In 2005 I warned people about the imminent collapse of the RE market. Of course I was too stupid to understand that things always appreciate.
Talking about the coming (continuation) of the devaluation of the USD fell on the same death ears. But I think things are about to change. Not today, not tomorrow. But in the end, nobody should say it happened so rapidly. Because it didn’t. Just like RE, the signs were out there, the signs gave ample time to act.
The only reason we are different than a third world country and that our currency didn’t collapse just yet is because we had the “privilege” of having the “World Reserve Currency”. Had the world not accepted the USD as their means for their Reserves things would have changed a long time ago. But instead we could inflate at will, we could spend without worries, run budget deficits as if it were a competition of who could spend the most. I still don’t know if the Republican or Democrats should get that trophy…(how about we just create more money and hand one to each Party?)
I’d really be surprised if 3 years from now, the USD had a similar purchasing power as today. One of the next big bailouts will have to be to bailout the States. Some 40+ are running budget deficits and there is no solution in sight because the mentality in politics is that we shouldn’t trim spending. Unemployment will get worse in the coming years before it gets better. More people depending on government while less people contributing to it. That’s not exactly the equilibrium that is needed. Instead of realizing that government and the quasi private Federal Reserve have much to do with the economic bubbles people blame the free market. A market that doesn’t even exist here in the US. The solution is more government control. More bailouts. More lending.
How long will China and other creditors continue their USD business as usual. They have Reserves. They could spend those Reserves. And even in the absence of spending those Reserves; just no longer acquiring more USD debt or greatly reduce the exposure to USD notes in the future would cause a massive imbalance; especially since we need to create more and more USD in order to “fix” the problem.
And I’m fully aware that the USD had a great rally in the past 7 months. But then there was also a bear market rally following the 1929 crash when the Dow fell from 4000 to 2000 only to rally to 3000 in 1930 before hitting less than 500 by 1932. Of course, this time is completely different.
But don’t worry, everything will be just fine. Real Estate always goes up.
Although “death ears” might be a bit too apocalyptic, I think you are generally right about the direction of the USD. In the short term, we may see some falling prices (what some people wrongly label “deflation”), but in the long run having too many dollars chasing too few goods can only lead to reduced purchasing power. For the first time in a long time, I’m starting to invest (partly) in gold stocks.
“The only reason we are different than a third world country and that our currency didn’t collapse just yet is because we had the ‘privilege’ of having the ‘World Reserve Currency.’”
Which is another way of saying: As unreliable as the dollar was, the alternatives were even worse.
“Some 40+ are running budget deficits…”
Correct me if I’m mistaken, but I thought most states were constitutionally prohibited from deficit spending (?). Here in Florida, the state government hasn’t gone into deficit for that reason, although it has dipped deeply into reserve funds.
I agree with the danger, especially given the new admin’s announcement of years of trillion dollar deficits. There’s a guy I work with that is fond of saying “I’m shorting America”, but I responded basically with the “As unreliable as the dollar was, the alternatives were even worse.” line.
i still think short- to medium-term, the dollar will hold some value (against other currencies), because it’s where people go when they’re anxious. like others have said about gold, it’s a good safe-haven and, for now, people still mostly believe that the US writes good cheques. but i think i probably agree with you that in the long-term, it looks grim. all those cheques have to be backed by something. . .
-mike
p.s - i should have prefaced this by saying i know almost nothing about economics
In that case can we then have the US banking system commission the mints to print up a new 0$ bill. We could put the “Big O” on the “Zero” that would work well stylistically.
Excellent post. It would behoove all Americans to watch the video “Corrupt Banking System” you linked to and then give some hard thought about who the Federal Reserve is and what does it actually do.
Not sure where it’s at today, but The Economist had an article a while back about the dem congress holding up consideration of GWBs picks to fill empty slots, that, combined with a couple of expected retirements and Bernanke’s stint ending in 2010, would allow the board to be constructed by one political party in whatever way they wished. They were muy worried about the politicization of this group. So the answer as to what they will do is probably, whatever the Obama admin wnats them to do.
The USD fluctuates daily and the world at large as a big stake in what happens to the US. During the last depression here cash was king, it wasn’t like Germany in the '20’s. I could see prices deflating as a realistic scenario too. Having some kind of precious metal or stones, actually having theml, not just a piece of paper that says you own it, isn’t a bad idea either. That’s why I am buying my wife more jewelry these days…
If you can find good deals on physical gold its probably a good investment right now. Problem is finding it. When the SPOT price of gold was around 810 a few weeks ago I was trying to buy some American Eagle coins. Best price I could find from someone who actually had them in his possession at the time was 1000.00. I found an internet site that had them for around 890 but they didnt have them in stock, they were waiting on shipment from the Mint. You could lock in your price but would not receive shipment for an estimated 2 weeks. Actual gold you can hold in your hand is getting scarce. Just hope the government doesnt outlaw hoarding gold like they did in the 1930’s.
I’m like you in that I think a real concern is deflation. I think deflation will be the short term problem but sooner or later we will see some really scary inflation.
If we have any deflation, it is short term…just like low interest rates. In order to finance these HUGE deficits, we are going to have to pay the Chinese a much higher return. There is too much cash being pumped into the system; it has to spur inflation. If it doesn’t then I promise you another bubble is developing somewhere…
Don’t forget that during the last depression, the USD was also still backed by Gold. And dhow the USD screwed Americans by confiscating their gold, paying them $20/oz (I blieve it was $20) only to turn around one year later and announcing that gold is at a relationship of $35/oz. So much for FDR…
Yes, the World has a huge interest in the USD. But I also think that the World is starting to wake up and doesn’t want all their Reserve Eggs in one basket. How can they diversify out of it without causing too much of a drop in the perceived value of the currency and avoid having most of their USD portfolio take a huge hit? I think that’s why it takes time.
There’s no doubt that many assets are going through a deflationary period, it’s those types of assets that depend on credit, or assets that are in a category of goods that depend on credit. The real question is how all the inflation that already took place, inflation = creation of new money by debasing the currency, will affect prices and the value in the currency in the future.
Does Obama even has the slightest clue and knowledge of what we are doing. Does he know what the USD is backed with, what the Federal Reserve System is, how it operates? How it is to blame for the biggest bubble the world has ever seen? There he points his fingers at China while at the same time he wants bailouts after bailouts. Spending money on bailouts is one thing, IF YOU HAVE IT. China for example proposed their $500B bailout not to long ago but they have Reserves. But to be such a proponent of American bailouts and therefore also pro-debasing of our currency through inflation, while at the same time pointing at others saying that they are manipulating their currency…So much for Change…Or was he talking about turning Dollar bills into change?
The biggest problem we have today is a lack of understanding of basic math…its all about the math. Feds don’t know math, states don’t know much more and I am convinced that the average individual doesn’t know math either. None of the issues facing our country are really complex; its a simple math equation. When your spending is more than you income year after year after year…you have a problem and when you ignore them you have bigger problems. Heck, I could almost vote for tax increases if I really believed they would pay down the debt and cut spending. But they will not. We are going to have to have a complete collapse; a bankruptcy perhaps. Better yet, technically we are bankrupt, we just need to admit to it and acting accordingly.
Of course, Obama blames the Chinese, because he is a lawyer and that is what they do - assign blame to someone else beside their constituets. This is all such a shame; on our present course we are headed just like all great societies.
It’s well known that CA is running at a deficit, the recent numbers were $13B for CA but I heard that that number is already outdated again. Don’t quote me on those exact numbers but the States managed to out outspend the increased revenue over the past years. Imagine all the increase in property tax revenue, all the increased revenue from all the sales activity made possible with the artificial funny money in circulation from the credit bubble - and they still managed to take that opportunity to set themselves up for financial difficulties just two short years after the shit hit the credit fan. Amazing, isn’t it?
And what do those elected idiots do? Raise taxes. Maybe we should set up a system in which we flip a coin for government spending. At least then there’s a chance that 50% of the time they don’t waste the money.
I guess you must be right (or close to it), since I just found a news source that indicated that 36 states are facing deficits for FY 2009. Florida’s constitutional requirement must be an exception. Pretty scary, isn’t it?
The scary part is that this is just the beginning. They can’t and won’t solve the budget deficits. What, you’re going to raise taxes so astronomically to make up for it? It’s not impossible but the heard mentality has it that we need big government. California already announced how they might not return your money on overpaid State Income Taxes - instead you get an IOU…
What, you’re going to raise taxes so astronomically to make up for it?
Na… they’ll have to cut spending, but the Feds will cover the difference with more invented cash.
I love how the way out of the crisis caused by spending money we don’t have… is to spend more money we don’t have. The truth is that we are screwed and there is no way around it. Whether we slash spending to balance the books or run up a huge debt and then devalue the $ we are going suffer serious economic pain for a long time.
I agree with your assessment of the situation. We are screwed, we will pay one way or another or this. Either through “regular” taxation or through the hidden tax of inflation. I think a couple things are for certain, foreign countries will be more careful at buying our debt, China comes to mind first. And what Americans must realize is that the standard of living we used to enjoy in the past 10 years (or even longer than that) was a luxury. We and nobody else for that matter has “The Right” to that, nothing comes for free and I think the future will teach us an important lesson as Americans will be forced to live within or even below their means. It’s just a matter of time.
What I find interesting is how everybody used to laugh at comparing the US to Japan when we’re doing everything to follow the exact same path. And isn’t it amazing that our current problems has its root at the monetary level. Yet nobody but a few even question the role of the Federal Reserve System and its role at minpulating short term rates and the monetary supply in circulation. Remember the days when people made fun at the “conspiracy nuts” seriously questioned the discontinuation of M3?
And what Americans must realize is that the standard of living we used to enjoy in the past 10 years (or even longer than that) was a luxury.
The sad thing is that the last 10 years weren’t even good ones. It was obvious that we were funding our lives with increasing debt, and that always must end eventually, and you have to start paying it down. That must happen even if there isn’t massive financial fraud like we’ve experienced.
If we took away the escalating personal and national debt, as well as the phony financial ponzi schemes, I wonder what the stats would show for our economy? I think we’d see that we’ve actually been in steady decline for 10 years.
It is like somebody on a personal level who is experiencing pay cuts, but instead of cutting back on spending, they spend just as much or more and put the difference on their credit card or house mortage. This “works” for awhile… they can pretend they are doing as well as before… but eventually their debt load becomes so high that they are unable to take on anymore, and now they not only have to get by on their lower salary, they have to pay off the debt as well!
