Another nail in the US dollar's coffin

[donsu]

http://www.atimes.com/atimes/Global_Economy/IB07Dj01.html


Growing political instability in the US will weigh heavily on the dollar during 2007. This weight, combined with growing political pressure for dollar devaluation and a slew of negative economic factors, is likely to prompt significant dollar depreciation against most other currencies. The dollar's decline will help send asset values in the US sharply lower and precious metals prices soaring.

-snip-

Over the next few weeks, a spirited debate will increasingly grip Congress over how the legislature can exercise its constitutional powers to impose its will on the Bush administration. This debate will form the backbone of legislation that will significantly reduce funding for the war in Iraq and US military adventures in the Middle East.

If, as expected, the administration ignores such legislation, impeachment proceedings against Bush or Cheney, or both, may ensue. This battle royal between Congress and the Bush administration will create enormous political instability in the US. This instability will weigh heavily on the value of the dollar.

-snip-

No legs left to stand on
In addition to rapidly increasing political instability, growing pressure in the US Congress for the devaluation of the dollar will also undermine support for the greenback. Democrats, who now control Congress, have long lobbied for the revaluation of the yuan and yen against the dollar. Revaluation of the Chinese and Japanese currencies means devaluation of the dollar.

-snip-

Economic factors in the US are also cutting the legs out from under dollar support. In addition to huge current-account and budget deficits, inflation in the US is much higher than in many other countries. Continued high international energy prices and very rapidly rising grain and oilseed prices - the product of soaring demand for biofuels - will push inflation in the US higher in 2007. The idea that inflation will increase in the months ahead is just beginning to register with financial markets in the US, where nominal bond yields have begun to climb.

-snip-

Finally, as the prices for many dollar-denominated agricultural goods double in 2007, many of the world's central banks will encourage the appreciation of their own currencies in order to contain imported inflation. This process has already begun with several large central banks beginning to shift reserves out of dollars and US Treasury securities.

-snip-

The dollar's swoon appears inevitable in the coming months. As the value of the dollar drops, US asset markets will also swoon. Against this background, precious-metal prices will head sharply higher as investors increasingly diversify out of dollar assets backed by weakening profit outlooks and falling real yields.

Jephraim P Gundzik is president of Condor Advisers. Condor Advisers provides investment risk analysis to individuals and institutions worldwide. For more information, please visit www.condoradvisers.com.
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and, then everything will cost more

[northzax]

1. ahh, two things they don't mention

first off: the US asset markets are still the most stable in the world, given that, the declining dollar does not neccesarily mean that the asset markets will decline as well, as foreign capital continues to flow in to buy ever cheaper US securities. Good produced overseas will be more expensive, true.

Second, a revaluation of the Dollar against the Yuan does not mean anything globally except for the increase in costs of goods produced in China. the value of the Yuan-Dollar relationship won't affect the Dollar-Euro, for instance, very much at all.

[Warpy]

3. The worm's eye view of this is

that people who are heavily invested in stocks will do well, and that means the upper quintile. People in the lower four quintiles will start to see runaway inflation which the Fed will blame on too many dollars chasing too few goods, an obvious lie but it worked in the 70s, and they'll do just about anything they can to make sure another minimum wage increase doesn't get passed for at least another decade.

Wages will be stagnant and prices will skyrocket, and families will assume more and more debt. The housing bubble is kaput, even if prices start to stabilize, so families won't be able to count on appreciation in housing to offset crippling debt loads.

The yuan will be revaluated against the buck, count on it. China can accept the dollar's slide only as long as there are more industries to loot, then they're going to want to stop giving away their goods.

[roamer65]

4. Yes, eventually the Chinese will let the renminbi yuan float...

in order to pick up increased purchasing power for oil and other raw materials.. When the Chinese float their currency, the party is over.

[whistle]

2. Last week I paid for an item from the UK which cost $213.50 US...

...based on the GBP exchange rate. The item arrived broken and was returned for a full refund for which I received just $198.10 US a loss of 7.3% of which 2.3% was thr transaction fee. So the dollar plunged 5.0% against the British pound sterling in just 8 days.

[northzax]

18. probably not

in fact, it didn't really. you have to remember that there are different rates for buying pounds (which you did to purchase the item) and buying dollars (which you did to return) it's how money changers make their living.

[whistle]

21. Money changers??? Didn't Jesus vent his anger with such a system

...2000 years ago?

[dysfunctional press]

22. only because it was operating in the temple.

there's even a parable in the book of luke(iirc) extolling the virtues of profit and capital gains.

[whistle]

25. Son-of-a-bitch...biblical capitalism....so why did it take so long to become

...established in the world? My next question would be why does present day capitalism violate the virtues of good living and embrace the seven deadly sins plus a myriad of other sins like usury to an excessive degree?

[OmmmSweetOmmm]

24. On the other hand, in my business, it seems that I am getting more International sales because

of the weakened dollar. When this happens, I know it's a good sign for me on the temporary level but a bad sign on the whole.

[redqueen]

5. China has an interest in keeping us afloat.

At least I keep telling myself that.

[roamer65]

6. Yes, but that clock is about to run out very soon.

I am guessing an attack on Iran will force the Chinese to start dumping dollars em masse. It seems like most Asian and Middle Eastern central banks are all ready lined up to start dumping dollars. Only detail remaining is which one will start the panic by making the first large move.

[redqueen]

8. I thought China owed Iran a lot of $$$$...

In light of that, it might serve their interests to have a 'partner' such as us in control of the spigot?

:shrug:

[LSK]

10. what does China need more of? money or oil?

[redqueen]

11. But if we can give them the oil...

and they get to ignore their debts...

[LSK]

13. my brother in law makes the same argument as you do

However I say, look at the mess we made in Iraq and their oil production is down. Why would Iran be any different? Also there are some oil fields near the Iraqi border which I would assume would turn into battlefields.

[redqueen]

14. Yeah, you make a very logical argument...

I can only think... maybe China's greedy oligarchs are no more posessing of foresight than our greedy oligarchs?

:shrug:

I'm just trying not to get too worried.

[northzax]

19. and bankrupt themselves in the process?

seems unlikely. there would be riots in the streets of Beijing if the real effects of the currency changed that much that quickly. remember, China needs the US to sell stuff to, and holds billions of dollars of US paper, as of the end of 2005 about $820 billion worth. When someone owes you almost a trillion dollars, it's not considered a good financial plan to bankrupt them, you know? plus, we have the advantage, rare among countries, that our debt is denominated in our own currency. (along, by the way, with most other countries' debts) we owe Dollars, not Yuan. for every 5% the Dollar declines against the Yuan, the Chinese government loses about $45 billion in real terms. we pay our debts in Dollars, no matter what that Dollar is actually worth to the reciever. the PRC has a legitimate financial interest in keeping the Dollar stronger.

[lectrobyte]

20. when someone owes you almost a trillion dollars

it would be bad form to bankrupt, them, true. But he who gets out of dollars first, wins.

[roamer65]

23. Exactly, last one out is the "rotten egg".

[LSK]

7. and if we attack Iran???

Dont they get like 20% of their oil from there and a bunch of Natural Gas?

:scared:

[redqueen]

9. See my post above...

just speculatin', mind.

[IDemo]

12. Also from Asia Times, earlier this week -

China aims to spend $200bn of reserves

By Zhou Jiangong

SHANGHAI - The Chinese government is taking action to implement a new policy of diversifying the disposal of the country's over US$1 trillion foreign exchange reserves which was initiated by the Central Conference on Financial Affairs three weeks ago.

The Ministry of Finance (MOF) is planning to issue yuan-denominated bonds to raise funds that will be used to "buy out" as much as $200 billion from the country's foreign reserve pool.

<snip>

The new policy to diversify the disposal of the country's huge yet growing foreign exchange reserves is also bound to change China's current foreign exchange management regime, which is dominated by the State Administration of Foreign Exchange (SAFE).

According to the People's Bank of China, (PBoC), the central bank, the SAFE is responsible for the stewardship of the largest foreign exchange reserves in the world. It is estimated that over 60% of the reserves are invested in US Treasury bonds, with an annual return rate of about 3.5%.

It is risky to put all eggs in one basket. Also, the expected appreciation of the yuan is worrying the Chinese government. If the US dollars depreciate against the yuan by 5% this year, which is almost certain, the reserves will "shrink" by $50 billion against the yuan, equivalent to the amount of capital the Central Huijin Investment Co has injected into Industrial and Commercial Bank of China (ICBC), Bank of China (BOC) and China Construction Bank (CCB).

Such concerns finally prompted Beijing to decide to reform the management of its foreign exchange reserves.

[donsu]

16. thanks for this info - looks like things are in motion

nt

[originalpckelly]

15. Here is the Mr. Gundzik 2 years ago at the start of 2005 predicting a massive dollar devaluation:

http://www.energybulletin.net/4032.html

"The rebalancing of reserves could swiftly snowball if Russia decides to redenominate its oil and gas exports to Europe from dollars into euros. Both the EU and Russia are interested in such a redenomination. This change would force Europe's central banks to reduce their dollar reserves. It could also encourage the Organization of Petroleum Exporting Countries (OPEC) to redenominate its oil exports into euros.

The redenomination of oil would allow the traditional relationship between oil prices and oil supply and demand to reassert itself. The redenomination of oil into euros would force the dollar to devalue by 30-50%. It would also force foreign central banks, which hold about $1.5 trillion of US Treasury securities, to liquidate a portion of their holdings, pushing US interest rates much higher."

Mr. Gundzik is a propagandist.

[Ezlivin]

17. The United States is Insolvent

It's far worse than most of us realize and all of our rationalizations mean nothing in light of the cold, hard mathematics involved.

On a Friday, December 15, 2006, the Treasury/OMB report titled "Financial Report of the United States Government" was released. David Walker, Comptroller of the US, provided an accompanying statement that read, in part:

Despite improvement in both the fiscal year 2006 reported net operating cost and the cash-based budget deficit, the U.S. government’s total reported liabilities, net social insurance commitments, and other fiscal exposures continue to grow and now total approximately $50 trillion, representing approximately four times the Nation’s total output (GDP) in fiscal year 2006, up from about $20 trillion, or two times GDP in fiscal year 2000.

As this long-term fiscal imbalance continues to grow, the retirement of the “baby boom” generation is closer to becoming a reality with the first wave of boomers eligible for early retirement under Social Security in 2008.

Given these and other factors, it seems clear that the nation’s current fiscal path is unsustainable and that tough choices by the President and the Congress are necessary in order to address the nation’s large and growing long-term fiscal imbalance.

We need $53 trillion in the bank right now in order to pay for our debt.

Read more here and make sure you are sitting down.