“Fears of dollar collapse as Saudis take fright”

[bsrsharma]

sneak into Mexico

Wrong direction Cat! Try going north. Canadian $ touched parity today. Besides, they almost handout visas like halloween candy for professionals. No need for tunnels. 

[partypup]

“Definitely, I think we won’t see real loss of value of 50% in just a couple years (like for e.g. $1600 for gold, $200 for oil, $8 for milk, $6 for gas etc.,) unless we go through a Soviet style revolution – which I am not expecting.”

Okay B-man, if both of us are still on this board in September 2009, we’ll see where gold, oil and milk are. I’m not expecting $8 milk (I think the demand for cow juice will drop before we hit that price point), but $200 oil is not out of the question at all. Analysts in Asia and Europe were speculating this week (after the rate cut) that oil could easily be $180 by the end of next year. And if we take on Iran…you’d better hope you have a Huffy or a skateboard in your garage.

I actually think gold will be above $1600 in 3 years. In 1978 inflation-adjusted dollars, it should be about $1800/oz. I think the central banks have done a fine job of suppressing the price of gold to hide the deterioration of their fiat trash, uh…currency.

Here’s the bottom line: I don’t think that the Fed, Congress, the central banks or anyone esle at this point has the power to “slow the fall.” This beast has taken on a life of its own now. No one, least of all China, wants to see the US take a dirt nap. But the ugly truth is that the as soon as someone blinks, and the stampede begins, it’s over. It will happen so fast, there will be no time to think about safety nets.

And let’s face it: if they had any “real” safety nets, they would have used them by now. The only bullet they had was a rate cut. They fired and missed. In FACT, mortgage rates actually JUMPED after the rate cut, as they follow the bond rate: the average rate on a 30-year U.S. mortgage with no upfront points rose 1/8 of a percentage point on Thursday to 6-1/2 percent, according to BestInfo Inc. Doh!!!

We are in uncharted territory, my friend. “Safe” has no meaning anymore.

In a Depression (and make no mistake, that’s what we are about to enter)everyone does hurt. I guess that’s why they call it a Depression?

[bsrsharma]

only bullet they had was a rate cut

Price controls http://en.wikipedia.org/wiki/Price_controls have been instituted 3 times in the last 60 years. If sustained inflation crosses 6%, I think it will be back.

[partypup]

“Price controls http://en.wikipedia.org/wiki/Price_controls have been instituted 3 times in the last 60 years. If sustained inflation crosses 6%, I think it will be back.”

I guess price controls might work to suppress the price of some goods — like corn — and wages. But what about the commodity that drives the world economy: oil? Is it realistic to expect that if a devalued dollar brings the price per barrel to, say, $150, we can “freeze” the price that consumers pay at $4/gallon? That sounds to me like it would require a lot of gov’t subsidization — with money we don’t have.

What’s happening now — which is unique from the 70s and other periods of price controls — is that the U.S. imports the vast majority of its goods. So I wonder how will price controls work when we have no control whatsoever over the sources of production? In that case, it seems to me that the free market would have to set prices for those goods. And for anyone using the American peso, that ain’t good news.

We have placed ourselves in an untenable position, out of sheer arrogance.

The saddest thing to come out of all of this — and the reason that I think we are at greater risk of collapse than ever before — is that for the first time since WWII, the dollar is in grave danger of losing its status as the world’s reserve currency. People mocked the Euro 3 years ago (I wasn’t one of them; I was buying Euros). But now that it is $1.40 to the dollar, it is undeniably a force to be reckoned with. The greenback – *sigh * – is no longer irreplaceable. There is finally a viable alternative. And the Saudis realize this.

I think what would serve all of us right now is to take off our blinders and abandon the wishful thinking, because like it or not, what is happening now in the global economy — and to the US in particular — is simply UNPRECEDENTED. There’s no denying it. Every person on this board only has a memory of the US as the strongest, most powerful country on earth. We’ve spent our entire lives with that memory, so it’s understandable that we would cling to a belief that we will pull through this, we will stay on top, that things will return to the status quo. But at a certain point, I think we all have to come to terms with the fact that the world, and the global economy, is a dynamic, organic entity, and it changes. As it should. The US wasn’t always the King of the Hill. And it won’t always be the King. Right now, we are watching as the King is de-throned…

Our lives are about to change. Better to prepare for the change rather than being blind-sided by it. That’s my advice.

[JWM in SD]

Nice job Partypup. This is something I’ve been trying to get people to understand: Hyperinflation will not save you unless it makes it into your wages!!! Even then, there are severe side effects.

I hate to say it but Partypup is probably correct. I was willing to give the Fed the benefit of the doubt prior to Tuesday. Not anymore.

People, there is a War on Savers being waged right now. The front line of that war is the housing market in bubble locales.

[bsrsharma]

Partypup: I don’t dispute your portrayal of the events to come – just the velocity of change. US is a continental nation with a fifth of global GDP. How can any event just collapse it into Haiti or Bolivia like status in a short time? There are international linkages in trade, finance, politics, military, human etc. that prevent your free fall scenario. What I mean is, if US just vanishes from the face of the earth (in the present form) lot more people than Americans will be hurt severely. That is a powerful resistance to your total loss scenario. All you have said may happen – just gradually over 20 to 30 year period. In fact, I think the retirement of baby boomers will be much more destructive, economically, than what we are seeing now. Look at how “Great Britain” became U.K. a century back. That is our model, not the Soviet Union to Russia collapse.

[JWM in SD]

“That is our model, not the Soviet Union to Russia collapse.”
I’d like to believe we have more time as well but I don’t you are making a valid comparison there. 150 years ago there wasn’t a mass media with the instant reach that exists now. Even 15 years ago was different because the internet did not exist. I think we are reaping some the side effects of improvement in communications over the past several decades. This blog wasn’t possible as little as 13 yrs ago. What does that tell you?

[partypup]

B-man, I sincerely hope you are right. And until 18 mos ago, I had been living my life under the assumption that the US would experience a slow, steady decline — certainly not something that I would witness in my lifetime. I’ve invested too much of my life and finances in this country and its institutions; it’s certainly not my preference to see it all go to crap.

But just consider how rapidly our decline has been developing lately: the price of oil ($22 in 2002); gold ($250 in 2002); the dollar’s decline (enough said – it’s dropped most 5% in the past 3 months alone!) The scope and pace of these changes simply do not indicate that we have 20-30 more years of “power” left. More frightening: the pace is not slowing. If anything, it is ACCELERATING.

And correct me if I’m wrong, but I don’t think the Soviet Union collapsed in 20 years. Wasn’t it more along the lines of 10? I distinctly recall growing up with the threat of a nuclear Soviet when I was in high school in 1982, and by the time I graduated from law school in 1991, Russia had become a toothless tiger — irrelevant in world affairs. And what do you know? 20 years later, they are making a bid to re-establish themselves as a political and economic force. Let’s see: 1984 to 2007: power to decline to rising power again.

Change can happen — quickly.

Unlike Russia, however, the US has virtually stripped itself of oil, the natural resource that has re-ignited Russia’s wealth. I’m not sure what would re-ignite our growth, especially give the domestic demands like retirement and social security that you cited.

Also, the fact that others (i.e. those other than Americans) will be hurt severely when the US collapses does not preclude a swift collapse. Resistance is inevitably futile to the laws of economics.

Recall that prior to the Great Depression, the US was playing the role of China today, attempting to prop up an ailing UK with exports and cash. The US most certainly didn’t want the UK to tumble from power; we were not ready to assume the help of world empire. And when the UK tumbled and the Great Depression was triggered, EVERYONE suffered. Despite our valiant attempts to forestall the inevitable, the inevitable happened. And out of the ashes of the Great Depression the US rose to power and began to establish the dollar as the world’s new reserve currency over the Pound. It doesn’t matter what the players want; in the end, no matter how hard we may try to forestall the inevitable, we must reckon with the forces of economics.l And the longer we put off the inevitable, I believe harder or faster the fall. Much like pressure that builds up in a water hose when the neck is crimped. The longer the pressure builds up, the faster it all comes out.

Bottom line, no one thinks the US is going to vanish from the face of the Earth. Civilizations usually don’t disappear (with the exception fo the Mayans and those unfortunate folks on Easter Island). But I think we have to be mindful as JWM noted, that the rate of collapse may be actually be different than what we have experienced in the past, particularly since we now have a global economy and a chain reaction of events can be set off in a matter of days, weeks or months. Hundreds or thousands of years ago, countries gradually lost power over decades or longer because it took so much longer for them to amass the manpower necedssary to conquer and settle a territory, or to communicate information, or to feel the effects of changes to their economy throughout their country. And economies were relatively independent of one another.

But all that has changed now. BTW, have you ever seen “Rollover?” I’m not a big fan of Kris Kristofferson or Jane Fonda, but I watched it again recently, and damn! That movie was truly ahead of its time. Economic devastation can occur in the blink of an eye under the right circumstances. In short, the movie depicts what would happen if the Saudis (read: China in 2007) were to sell a fraction of their dollar reserves. The the results are catastrophic and immediate. Of course, it’s just a movie — but food for thought, nonetheless.

I might add that if this administration is foolish enough to go to Iran, the timetable for collapse will certainly accelerate, as we can surely not win militarily, nor do we have the funds to support another war. The last thing we need is for the world to publicly witness another resounding military defeat in the face of an economy that is admittedly now in severe deterioration. At that point, the Emperor will surely have no clothes. The US has remained Top Dog for the past half century because (a) we had a stable currency (b) with no viable alternative and (c) we had the military means to attack or defend anyone to adjust the world order as we saw fit. (a) and (b) are clearly things of the past. Our future as a world power depends on (c). Iraq has called that into serious question; events in Iran will provide a decisive answer.

[blahblahblah]

Allow me to summarize the responses that we will surely soon see to this post, so that we don’t have to waste any time reading them.

* Our economic problems are nothing in comparison to the problems we face from the islamofascists that want to kill us all.

* Our economic problems have nothing to do with George Bush or the pre-2006 Republican congress. They are all the fault of cowardly democrat traitor terrorist-appeaser commies.

* George Bush’s tax cuts have worked miracles on the economy, you people are all just too biased to see it.

* Al Gore is a fat poo-poo head and our economy would be much worse had he been elected president.

* The economy was good in the 90s only because it was so bad under George H.W. Bush. He did all of the hard work and Clinton took credit for the results. And Clinton got a BJ and lied about it hee hee.

[Arraya]

“The US has remained Top Dog for the past half century because (a) we had a stable currency (b) with no viable alternative and (c) we had the military means to attack or defend anyone to adjust the world order as we saw fit. (a) and (b) are clearly things of the past. Our future as a world power depends on (c). Iraq has called that into serious question; events in Iran will provide a decisive answer.”

Great post! However I think you are missing the most important thing here: An endless supply of cheap oil, which is the life-blood of our economy…

http://www.theoildrum.com/

[JWM in SD]

partpup I agree with you on almost everything except the military. The US military is still the best. If there was political will to take Iran, then it could be done conventionally, don’t kid yourself there. The problem is that the public is not in favor of it and would not tolerate the casualities incurred to do that.

[j]

The Canadian Dollar is now worth more than the US dollar. WOW the Fed still does not get it. They can not lower rates and save the housing market. They are just killing the dollar.

[(former)FormerSanDiegan]

Has anyone looked behind the facts behind the common perception that the FED, by lowering rates is killing the dollar.

If this were true, would the converse be true. i.e.. When the FED raises rates does that cause a stronger dollar ?

The answer is NO.

FACT:
In 2002 the Fed Funds Rate = 1.75%
In 2002 the Dollar Index = ~ 120

FACT:
In 2007 the Fed Funds Rate = 5.25% (prior to recent cut)
In 2007 the Dollar Index = ~ 82 (prior to recent cut)

So, the FED raised rates, in fact they TRIPLED the Fed funds rate, but the dollar still declined by more than 30% over this period.

It appears to me that the value of the Dollar is not really closely related to the Fed funds rate.

So, why all the buzz in the media about the FED killing the dollar ? It’s been declining over the past 5 years. Must be other factors at play here, don’t you think.

[drunkle]

add the deficit and money printing operations… if gold is a reasonable measure of inflation (dunno if i accept that tho), then the dollar has been sliding for a while.

if lowering the fed rate does not contribute to inflation, then it can’t do anything for the economy either…

volker increased the rate and reigned in the inflation of the 70’s.

[bsrsharma]

FormerSD: The $ index (assuming it is tied to exchange rate of a weighted basket of currencies) is a function of many variables. Approximately,

$ index = f(FFR, Federal budget deficit, Trade deficit, ….)

So, it can’t be compared with just FFR. If you want to do a more complex analysis, involve Federal budget deficit & Balance of trade deficit and run a multivariate regression

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