What Happens When the Dollar Collapes?
When foreign investors stop investing in dollars, U.S. bond prices will drop, then U.S. interest rates will rise. Mortgage and credit card rates will soar, bursting the housing bubble. Home prices will decrease by 50% or more in a matter of months, bankrupting millions of over-extended, over mortgaged homeowners.
But this is just the beginning, The Treasury will attempt to float the economy by printing more currency, in turn, reducing the value of the dollar even more. Those who have their live savings in CD’s, cash or Bonds backed by the U.S. dollar, will loose it all. While gold and other commodities will rise in value – we are already seeing a steady rise in gold values.
Most U.S. consumer finance companies will be bankrupt as there will be few who can pay the interest rates. Then the crisis goes global. We will no longer be able to purchase foreign goods, they will become far too expensive. At that point the rest of the world has a recession – the U.S. consumer will no longer be able to buy Chinese electronics and Japanise cars, instead we will have to buy cars made in the U.S. However, it’s not likely that we’ll be able to buy anything at all.
Our foreign counter parts will make an attempt to stabilize the global economy. They will cut interest rates and buy dollars with their own currencies, This will flood the world with euros and yen the way the U.S. now floods the world with dollars. The result of these “competitive devaluations” will be the death of the fiat currency,
Eventually European and Japanese bonds will collapse as the U.S. dollar.
Our best hope, and looking less likely, is a gradual decline in the value of the dollar. This will generate a significant drop in exports to the U.S., but may bolster our ability to export abroad. However, anyway that you look at the problem of the dollar, the outcome and recovery are going to be difficult.
Brace for impact!
Four International Articles on the Weak dollar
Once-Dependable Dollar Now Down and Out (Source)
By Yuriy Humber Staff Writer
Confidence in the U.S. dollar has slumped to a new low, as a series of political and economic statements last month questioned Russia's reliance on the world's most convertible currency.
Within a month, the U.S. currency was called "unreliable as a reserve currency" by Finance Minister Alexei Kudrin, made a taboo word by the Public Chamber and centrist politicians, and ditched by the general public amid reports of its imminent depreciation.
The U.S. dollar has fallen to its lowest rate against the ruble in a year, 27.2424, with signs that further drops are likely, prompting analysts to propose that the time to save or speculate in rubles has come.
"In the short to mid-term, the choice has to be for the ruble," said Yaroslav Lissovolik, chief economist with investment bank Deutsche UFG.
`E. Asia must prepare for possible dollar collapse' (Source)
TOKYO: With the U.S. trade deficit at a record high and global interest rates rising, East Asian economies need to be prepared for a possible `collapse' of the dollar, the Asian Development Bank warned on Tuesday.
"Any shock hitting the U.S. economy or the global market may change investors' perceptions given the existing global current account imbalance,'' said Masahiro Kawai, ADB's head of regional economic integration. "Our suggestion to Asian countries is: do not take this continuous financing of the U.S. current account deficit as given. If something happens then East Asian economies have to be prepared,'' he told reporters on a trip to Japan.
Because of the highly interdependent nature of the East Asian economies, if countries worked together to allow their currencies to collectively appreciate against a tumbling dollar then the cost of adjustment would be spread, he said. "The possibility of a U.S. dollar collapse or sharp decline may be small at this point but it would generate very significant turmoil so East Asian economies... ought to be ready for that,'' Mr. Kawai said.
The Manila-based ADB is working on several indices of Asian currencies that could be helpful to monitor exchange rate movements in the case of a sharp dollar decline, though its main aim is to help develop regional bond markets. — AFP
Dollar continues to weaken against rivals
Canadian dollar reaches 30-year high against U.S. counterpart
E-mail Print Disable live quotes
By Wanfeng Zhou, MarketWatch
Last Update: 5:12 PM ET May 2, 2006
NEW YORK (MarketWatch) -- The dollar remained under pressure Tuesday as investors continued to digest CNBC's day-earlier report about Federal Reserve Chairman Ben Bernanke's comments and awaited his Wednesday speech for more clues on the U.S. interest-rate outlook.
At the same time, the euro and pound were lifted after solid euro-zone and U.K. manufacturing data.
Strong economic reports out of the euro zone and the U.K. "are fueling gains on the European currencies," said Mike Malpede, senior currency analyst at Man Global Research. "The technical dynamics still are pointing towards a weaker dollar."
In late New York trading, the euro strengthened to $1.2621, up 0.5%. The dollar weakened to 113.25 yen, down 0.4%. The British pound was fetching $1.8406, up 1%, while the dollar changed hands at 1.2368 Swiss francs, down 0.4%.
"The euro/dollar remains grossly overbought in the near term, but the momentum of the trend may carry it higher still before a more serious retracement kicks in," said Boris Schlossberg, senior currency strategist at FXCM, in a note.
Euro Advances After Manufacturing Expands by Most in Five Years (Source)
May 2 (Bloomberg)
-- The euro rose, approaching an 11-month high against the dollar, after an industry report showed euro- region manufacturing expanded at the fastest pace in more than five years last month.
The euro has risen 6.7 percent versus the dollar this year as signs of faster growth prompt speculation the European Central Bank will increase its pace of interest-rate increases while the Federal Reserve prepares to end an almost two-year cycle of boosting borrowing costs.
``The European economy is doing better, propelled by Germany's good performance,'' said Masaki Fukui, a senior market economist and currency analyst in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest lender by assets. ``This will all reinforce expectations of further ECB rate increases, pushing up the euro.''
When foreign investors stop investing in dollars, U.S. bond prices will drop, then U.S. interest rates will rise. Mortgage and credit card rates will soar, bursting the housing bubble. Home prices will decrease by 50% or more in a matter of months, bankrupting millions of over-extended, over mortgaged homeowners.
But this is just the beginning, The Treasury will attempt to float the economy by printing more currency, in turn, reducing the value of the dollar even more. Those who have their live savings in CD’s, cash or Bonds backed by the U.S. dollar, will loose it all. While gold and other commodities will rise in value – we are already seeing a steady rise in gold values.
Most U.S. consumer finance companies will be bankrupt as there will be few who can pay the interest rates. Then the crisis goes global. We will no longer be able to purchase foreign goods, they will become far too expensive. At that point the rest of the world has a recession – the U.S. consumer will no longer be able to buy Chinese electronics and Japanise cars, instead we will have to buy cars made in the U.S. However, it’s not likely that we’ll be able to buy anything at all.
Our foreign counter parts will make an attempt to stabilize the global economy. They will cut interest rates and buy dollars with their own currencies, This will flood the world with euros and yen the way the U.S. now floods the world with dollars. The result of these “competitive devaluations” will be the death of the fiat currency,
Eventually European and Japanese bonds will collapse as the U.S. dollar.
Our best hope, and looking less likely, is a gradual decline in the value of the dollar. This will generate a significant drop in exports to the U.S., but may bolster our ability to export abroad. However, anyway that you look at the problem of the dollar, the outcome and recovery are going to be difficult.
Brace for impact!
Four International Articles on the Weak dollar
Once-Dependable Dollar Now Down and Out (Source)
By Yuriy Humber Staff Writer
Confidence in the U.S. dollar has slumped to a new low, as a series of political and economic statements last month questioned Russia's reliance on the world's most convertible currency.
Within a month, the U.S. currency was called "unreliable as a reserve currency" by Finance Minister Alexei Kudrin, made a taboo word by the Public Chamber and centrist politicians, and ditched by the general public amid reports of its imminent depreciation.
The U.S. dollar has fallen to its lowest rate against the ruble in a year, 27.2424, with signs that further drops are likely, prompting analysts to propose that the time to save or speculate in rubles has come.
"In the short to mid-term, the choice has to be for the ruble," said Yaroslav Lissovolik, chief economist with investment bank Deutsche UFG.
`E. Asia must prepare for possible dollar collapse' (Source)
TOKYO: With the U.S. trade deficit at a record high and global interest rates rising, East Asian economies need to be prepared for a possible `collapse' of the dollar, the Asian Development Bank warned on Tuesday.
"Any shock hitting the U.S. economy or the global market may change investors' perceptions given the existing global current account imbalance,'' said Masahiro Kawai, ADB's head of regional economic integration. "Our suggestion to Asian countries is: do not take this continuous financing of the U.S. current account deficit as given. If something happens then East Asian economies have to be prepared,'' he told reporters on a trip to Japan.
Because of the highly interdependent nature of the East Asian economies, if countries worked together to allow their currencies to collectively appreciate against a tumbling dollar then the cost of adjustment would be spread, he said. "The possibility of a U.S. dollar collapse or sharp decline may be small at this point but it would generate very significant turmoil so East Asian economies... ought to be ready for that,'' Mr. Kawai said.
The Manila-based ADB is working on several indices of Asian currencies that could be helpful to monitor exchange rate movements in the case of a sharp dollar decline, though its main aim is to help develop regional bond markets. — AFP
Dollar continues to weaken against rivals
Canadian dollar reaches 30-year high against U.S. counterpart
E-mail Print Disable live quotes
By Wanfeng Zhou, MarketWatch
Last Update: 5:12 PM ET May 2, 2006
NEW YORK (MarketWatch) -- The dollar remained under pressure Tuesday as investors continued to digest CNBC's day-earlier report about Federal Reserve Chairman Ben Bernanke's comments and awaited his Wednesday speech for more clues on the U.S. interest-rate outlook.
At the same time, the euro and pound were lifted after solid euro-zone and U.K. manufacturing data.
Strong economic reports out of the euro zone and the U.K. "are fueling gains on the European currencies," said Mike Malpede, senior currency analyst at Man Global Research. "The technical dynamics still are pointing towards a weaker dollar."
In late New York trading, the euro strengthened to $1.2621, up 0.5%. The dollar weakened to 113.25 yen, down 0.4%. The British pound was fetching $1.8406, up 1%, while the dollar changed hands at 1.2368 Swiss francs, down 0.4%.
"The euro/dollar remains grossly overbought in the near term, but the momentum of the trend may carry it higher still before a more serious retracement kicks in," said Boris Schlossberg, senior currency strategist at FXCM, in a note.
Euro Advances After Manufacturing Expands by Most in Five Years (Source)
May 2 (Bloomberg)
-- The euro rose, approaching an 11-month high against the dollar, after an industry report showed euro- region manufacturing expanded at the fastest pace in more than five years last month.
The euro has risen 6.7 percent versus the dollar this year as signs of faster growth prompt speculation the European Central Bank will increase its pace of interest-rate increases while the Federal Reserve prepares to end an almost two-year cycle of boosting borrowing costs.
``The European economy is doing better, propelled by Germany's good performance,'' said Masaki Fukui, a senior market economist and currency analyst in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest lender by assets. ``This will all reinforce expectations of further ECB rate increases, pushing up the euro.''
posted by Van at 10:40 AM
8 Comments:
Van, that dire prediction has been made for decades now and it is based on at least two fallacies.
The first is that foreign investment in America is a bad thing (it's most certainly NOT) and second that global investors will suddenly abandon the U.S. for greener pastures and send our economy into a tail spin.
Well, there are no real "greener pastures," at least not at this point.
China and India are both developping economies. Japan's workforce, though more competitive than most of Europe's is NOT as competitive or productive as America's.
The Japanese government continues to subsidize Japanese cars sold in the U.S. - in effect GIVING each American consumer thousands of Japanese dollars along with the cars they sell.
Europe's workforce is incredibly, even stultifyingly unproductive compared to America's. That's why France sought to make those modest economic reforms in order to allow their companies to create new jobs down the road. The French reaction proved how much trouble that country is really in. Germany under new Chancellor Angela Merkel is unabashedly embarking on "American-styled reforms." THAT alone, speaks volumes about Europe - even many Europeans can see where they went wrong, economically.
Moreover, Europe's working population is aging much faster than America's right now.
In short, America remains the best investment around.
The huge deficit is largely due to the expense of two major wars on the heels of an incredible recession sparked by the Spring 2000 implosion of the NASDAQ, deepened by the $100 billion hit that was 9/11/01 that sparked hundreds of more billions of dollars in both foreign and domestic wartime spending.
Recall that the last time the deficit was reduced, it was reduced by the Gingrich plan (he'll be running in 2008)...his "Balanced Budget plank," signed onto by W J Clinton, cut government spending and with an incredible boost of economic growth (1997 -2000) fueled by loosened margin rules and more lax IPO regs, the U.S. "OUTGREW" its deficit. It didn't "TAX its way out of it." The latter would've been disastrous.
Am I concerned about our burgoning deficit and national debt?
YES.
Do I see impending gloom and doom?
NO.
This comment has been removed by a blog administrator.
shelly l. said...
Too bad wages aren't going up to match inflation even a little bit...
This has me worried too. Should we start buying gold?
The foreign investment in the U.S. that has me worried the most is the Saudi's. If we start promoting other forms of energy other than their oil . . .
JMK - I think that you may be missing the overall point.
First, I’m not suggesting that investment in the United States bond market is a bad, nor am I suggesting that foreign Central Banks investing in hard U.S. assets is bad either.
What I am suggesting is that needing to sell 800 + billion per year in hard assets and Treasury Bills is not going to work for our economy long term, any economy - I think that we agree on that.
Our government cannot possibly expect to continue operating at such high trade deficits, so naturally our dollar is going to fall in value.
It has, but our deficit has not. This is a unique development which is causing alarm among foreign investors.
There may not be greener pastures now for investment dollars, but that can change at any moment. Take for instance the housing boom (bubble).
Currently Fannie Mae and Freddy Mac are over 16 trillion in debt. There traditional role for providing liquidity for mortgage loans has changed, now these organizations sell bonds, and provide speculation for investment.
That’s not such a bad thing, except that millions of citizens are over extended on their mortgages. So when they default, it's mahem.
It’s not a coincidence that over 37% of consumer spending is from cash out refinance loans since the year 2000. Now, as the interest rates rise, there will be fewer loans.
Heck, why do you think that the Fed is dragging its feet on raising interest rates?
The Fed is in a tight spot. Raising the rates will slow growth, tremendously.
People are using their mortgages (mortgage loans) to live, pay bills, make purchases, take vacations, pay their mortgates - most of these loans are adjustable.
Then there is the adjustable rate mortgage, it's at record highs, and I haven’t even mentioned that 5% of mortgages are interest only for the first 5 years.
So what do you think will happen when 20 million people default on their mortgages? I’ll tell you… Central banks will look for greener pastures, it's that simple.
And right now, the Euro looks pretty good compared to the dollar. I hope that you do not think that Central Banks are somehow monolithic in their actions. They, like corporate executives, only look to the next quarter.
Our economy is in a unique place. This sort of bubble (the housing bubble) has never happened before. In essence our economy is being floated by debt. If the housing bubble crashes, so will the dollar.
As I mentioned, we should hope for a gradual decrease in our currency. But with inflation rising, our ballooning deficits, and an extremely inflated mortgage sector which produces more consumer spending than wage increases new investment – a gradual decrease in unlikely.
I'm hoping for the best but preparing for the worst.
Shelly - the trouble with purchasing gold or other metals is that the United States is using a Fiat Currency.
If many purchase Gold, then the value of the dollar drops, this is mormally a good thing. But our economy is artificially growing, we're living on debt. So a droping dollar can be bad in this case - especially if the dollar drops too low or too fast.
The Gold market is increasing in value, so are all metals. This is largely based on perception, perception of the dollar.
In an economy like ours, you cannot go wrong with Gold, at least for now - so yes, you should add some gold to your portfilio, but your best investment is always long term index funds - steady growth that outpaces wages and inflation.
One of the reasons that a barrel of oil is so high is that many are purchasing oil on the commodity markets. This reduces supply and drives up the price - demand.
So, you're right about that too. It is time for a alternative energy sources.
I read that Ford Motor Company has developed a Hydrogen Car - it costs $300,000 - wow!
I hope that they can bring that price down some.
Dean Baker Co-Director of the Center for Economic Policy and Research Institute has this to say:
"A decline in housing prices would have a very serious effect on the economy. Housing has been supporting the economy ever since the recession. Roughly 5% of the GDP is associated with homebuilding and construction. On top of that, we've had this huge consumption boom based on people taking out second mortgages and refinancing their homes spurring on the economy.
My estimates of bubble wealth -- the rate of growth of house prices exceeding the rate of growth of inflation -- come to around $5 trillion. Roughly 4% to 6% of that is $200 billion to $300 billion a year in housing-bubble-driven consumption. That's a lot to replace"
On the flip side:
James F. Smith, chief economist at the Society of Industrial & Office Realtors says this:
There are several reasons why a national housing bubble is relatively silly. According to census data, current home-ownership rates are at 69.3% of all households, a record. If you look at home ownership by age group, the highest rate -- above 83% -- are among owners aged 70 to 74. Only marginally below that is owners aged 65 to 69.
Nobody seems to look at how home ownership rises with age. The older we get, the higher the probability that we're going to own a house. If you look at the baby boomer generation, you get a picture of increasing demand that won't end for another 40 years.
And
"On top of that, mortgage rates are pretty darn low. The only way rates are going to rise is if inflation rises and the fear of inflation drives the 10-year Treasury up to 7% or 8%. Mortgages would go back to 9% or 10%, temporarily killing the housing market, but only temporarily.
It doesn't mean there aren't a few local bubbles in areas like Washington D.C., Los Angeles, suburban Boston, or suburban New York. But we've had many of those in the last 20 years or so. Texas collapsed in 1986, Southern California collapsed in 1989, and Massachusetts and Connecticut collapsed in 1991."
Why such a dire prediction? GDP is up, way up.
Isn't this good for the economy?
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