“Fears of dollar collapse as Saudis take fright”

[Bloat]

Great reading here. A good amount of doom and gloom though. I hope the future isn’t all bad. These things run in cycles and history repeats itself:

* In the late 80’s the total market value of Japan’s RE was double that of US RE. Their stock market value was fully half the world’s value. Much worse than our current bubble. “Japan’s economy would rule the world”.

* For the last 100 years the basis of the US Economy (and other’s) has been a conversion of cheap oil into wealth. The next 100 years?

* Major established currencies run long cycles, just 5 years ago the dollar was “too” strong and ok to let it drop (Greenspan). All else equal a currency getting weaker is a cause for it to get stronger and vice versa.

* The Euro is still a new currency and has looming problems with member counties not meeting reserves and running deficient spending beyond their charter.

* China will need to face a currency adjustment, when and how ugly (for them and us). Probably worse for them.

Ok, I jumped around alot,

Past doom and gloom periods: The Soviet threat, Vietnam, Oil Embargos, Jimmy Carter, S&L/RTC, DotCom, Iraq, RE Bubble, etc. Is now really worse than then, or does it just seem so. The next administration has an opportunity for great change (Republican I hope). Maybe a couple of recessions here and there, but hopefully no depression (or will history repeat the ’30s for us too?).

[JWM in SD]

Nice post Bloat, thanks for the historical perspective.

[partypup]

Bloat, I agree with you on one point: things do run in cycles, and history does repeat itself. But I think you are being overly-optimistic in focusing only on doom and gloom periods of the past 50 years. I think we need to dig a little further back to find a parallel to what’s going on today. The Perfect Storm of a crashing housing market, a volatile stock market and a credit crisis have happened only once before in American History: in 1929.

What makes the crisis especially frightening in this go round is that the dollar has never been weaker. During the Great Depression, the dollar was a safe haven, which allowed us to weather the storm better and help us get back on our feet more quickly. This is primarily because we lacked staggering levels of debt, and our currency was tied to gold.

And don’t fool yourself: the ugliness that is about to be unleashed will not be worse for China, 3/4 of its 1 billion people having never owned a car, a house, an iPod or a pair of designer shoes. The standard of living of the average Chinese citizen has not risen so far during this boom that they will be completely devastated when the crash comes.

No, the real pain will come to the indulgent, self-entitled, complacent American who has never experienced real pain, suffering, shortages or severe unemployment; the American who will have trouble adjusting to the fact that they may not be able to afford gas to get to work — and may have to walk or bike; that they may not have money to indulge in Christmas shopping or eating out; that they may not be able to buy a new car simply because they are bored with the 4-year old model in their garage; who won’t be able to take a trip every year or two to “get away from it all: that they may never be able to buy their own hope again or keep the one they have; that they may never be able to afford to send their child to college, because that is already becoming a luxury reserved for the upper middle and upper classes. Make no mistake, the coming “adjustment” will be much worse for people who are used to having it all.

History does and will repeat itself, yes. But just which bit of history we are about to repeat is the question. Personally, I believe that we will know by January 2008 whether this is crisis is one that most of us have lived through before, or whether we’re about to see something that only our grandparetns and great-grandparents have had the misfortune of experiencing.

Moreover, there’s not a damn thing that the next administration — Republican or Democrat — can do to reverse this crisis, unless they somehow harness the power to turn back the hands of time, maybe 30 years or so, before we accumulated massive debt, entitlement programs we no longer have the ability to pay for, and before we decided to import 70% of the goods we consume. I fear that the damage that has been done is irreversible, at this point, and that the 2008 elections will be largely about peddling a sense of false hope and denial. Denial is largely what got us into this mess. How long have we known about the looming deficit crisis and entitlement crisis and thought, “Well, things are still fine. So there must not be a problem, right?”

The wise American is one who will be prepared to accept the fact that their standard of living is about to be lowered (unless they take action and make investments now to prevent that from happening to them), as has happened to populations of formerly powerful civilizations through world history. As Americans, we are neither special or unique in this regard.

Again, I truly hope that my predictions are wrong. But we will know soon enough. Let’s return to this thread in 4 months…

PS — I’m sorry if this is perceived as too much “doom and gloom” for most, but it just seems to me that “this time it IS different”, fundamental changes to our world are happening, we need to be honest and recognize this instead of hoping and praying that this will be just a blip in a cycle that will end in continued prosperity for the US.

I don’t think there is any harm in being prepared for the worst.

[partypup]

“that they may never be able to buy their own hope again or keep the one they have;”

Sorry for the typo: meant “house”, not “hope”.

[NotCranky]

“Buying hope” belongs on another active thread.

“What’s the next bubble?”

[bubba99]

Doom and Gloom- for sure, but when you speak of the metoric rise and fall of the United States, it all seems possible.

Unlike the European conutries that have a thosand years or more of history, and a long rise to economic power before their ultimate fall – the U.S. peaked in only a few hundred years, and the fall could be a few decades.

We (the U.S.) have exported most of our manufacturing, intellectual property development, and raw material acquition to other countries. We make little except food, and consume a lot. Our government is way in debt and promises to pay impossible benefits in the future to “retired” workers.

I really do not see what can save us from our own desire to destroy our own economy. The dollar has competition for the world currency, the once mighty U.S. military is almost ham strung in two little mideast counties, and we have real competition from China and the rest of the developing world for oil.

Yep, the great era of the United States is almost over.

[JWM in SD]

“U.S. military is almost ham strung in two little mideast counties…”

I agree with all you said except this statement. They are not militarily hamstrung they are politically hamstrung. The job of the military is to break stuff not be policemen. The problem is a bad definition of what their mission was supposed to be. In the case of Iran, don’t kid yourself, the US Military unrestrained could flatten them easily. The problem is whether the world court wold accept that and whether the US citizens have the stomach for the casualties involved. People seem to forget how brutal WWII really was and it was over in a matter 4 years. Iraq is nothing compared to that. As much as I dislike the comparison to vietnam, I think the Iraq situation is suffering the same set of issue.

[bsrsharma]

Wile E Coyote moment

partypup has some serious company from NYT economist Paul Krugman. He published this analysis last year:

http://economistsview.typepad.com/economistsview/2006/04/krugman_will_th.html

He revisited the topic recently in a NYT Op-Ed

September 20, 2007, 11:26 pm
Is This the Wile E. Coyote Moment?

Lots of buzz suddenly about the possibility of a sharp fall in the dollar. The Canadian dollar is back at parity with the greenback; there are rumors that the Saudis are planning to diversify into euros, and maybe even that the Chinese might break the dollar peg. A nice summary at Barry Ritholtz’s blog The Big Picture.

I could say that I saw this coming; the problem is that I’ve been seeing it coming for several years, and it keeps not arriving (and I don’t know if this is really it, even now.) The argument I and others have made is that the U.S. trade deficit is, fundamentally, not sustainable in the long run, which means that sooner or later the dollar has to decline a lot. But international investors have been buying U.S. bonds at real interest rates barely higher than those offered in euros or yen — in effect, they’ve been betting that the dollar won’t ever decline.

So, according to the story, one of these days there will be a Wile E. Coyote moment for the dollar: the moment when the cartoon character, who has run off a cliff, looks down and realizes that he’s standing on thin air – and plunges. In this case, investors suddenly realize that Stein’s Law applies — “If something cannot go on forever, it will stop” – and they realize they need to get out of dollars, causing the currency to plunge. Maybe the dollar’s Wile E. Coyote moment has arrived – although, again, I’ve been wrong about this so far.

Much more about all this in a thoroughly incomprehensible paper I recently published in the European journal Economic Policy. Don’t bother clicking if you hate funny diagrams and Greek letters.

[Bloat]

Pup,

I agree with much of what you say, but:

1929 was much different and was a cause for much real change that ensured future prosperity (along with being an undamaged WW2 victor). The current stock market is not historically excessivley volatile. The crashing houseing market and credit crisis have yet to play out.

I recall the Carter admin as the gloomiest: something like 10% unemployment, 16% mortgages, gas lines, crime, Iran hostage, etc. It turned out to be the bottom, the beginning of a great bull market in both stocks and RE. Not a parallel to today, just an observation.

For China, they have 300M of their population that have acheived some degree of prosperity mostly dependent on a strong US economy. This segment exerts extreme pressure on their polical leaders for continuation.

I agree with your comment: “the real pain will come to the indulgent, self-entitled, complacent American who has never experienced real pain, suffering, shortages or severe unemployment . . .” (much like 1979).

I slightly favor a Republican administration, but from either side don’t underestimate the power of a charismatic president/admin. I’m not sure who that would be now (maybe Guilianni) but Bush just is not it(amoung other things). Regan, Clinton, Kennedy had it, compare to those who didn’t.

On the dollar, check out: http://eh.net/hmit/exchangerates/ for a long term historical perspective. The relatively controlled (so-far) decline of the dollar is a good thing from my perspective. No country wants to see a collapsed dollar. A weaker dollar is great for our manufacturing, exports, jobs and why other countries build their products here (autos, etc). It is bad for China.

JWM – definately agree with you regarding the polically hamstrung military. Also, the Iraq war is a relatively cheap war to date in terms of our budget and gdp.

The gloom: Historically, all great dynasties have declined or collapsed, so ours is inevitable but when and how bad. Ours is based on capitalism and energy (oil). I say a real plan away from oil to nuke/solar/wind/geo/etc could delay our fate.

[Arraya]

Doom and gloom?

About a year ago, my fiancé and I were thinking of buying a house. Reading mainstream media back then would lead one to believe that we were experiencing a mild softening of the market and surely would recover in early 08, HA!. After doing a little research on the Internet I found a few “bubble” articles speaking of 40-50% declines. A few of my acquaintances, some in the RE industry and others, well educated professionals, pawned if off as doom and gloom. Funny, all it takes for a reasonably intelligent, rational person is a few hours of studying Piggington’s to figure out the housing market is in dire straights. Thank you, all you doomersayers out there!

One person’s doomsayer is another’s savior I guess…

The mainstream media is practically useless in doing it’s job as a watchdog for the masses. The financial clusterfuck brought on by the fed and wall street that many of you allude to pales in comparison to the economic havoc that most likely will be brought on by declining oil production. By the time the current financial mess unwinds over the next few years we should be at peak or pretty damn close, per most experts. We will be changed forever and it will be painful. I really wish I did not think so. Try spending some time studying the oil drum blog and not coming to the same conclusion. Peak oil is the biggest white elephant in the room and the US is the least prepared to deal with such a problem.

But I am sure we will get ample warning from the media and proper steps will be taken by the feds, right?

“We have only two modes—complacency and panic.”
—James R. Schlesinger, the first energy secretary, in 1977, on the country’s approach to energy

“Of all races in an advanced stage of civilization, the American is the least accessible to long views… Always and everywhere in a hurry to get rich, he does not give a thought to remote consequences; he sees only present advantages… He does not remember, he does not feel, he lives in a materialist dream.”
—Moiseide Ostrogorski (1902, 302-303)

[Arraya]

“The gloom: Historically, all great dynasties have declined or collapsed, so ours is inevitable but when and how bad. Ours is based on capitalism and energy (oil). I say a real plan away from oil to nuke/solar/wind/geo/etc could delay our fate.”

Bloat-The Dems seem to be much more vocal regarding decreasing oil dependency. Yeah, it’s just talk, but at least they are vocalizing it…

The Republicans just seem to be comparing dick sizes in regards to the evil terrorists.

[Bloat]

Arrays,

You’ve got a way with words,
Agreed regarding the Dems & Oil. I am slightly Republican because I want to be taxed less and I don’t want my taxes to pay for a national healthcare boondoggle or illegal immigrant benefits. Maybe a Repub admin not rooted in oil is what is needed.

To bring this back to the housing market, in the future, when 1kw cost 30 cents, I see a housing value component based on a roof’s solar orientation and if it has solar already. This is a goal for my next house.

[drunkle]

some people have gone throught the experiment of trying to buy non chinese goods. their results were less than favorable.

the yuan is pegged to the dollar, but as a result, china is experiencing serious inflation due to a falling dollar.

if china revalues the yuan, what will happen?

americans can’t buy goods. not even shitty chevys since they’re made in mexico. certainly not the oil that we’ve become dependant on, built our communities and society around.

american food will be exported for higher profit in foreign countries (china).

what else do you need for a convincing doom and gloom scenario?

[bsrsharma]

Japanese Shift Cash Out of U.S. Investments

TOKYO, Nov. 22 — Many in Japan are starting to speak of “quitting America,” but they are not talking about a rise in anti-American political fervor. Rather, they mean a move away from American investments that is altering global capital flows and helping to weaken the dollar.

The move is seen in decisions of individual investors like Daijo Okudaira, a 66-year-old clerk at a Tokyo consulting company. Like many Japanese, Mr. Okudaira had long limited his overseas investments to the relative safety of securities from developed countries, particularly the United States.

Starting late last year, however, Mr. Okudaira made drastic changes to his portfolio, putting $50,000 into mutual funds focusing on stocks in China and other emerging economies. He said he had been drawn to these countries because they seemed to hold much brighter growth prospects than the United States.

“People say the engine of the global economy is shifting from the United States to emerging countries,” Mr. Okudaira said. “Emerging countries have growth and energy that America and Europe lack. They remind me of Japan 40 years ago.”………..

[bsrsharma]

Japanese Shift Cash Out of U.S. Investments

TOKYO, Nov. 22 — Many in Japan are starting to speak of “quitting America,” but they are not talking about a rise in anti-American political fervor. Rather, they mean a move away from American investments that is altering global capital flows and helping to weaken the dollar.

The move is seen in decisions of individual investors like Daijo Okudaira, a 66-year-old clerk at a Tokyo consulting company. Like many Japanese, Mr. Okudaira had long limited his overseas investments to the relative safety of securities from developed countries, particularly the United States.

Starting late last year, however, Mr. Okudaira made drastic changes to his portfolio, putting $50,000 into mutual funds focusing on stocks in China and other emerging economies. He said he had been drawn to these countries because they seemed to hold much brighter growth prospects than the United States.

“People say the engine of the global economy is shifting from the United States to emerging countries,” Mr. Okudaira said. “Emerging countries have growth and energy that America and Europe lack. They remind me of Japan 40 years ago.”………..

[Author]

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