The U.S.A. dollar and future economic prosperity

On one of the interviews with traders on the floor, there is still, according to the person being interviewed, several traders expecting a drop in the dollar later. Right or wrong in that forecast, they buy based on that.

If they are right, then earnings will explode on the S&P because so many of the companies get earnings from overseas. Even if revenues don’t rise, in dollars they would soar as would the price.

Now, there are so many countries moving away from the dollar that I can see why they believe a drop in the dollar is coming but, it may not be for months or a year or two. I think that even if they are right, they could easily be ahead of the game.

As long as the 2.5 billion people that control 2/3 of the global economy, aren’t spending, I can’t see earnings rising in real terms much. The Baltic Dry Index doesn’t reflect a global recovery of significance and I believe it would rise if those 2.5 billion were spending more.

At the same time, there is growing nervousness about the deficits and the dollar. It seems to be trying to build a base around 77 but, has had a hard time staying above it. There is nothing to support the dollar fundamentally due to the government policies. Only through the propping up of it by nations and central banks that don’t want a collapse, does it seem to stay up.

If we slide into a deep depression, it could easily go from zero CPI directly to 1,000% CPI virtually overnight if any nation panics and stops accepting dollars for trade. The ripples through the other nations would be rapid.

Until that time, however, short term dollar rallies, market corrections, even a severe one, bond prices rising, etc. are all possible. Our fate is no longer determined by what we do. There is nothing our government can do to make 2.5 billion people and foreign nations do what isn’t in their best interest and they will determine demand and the fate of the dollar. With the trillions of loose canons (dollars) out there that can be spent on raw materials like oil, copper, etc. or food stocks like wheat, corn, soybeans, sugar, etc. and on gold and silver, the velocity of money could take off like a rocket if there is any growth in fear of holding dollars.

The government here, can’t do a thing about it unless they are willing to put us into a deeper depression by raising interest rates and destroying all purchases needing credit. Housing would plummet in price and the GSE’s making the thousands of bad loans would collapse and leave the tax payer hanging. The banks would fold, and the tax revenues drop so fast and far that no nation would accept dollars because without tax revenues, even interest on debt at higher interest rates would be impossible to pay.

The CBO projects a quadrupling of interest on debt from just under $200 billion (public debt only, not interest on trust fund debt) to $800 billion just with normal interest rate increases during a recovery. That is more than we took in this year in corporates and individual tax receipts. Thus, further declines in the economy will make things rapidly get much worse.

Trying to save the dollar could actually collapse it. Not trying to save it will probably collapse it.

As AP said, we never should have started these interest rate cuts in a credit recession. All we were doing is digging the debt hole deeper when it was already too deep. But, then we shouldn’t have done them after the tech bubble broke either and caused the housing and debt bubbles we are dealing with now.

A stable monetary policy and good economic policy is what was needed and we haven’t had that for decades. If you are a patient person or business and rates are going down and you know they will keep going down, do you borrow after the 1st, 2nd, 3rd cut? Or do you wait til the bottom? Or, do you hurry up and borrow at the first rate hike, knowing more will follow?

Trying to stimulate the economy with a series of rate cuts doesn’t make a lot of sense once everyone knows that there is a pattern to them and waiting longer gets you a better rate. But, if you knew that you would pay 5% this month, next month and next year and you needed to borrow, would you wait?

There are other ways than interest rates to stimulate or restrict lending although I am not a fan of most if any of them (haven’t studied them much). The purpose of the FED was to keep money in line with demand, not create demand or reduce demand for the money. It was not to create employment with easy money so companies would borrow more and thus hire more. It was not to bail out banks or Freddie and Fannie and FHA or GM or AIG.

If those things were to be done, Congress, using tax revenues or debt wisely, was to be the means of doing those things. However, they have become so dependent on the FED and Treasury that they are unprepared to do their job.

Also, on making the FED the agent of Congress for money supply. Congress is still Constitutionally responsible and they can’t be if they aren’t allowed to audit what their “agent” is doing and making sure that “agent” is not violating the intention of Congress when they made them their “agent.” What we have now is the “tail wagging the dog.”

For decades we have used policies that have stacked up risk until the private sector can no longer support the government.

quote:
In 2009, government will consume a whopping 61.34 percent of national income.

http://www.heartland.org/publications/budget%20tax/article/25904/61_Percent_of_National_Income_Goes_to_Government.html
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That can’t be sustained and will lead to a collapse of the dollar when the loans to us stop coming.

JanPaul

Related Posts:

• Earnings from oversea
• I see bears are firing up the BBQ grills.
• Many reasons our country is in trouble.
• Government needs to fill up the gap for consumer spending to delay the collapse
• Before you buy, make sure you are in an area that didn’t have the big bubble in housing.

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