago and it has stood the test of time so that now "Keynesianism" is widely followed in every advanced economy - China, Japan, Germany, U.S., U.K., even Russia see the wisdom of stimulating demand to produce growth, instead of waiting for the "Invisible Hand" to "rebalance" the market forces.
We can and must keep growing because the alternative is economic collapse, poverty and war - exactly the conditions that caused WWII.

Isn't he cute? Challenge him a little about his belief system and the ad hominem attacks ensue. He's an asshole.

not quite right

Keynes Stimulus was to directly increase individual income. It was income that was the key element in the equation...but that income had to go to citizens, people in the U.S. and of course back in 1920, they didn't have global labor arbitrage so of course this isn't being addressed.

So, Keynes stimulus equation really means jobs, jobs, jobs or money directly into the pockets of people, that's raw money.

His "buy cars and buy houses" is indirect money and zeroed in on areas that well, in my view really put the market out of balance. i.e. houses are too expensive and many cars are too. Who the hell is paying $40k for a new car anyway? Who is taking on these $400-800/month car payments?

I don't see anything so "asshole" in his statements but if you are referring to people who "hound" you on DK just "because" or you might have hinted on some "thought" against their "religion" and he's that type...

I'll take your word on it.

Let's estimate the total number of hours wasted in useless comment wars on DK. ;) I sure now I got sucked into the vortex until I realized it wasn't an enlightening discussion by any stretch....

Wasted time is right

Which is why I refuse to post there anymore.

You may not see "asshole" right here in these statements .... but scratch the surface and the ad hominem insults appear right away.

So .... if your looking to do battle .... gjohnsit (aka midtowng) has x-posted his diary (aka article) on the orange.

As for me ... I like it here just fine.

The reason I started EP

was multifold. First, there was no community blog anywhere devoted to all things economic. I believe economic policy is the most important policy of them all and that's because so often even wars are over economics.
Of the "good blogs" on economics it's basically either one person or a select group and just recently they started to do guest posts. Now I can understand this because many are real Economists or real financial analysts, etc. but there was no place, no voice for the layperson or the occasional economist, the educated.

It's also difficult (and we've had a few) to enable anyone to write a blog post and on top of it go to the front page and keep the credibility and quality up. Now so far, so fantastic....we have good credibility due to the diligence, good references, accurate statistics of everyone who is writing.

It's all great to argue about whether the color of a touched up photo makes Obama look "more black" and therefore is discriminatory but when you've got 50% of all black students dropping out of high school, a huge percentage in jail and economic opportunity almost non-existent, huge disparity in economic justice (and I can tell you for sure in tech jobs....discrimination is RAMPANT to this day!) etc...

that to me is the important thing.

The other reason was I really cited my posts with credible references yet I would get "comments" in 15 seconds of posting so there is no way they even scanned the post...
with some sort of BS that topic x was BS and the conclusion is y. This is especially true when I wrote about H-1B guest worker Visas and Professional labor issues but I got it even when writing a post about the brazen sex discrimination still going on in STEM occupational areas.

I also discovered many a credible economics blogger and readers who won't go near DK because they feel the site has no credibility, not realizing that there is wide variance between bloggers.

The final thing was while people believe sites like DK are a "community", it's really a top down site. It's owned by kos and he selects what is on the front page. Users cannot determine what post gets the most visibility. I wanted a "bottom up" control of the blog so users, readers can determine what should and should not be on the front page.

i.e. try to create a "bottom up" architecture.

BTW, this "buttom up" architecture is why it's taking me so friggin' long to do the upgrade. I've got some database conflicts with that mode and I want that....I'm trying to even improve it.

Post this on the Admin page

This is an absolutely first-rate description of why this blog is important.

Just glad you are here NDD!

We may not always agree but one thing for sure. We will debate it at the facts and not marginalize.

Of course I would like to add that you're our ray of sunshine in dark and stormy waters. (:o)

Re: rays of sunshine

Of course, my opinion is more that those rays of sunshine indicate short-to-medium-term breaks between hurricane squall lines, but around most econ sites, that passes for stark raving optimism!

Fed's and Treasury's plan to releverage

the bubble absolutely depends on lower interest rates. I don't think they have a Plan B.

China and Russia


Put this together with the weird buying sprees that the Chinese and Russian governments have been on, and it adds up to a disturbing picture.

A picture that suggests that the dollar's status as the global reserve currency is in question, and that the loss of seigniorage, that is extra boost to the dollar, that the US makes from issuing the global reserve currency goes poof. All those dollars held in reserve abroad, come flowing back to the US, 3rd world bank holdings held in dollars in New York flow to Switzerland, or other currency dominated accounts in world banking centers.

Right now, the Chinese have been amassing a gold stockpile.

China revealed on Friday that it had secretly raised its gold reserves by three-quarters since 2003, increasing its holdings to 1,054 tonnes - or a pot worth about US$30.9-billion - and confirming years of speculation it had been buying.

Hu Xiaolian, head of the State Administration of Foreign Exchange, told Xinhua news agency in an interview that the country's reserves had risen by 454 tonnes from 600 tonnes since 2003, when China last adjusted its state gold reserves figure.

The confirmation of its surreptitious stockpiling is likely to fuel market talk about Beijing's ability to buy secretly and its ambitions for spending its nearly US$2-trillion pile of savings. And not just in gold: copper and other metals markets are booming thanks to China's barely-visible hand.

The Chinese are already surreptitiously dropping their dollars for hard assets. And now, they're getting vocal about their desire to make the yuan a reserve currency. One of the ways of doing this would be to revive a limited gold standard. There are something like a billion ounces of gold on the planet, and $30 trillion in currencies. In the original Bretton Woods System, gold was fixed at $35/ounce. Now, it would have to be something like $30,000 and ounce. This is a 30 fold increase from the current price. That suggests tremendous inflationary pressure if we return to the gold standard.

The money supply and the value of real, consumable, items have been put out of whack by a financial sector that made funny money through CDS contracts and the like. Be very, very afraid. The Chinese are on to this. They've been making currency swap deals in yuan with Latin American countries. This cuts out the dollar, meaning that they don't need dollars to do foreign trade deals. Hoarding gold is an insurance policy for those who don't do such deals.

Which brings me to another very, very strange thing that's been going on. Russia is hoarding diamonds, another highly limited commodity that can back up a currency. Both gold and diamonds have industrial uses aside from their intrinsic value. It looks an awful lot like the post Bretton Woods system of global money is about to either collapse, or get much more interesting.