So, recently here Peter Dorman and I were commiserating over having largely called most of the current crises, only to fail to have seen the surge of the dollar as people "flew to quality," leading ultimately to the absurdity of negative yields on 90 day Treasury bills just a few days ago. A number of other commentators also have been beating themselves over the head for failing to foresee the dollar's strength (Brad DeLong and Arnold Kling, among others), although none of them were as prescient on other matters as Peter and me (ooh, ooh, such self-puffery).
However, in the last two days the euro to dollar rate has gone from about 1.27 to 1.33. Does this mean that the other shoe is about to drop, and that the world is about to become fed up with the dollar and run for their lives in the face of our ongoing massive current account deficit and historically unprecedented net foreign indebtedness, not to mention so much other baloney?
I think this is very much the "Reverse Tsunami" that Peter described months ago.
ReplyDeleteI think the conditions are set for a dollar collapse. So many people have been retreating from stocks and bonds that the US Dollar has risen in value.
But if economic activity has declined so much that the US Dollar is seen to be overvalued, then we have capital flight.
And THAT will be armageddon.
What about the rumoured shortfall in gold stocks to cover gold futures? Max Keiser has been ranting about this on PressTV (Iran). But so long as IMF debt and oil are marked in dollars it's a dollar hegemony world we live in. Iraq learned what happens when you try and denominate in Euros. Iran's the only other one who's threatening this move. But long term? The dollar's screwed. Why? Simple: there isn't one single reason in favour of holding it long term. Everything else is pontification.
ReplyDelete"the world is about to become fed up with the dollar and run for their lives...
ReplyDeleteYeah, but what is 'the world' today?
*the largest 200 corporations - combined sales are bigger than the combined economies of all countries minus the biggest 10.
* Of the 100 largest economies in the world, 51 are corporations; only 49 are countries (based on a comparison of corporate sales and country GDPs).
http://www.corpwatch.org/article.php?id=377
The QUOTE OF THE WEEK, btw, must be this:
26/11/2008
“ Following the collapse of Lehman Brothers in September, fails to deliver among the 17 primary dealers in the US treasury market have rocketed to more than $2 trillion over a period of weeks and still lie above $1.3 trillion. Broker/dealers have stopped delivering bonds. Holders of US treasuries are now scared to lend into the repo market in case their bonds are not returned, and potential buyers sit on the sidelines fearful of handing over their money to a counterparty that at best might not deliver a bond on time, and at worst might go under. „
Helen Avery in The US Treasury market reaches breaking point
http://www.euromoney.com/Article/2054070/The-US-treasury-market-reaches-breaking-point.html
Just as I was beginning to understand most of the fandangle financial jargon. sigh...what is the 'repo' market??
I'm surprised that after calling the crisis you would miss the flight to quality.
ReplyDeleteI missed the crisis completely, believing it would strike in 2009-2010 instead of 2007-2008. But that once it came interest rates would fall to levels below their 2003 levels is what usually happens, so its hardly surprising. It IS a downwave after all.
We are now seeing the shift to a new interest rate regime in which interest rates cease to reflect long term inflationary potential. This happened last time and its happening again.
Yes the dollar is going to fall. It was always going to, but this was not scheduled until the second half of the next decade at the earliest. With the early onset of crisis, the schedule might be pushed up a bit, but it's surely still some years off.
That would be really, really early.
OSO,
ReplyDeleteA complication is that the dollar had fallen quite a bit since 2000, with further declines since the beginning of the decline of the US housing bubble in mid-2006. As that was what I thought would trigger the collapse, it happened more smoothly. However, by early this year the dollar was arguably undervalued by some measures, especially against the euro and pound, and in a long swing sort of way started to go back up. However, when the floor fell out from the markets in September, it shot way up as we had this bizarre rush to the safe haven, despite the dollar's numerous longstanding problems.
Daro,
I do not know about a shortage of gold stocks. Of course, there are four major central banks that sit on huge gold stock volumes, the US, the British, the French, and the Russians. Gold prices have been rather erratic.
Brenda,
Well, how the corporations play in the forex markets is not obviously all that much different from how others do. If anything, they might almost be a rationally stabilizing element in that a lot of their trading is tied to real economic activity, namely exporting and importing, whereas a lot of other players are engaging in just plain old speculation and thus destabilizing the markets.
A "repo" is a repurchase agreement. So, one party gives another party an asset with an agreement to repurchase it back later at a given price. It is a huge market, and in fact the normal operating procedure of the Fed in the old days, meaning before mid-September, when they did open market operations, was to buy and sell US government securities in the repo market, not in the regular market, with the repo market being much larger and really driving the actual federal funds rate. Your old pal, Henry Liu, has written about how all this worked, although now, it is hard to tell what the Fed is doing as it piles all kinds of toxic waste from all over the world onto its balance sheet in a desperate effort to keep the global financial system afloat.
MA,
I guess it is a sign that we did not call how bad it would get. The idea of the dollar as a "safe haven," or as being "quality," given its enormous underlying problems, seems like a joke. But the crisis has been so bad that it has brought all sorts of primordial gut reactions. Run to the dollar, eeek! But, now? Well, maybe some of those who were doing the running are rethinking...
OSO,
ReplyDeleteA complication is that the dollar had fallen quite a bit since 2000, with further declines since the beginning of the decline of the US housing bubble in mid-2006. As that was what I thought would trigger the collapse, it happened more smoothly. However, by early this year the dollar was arguably undervalued by some measures, especially against the euro and pound, and in a long swing sort of way started to go back up. However, when the floor fell out from the markets in September, it shot way up as we had this bizarre rush to the safe haven, despite the dollar's numerous longstanding problems.
Daro,
I do not know about a shortage of gold stocks. Of course, there are four major central banks that sit on huge gold stock volumes, the US, the British, the French, and the Russians. Gold prices have been rather erratic.
Brenda,
Well, how the corporations play in the forex markets is not obviously all that much different from how others do. If anything, they might almost be a rationally stabilizing element in that a lot of their trading is tied to real economic activity, namely exporting and importing, whereas a lot of other players are engaging in just plain old speculation and thus destabilizing the markets.
A "repo" is a repurchase agreement. So, one party gives another party an asset with an agreement to repurchase it back later at a given price. It is a huge market, and in fact the normal operating procedure of the Fed in the old days, meaning before mid-September, when they did open market operations, was to buy and sell US government securities in the repo market, not in the regular market, with the repo market being much larger and really driving the actual federal funds rate. Your old pal, Henry Liu, has written about how all this worked, although now, it is hard to tell what the Fed is doing as it piles all kinds of toxic waste from all over the world onto its balance sheet in a desperate effort to keep the global financial system afloat.
MA,
I guess it is a sign that we did not call how bad it would get. The idea of the dollar as a "safe haven," or as being "quality," given its enormous underlying problems, seems like a joke. But the crisis has been so bad that it has brought all sorts of primordial gut reactions. Run to the dollar, eeek! But, now? Well, maybe some of those who were doing the running are rethinking...
Barkley from the viewpoint of the non-specialist it would seem that the United States in the eyes of the world is Too Big to Fail.
ReplyDeleteHere in the United States the sicker the economic sector the more credit worthy you become to the lender of last resort, because to the Treasury and the Fed even a sick GM is better than a dead one. For the US as a whole the lender of last resort is everyone else in the world. If they perceive that a deep recession in the US might trigger similar or worse recessions they might continue to purchase our debt not because it is safe as such but because there are very few alternatives sufficiently buffered away from the US economy. They might know or suspect that their patient was ultimately terminal but have no choice but to keep the flow of medicine going.
Think of the old expression: "if you owe the bank $10,000 the bank owns you; if you owe the bank $100,000,000 you own the bank." Total US debt held by foreign entities on September 30th was $2.86 trillion out of a total public debt of $5.8 trillion. As of Friday that total is now up to $6.4 trillion. Whether the percentage held overseas remained the same is a good question, but any way you slice it the US is at least temporarily in the position of owning the world.
You could sum it up not so much as 'Flight to Safety' as 'No Way Out'.
Bruce,
ReplyDeleteIn the end, it is all up to China, for better or worse, including to finance our fiscal stimulus package.
Besides driving up the cost of fiscal deficits, perhaps prohibitively, what other fallout occurs with the flight out of the dollar?
ReplyDeleteIt seems that a massive transfer of wealth is needed to all the world's workers in order to sustain aggregate demand and a viable world market. This would include a raise in the minimum wage in China, and elsewhere, including the U.S.A. I get the impression that a courageous stimulus package, increased minimum wage, full employment, and a treaty assuring labor rights could rescue capitalism and the dollar. Simplistic, but maybe? Impossible, probably.
Bloomberg recently predicted that the loon may be worth C$1.10 within the next six months.
ReplyDeleteSeveral people have noted that to be impossible, but given that the current FX is ca. US$0.80 to the loon and the assumption that it was an editing error, the implication is for about a 35-40% decline in the USD.
In which case, Stephen Gordon's optimistic version here will clearly not have been the one Mr. Harper believed.
As of Dec. 17 the euro dollar rate had gone to 1.44, with little publicity, so much attention being paid to the Fed's cutting of the target ffr to equal its actual.
ReplyDelete