Dollar loses reserve status to yen and euro

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After printing up trillions of new dollars and new bonds to stimulate the US economy, the Federal Reserve chief is now boxed into a corner battling two separate monsters that could devour the economy – ravenous inflation on one hand, and a perilous recession on the other.
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“He’s in a crisis worse than the meltdown ever was,” said Peter Schiff, president of Euro Pacific Capital. “I fear that he could be the Fed chairman who brought down the whole thing.”
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I guess TARP wasn’t the answer that everyone said it was…
They grumble that they’ve loaned the US record amounts to cover its mounting debt, but are getting paid back by a currency that’s worth 10 percent less in the past three months alone. In a decade, it’s down nearly one-third.
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The next Treasury Auction could the massive melt down that has been predicted for the past year. Either yeilds have to go up to 12% or so or the next auction will fail - turning the current recession into a depression.
 
Texas_Roofer said:
All other countries who did not control the reserve currency have not need rations so why should we?
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Because countries will begin dumping dollars. This, along with profligate spending and money printing, may conspire to make the dollar all but worthless.
 
Texas_Roofer said:
All other countries who did not control the reserve currency have not need rations so why should we?
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Because other nations don’t issue hundreds of billions in debt on a monthly basis to support their standard of living. If the US can’t borrow on the international markets deficit spending is corrected in one of three ways, massive tax increases that destroy the economy, massive influxes of devalued currency, or massive cuts in government spending. Which do you think will happen?
 
With all do respect, your post is out of line. First of all the NY Post is hardly an objective or well repected member of the print media. They sensationalize and scare people in order to sell papers. They claim that “ravenous inflation” threatens the dollar. This is unsupportable. The classic definition of inflation is “too many dollars chasing too few goods”. There are basically two kinds of inflation: demand pull and wage push. So, let’s examine the case.

The macroeconomic theory would dictate that when governements print money and circulate it into the economy, thru banks, it causes demand to expand. This is because the banks presumably lend the money to producers, who in turn buy raw goods and capital goods and begin producing more consumer goods. The concommitant rise in demand for raw goods and capital goods causes relative scarcity and that causes prices for said goods to rise. The producer then passes along those prices to the consumer. Presumably, they have to employ more people to produce those goods and that puts more money on the street in the form of wages. So, the combination of additonal supply of money and increased wages create the classic demand pull inflation. That’s the theory. Relaity is somewhat different.

The banks have not lent the money. Instead they have kept the money in their reserves in order to shore up their balance sheets and thus bring up the value of their stocks. If you read the finanial news daily, you would know that lending has continued to be all but frozen. So, since the banks have not lent the money out, there has been very little flow of money into the economy. Secondly, I seriously doubt anyone thinks that wages are going up. Unemployment continues to rise and there are 6 applicants for every job offered. While inflation may very well be a problem in 6 or more months, it is probably not a big problem anytime soon.

As far as the dollar being the currency of choice, it’s a more difficult case. There was an unsubstantiated report by tthe Independent a british tabloid much like the NY Post that reported that Suadi and the so called BRIC nations had talks that would have taken Oil off of the dollar peg. This was roundly denied by the heads of the counteries involved, but that doesn’t mean it didn’t happen. This might mean the end of Pax Americana, but panic in the streets hardly. Britian, it can be soundly argued, lost it’s status as a true empire when the Pound Sterling stopped being the currency of choice sometime in the late 1800’s. However, there was no panic in the streets and they continued on as a dominant force in the world political-economy for decades.

Out nation needs more intellect and less extremeism if we are to survive the current calamity that weighs upon us.**
 
Oh ok, that makes a lot of sense. Which is why the dollar has lost more than 10% of its value in the past year. Probably another reason gold broke $1000. That must mean our dollar is really strong! We are American. Zimbabwe could never happen to us! I didn’t just read this article and come to this conclusion. I have been studying the demise of our dollar for quite some time. Finally, there is an article out there (since most people pay attention to mainstream media, I figured this would be a good article to post) to back up some of my claims! (I have been made fun of in the past for stockingpiling!)

Anyways, may I ask what economics you study? I am assuming Keynesian. If so, you should take a look at Mises.org 😉
 
Texas_Roofer said:
All other countries who did not control the reserve currency have not need rations so why should we?
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a_priori said:
Because countries will begin dumping dollars. This, along with profligate spending and money printing, may conspire to make the dollar all but worthless.
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They will dump the dollars where? That is the whole thing about being the reserve, to dump you have to dump some where into a replacement currency. So say you dump $10 to 1 euro, are there enough euro? Will they print more? The printing of euro should equal European GDP not international issues
SamH said:
Because other nations don’t issue hundreds of billions in debt on a monthly basis to support their standard of living. If the US can’t borrow on the international markets deficit spending is corrected in one of three ways, massive tax increases that destroy the economy, massive influxes of devalued currency, or massive cuts in government spending. Which do you think will happen?
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assuming that happens we would lose the ability to import. So will that loss crush us? Probably not, Americans would be exporters as others would not accept our worthless currency. So our standard of living will lower to the extent these missing imports hurt us (as crude).
 
Texas_Roofer said:
assuming that happens we would lose the ability to import. So will that loss crush us? Probably not, Americans would be exporters as others would not accept our worthless currency. So our standard of living will lower to the extent these missing imports hurt us (as crude).
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I agree our standard of living will drop. Be prepared for 70% of the people of our country to start living like the poor Chinese or Indians. The working class in America will be living with a single room home, sporadic power, child labor, and limited education, essentially a subsistence existence. Yeah, it will be great…
 
SamH said:
I agree our standard of living will drop. Be prepared for 70% of the people of our country to start living like the poor Chinese or Indians. The working class in America will be living with a single room home, sporadic power, child labor, and limited education, essentially a subsistence existence. Yeah, it will be great…
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Change you can believe in.

“We are five days away from fundamentally transforming the United States of America.”
—Barack Hussein Obama, Oct. 30, 2008.

I guess he wasn’t lying, was he? Obama will transform us from the world’s greatest economy into one approximately the same as Bangladesh.
 
There’s no doubt the Dollar is losing value. I am in the invesment world as a profession. I have clients in Canada and this is a topic of discussion. Furthermore, there is no doubt that this is a net negative for our country. My objection is to what seems to me to be scare mongering. The Dollar is certainly at a crisis point, but I really don’t think it’ll cause panic on the streets inless we give in to it. I must say though that I’m a little uncomfortable with the heat of this thread. I don’t want to argue. I was just trying to shed some light and moderation on the subject. I’m sorry if I offended you and keep you as brothers and sisters in faith. Intellectually and professionally, however, this is a daily concern for me. I provide my sales staff with daily updates on this situation, so I’m interested.

May the grace and Love of the Lord be with all
 
perfectpeach said:
Oh ok, that makes a lot of sense. Which is why the dollar has lost more than 10% of its value in the past year. Probably another reason gold broke $1000. That must mean our dollar is really strong! We are American. Zimbabwe could never happen to us! I didn’t just read this article and come to this conclusion. I have been studying the demise of our dollar for quite some time. Finally, there is an article out there (since most people pay attention to mainstream media, I figured this would be a good article to post) to back up some of my claims! (I have been made fun of in the past for stockingpiling!)

Anyways, may I ask what economics you study? I am assuming Keynesian. If so, you should take a look at Mises.org 😉
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perfectpeach said:
I bet Zimbabwe WISHED they would have 😉
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It sounds like Zimbabwe was dependent on imports and had little exports which would flourish
SamH said:
I agree our standard of living will drop. Be prepared for 70% of the people of our country to start living like the poor Chinese or Indians. The working class in America will be living with a single room home, sporadic power, child labor, and limited education, essentially a subsistence existence. Yeah, it will be great…
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i do not think we are that dependent on imports
 
Big_Ro said:
The banks have not lent the money. Instead they have kept the money in their reserves in order to shore up their balance sheets and thus bring up the value of their stocks. If you read the finanial news daily, you would know that lending has continued to be all but frozen. So, since the banks have not lent the money out, there has been very little flow of money into the economy. Secondly, I seriously doubt anyone thinks that wages are going up. Unemployment continues to rise and there are 6 applicants for every job offered. While inflation may very well be a problem in 6 or more months, it is probably not a big problem anytime soon.
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Le’ts not confuse liquidity with “reserves”, and let’s certainly not think that cash on a balance sheet necessarily improves a bank’s balance sheet or its stock value. “Reserves” and typically thought of in terms of “net worth”, the item of much greater interest on a balance sheet than liquidity. Keeping cash does nothing for “reserves” in that sense. If, say, a bank had cash equal to 30% of its assets (very high) it would be more a cause for investor concern than compelling interest in the stock. Why? Because cash does not earn much today and holding that cash might actually guarantee losses. That bank with 30% of its assets in cash might have a tangible net worth of 5%, which would be disasterously low. On the other hand, a bank with 15% tangible net worth and 10% cash might be a very strong bank, and probably is. If the latter has good earnings, that’s the bank to invest in, not the one that is simply holding onto a lot of cash. Every investor who knows anything about banks, knows all that.

But I will agree that banks have a lot more cash than they used to have. There are two reasons for that. First, when interbank lending was uncertain, most banks raised cash because if they had a “run” of withdrawals, they couldn’t be sure of being able to borrow cash to satisfy it. That has largely faded as a concern, but the regulators are still requiring higher liquidity levels than previously. But most importantly, businesses aren’t borrowing, particularly small businesses. I talk to a lot of bankers, and their complaint is the lack of decent loans. Businesses just don’t want to borrow (or buy equipment or hire employees) because they don’t know what Pelosi/Reid/Obama will saddle them with next. Small businesses in particular are persuaded that P/R/O is going to hammer them, and don’t want to increase their vulnerability. Also, (and again, the same cause) businesses are reluctant to borrow even at today’s rates, for fear that two or three years from now, they will be paying 20% interest because of all the government overspending. People are saving more, but businesses are borrowing less. That causes cash balances to go up. Banks don’t like that imbalance, I can assure you.
 
Dollar devaluation is good for exporters, but not too good for consumers or non-exporting businesses.

Petroleum is necessary for all kinds of things in the economy, and its price is not determined domestically. It’s determined internationally, and the relative value of currencies matter a lot. For example, two summers ago when oil prices peaked at around $140, its “real” cost in Euros (compared to the relative value of the dollar to the Euro at the dollar’s peak) was only about $70.

And petroleum is not the only necessary raw material import.

So, with dollar devaluation, it becomes more difficult for American businesses to compete, not in overseas sales, but in overseas purchases, and it becomes more difficult for individuals to live with the international cost increases of things like petroleum, copper, nickel, etc, etc, etc, because they increase the cost of every good and service sold in America.

One could say it wouldn’t matter too much if everything went up at the same time; wages, etc. But usually wages don’t. In any event, is it really going to help a person who finds himself in a higher tax bracket simply because of wage inflation, even if wage inflation keeps pace with raw material price inflation? No, it doesn’t. And, of course, it doesn’t help him at all if his interest rates on borrowed money go to 20% or higher because the U.S. debt is hard to “sell” either to foreigners or domestically without a huge interest premium.
If the “market rate” for interest on Euros or the Yen is, say, 5%, equivalent value paid on dollar debt might have to be several times that.

The only people who benefit from dollar devaluation other than exporters are those who have fixed rate, low-interest mortgages, but no other debt, and who keep their jobs, but don’t get “inflated” into higher tax brackets. That would not be most of us.
 
Ridgerunner said:
I talk to a lot of bankers, and their complaint is the lack of decent loans. Businesses just don’t want to borrow (or buy equipment or hire employees) because they don’t know what Pelosi/Reid/Obama will saddle them with next. Small businesses in particular are persuaded that P/R/O is going to hammer them, and don’t want to increase their vulnerability. Also, (and again, the same cause) businesses are reluctant to borrow even at today’s rates, for fear that two or three years from now, they will be paying 20% interest because of all the government overspending. People are saving more, but businesses are borrowing less. That causes cash balances to go up. Banks don’t like that imbalance, I can assure you.
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I agree. Underwriting has returned to the market, people and businesses are required to show their ability to pay their loans back. Right now businesses in solid financial positions are not borrowing due to the uncertainty created by the government imposing itself in the markets and the massive debts being run up. The company I work at is doing OK, but the last thing we are considering is borrowing money to expand - our main concern is conserving our cash position and continuing to shed debt. Operating loans have adjustable rate interest, and many remember the early 1980s when even moderately leveraged companies went bankrupt when those loans hit 22% and higher. Our current strategy is being reflected in any business journal you care to read, no one wants to borrow. The only businesses that are borrowing are doing so because they are in dire straits and need cash to keep their doors open - but banks aren’t lending to them because their ability to pay them back is in serious doubt. This is affecting small businesses the most (employers of 100 or less employees employ over half the private sector workforce), there are no government bailouts.

The loan markets are not frozen, in fact it’s a great time to get a home or commercial loan if you can show you can pay it back. Home prices have dropped and loans are easy to get (100% financing is still common) but you have to show that you can make your payments (optional two years ago).
 
SamH said:
I agree. Underwriting has returned to the market, people and businesses are required to show their ability to pay their loans back. Right now businesses in solid financial positions are not borrowing due to the uncertainty created by the government imposing itself in the markets and the massive debts being run up. The company I work at is doing OK, but the last thing we are considering is borrowing money to expand - our main concern is conserving our cash position and continuing to shed debt. Operating loans have adjustable rate interest, and many remember the early 1980s when even moderately leveraged companies went bankrupt when those loans hit 22% and higher. Our current strategy is being reflected in any business journal you care to read, no one wants to borrow. The only businesses that are borrowing are doing so because they are in dire straits and need cash to keep their doors open - but banks aren’t lending to them because their ability to pay them back is in serious doubt. This is affecting small businesses the most (employers of 100 or less employees employ over half the private sector workforce), there are no government bailouts.

The loan markets are not frozen, in fact it’s a great time to get a home or commercial loan if you can show you can pay it back. Home prices have dropped and loans are easy to get (100% financing is still common) but you have to show that you can make your payments (optional two years ago).
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I talk to a lot of small businessmen (some not so small, but it’s all relative) and all of them are taking the very same approach your company is taking. The one exception I have seen in the last 9 months is one manufacturer who borrowed cash short term to buy some virtually new GNC toolmaking machines at a bargain-basement price in a bankruptcy liquidation. But he’ll pay it off this year. There is a little of that kind of thing. Also, there are lots of ranchers around here, and some still borrow for the “growout cycle”, (less than a year) but never to expand and nothing long-term. More marginal ranchers have been liquidating slowly for months. We don’t have a lot of row crop farmers, but they do some cyclical borrowing too, but not to buy land, better machinery or anything else. Poultry integrators are reducing capacity by attrition. I think we’re going to see significant food price increases in 2010. If so, people could rightly blame this administration and congress for that, but probably won’t.

It’s not that ranch and farm product prices are bad. They’re not. The distrust of this government is profound and pervasive among people who produce, but do not have the financial ability to “pay to play” like the giants do. Among other things, (I know more about ranching than farming) ranchers know if they expand their land or their herds by borrowing, they’re not only facing much higher interest rates in the future, but they’re going to be hampered by the “tax the rich” thing in making principal repayments if they do. Ranchers and farmers of even moderate size have big cash flows but not all that much left to spend, and a lot of their “big income” goes into debt repayment. (Land and breeding stock are really expensive.) Principal repayment does not lower your “ordinary income” for tax purposes, so farmers and ranchers (businessmen too) will pay “rich guy taxes” on money they repay to banks when Obama’s tax the rich scheme kicks in, so they’re breaking their backs to pay off as much as possible now. The tax increases will make loan repayment just that much more difficult. It’s a shame, too, because those are precisely the people who know how to turn borrowed money into production of things people need.

But you’re right. Banks will no longer allow people to “borrow themselves rich”. Some people equate that with unwillingness to loan at all, whereas it’s really an unwillingness to make bad loans.
 
Ridgerunner said:
But you’re right. Banks will no longer allow people to “borrow themselves rich”. Some people equate that with unwillingness to loan at all, whereas it’s really an unwillingness to make bad loans.
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And right now people should be listening very carefully to their lender. If they’ve been turned down for a loan the bank probably did them a favor. It’s an unbiased appraisal of their ability to pay off the loan; neither the lender nor borrower wants to deal with the alternative.
 
Ridgerunner said:
The only people who benefit from dollar devaluation other than exporters are those who have fixed rate, low-interest mortgages, but no other debt, and who keep their jobs, but don’t get “inflated” into higher tax brackets.
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Just locked 4.75% fixed mortgage, 0 points for the next 30 years (though I’ll likely set payments to be 25 years). As long as I can keep these old cars running, that’s ME! 😊
 
manualman said:
Just locked 4.75% fixed mortgage, 0 points for the next 30 years (though I’ll likely set payments to be 25 years). As long as I can keep these old cars running, that’s ME! 😊
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Exhibit “A”.

The 30 year lock is what makes it valuable. Don’t be surprised if there is a massive spike in interest rates that drives the value of your house down. If/when interest rates double your house could easily lose 30% or more of its value - but with your locked in interest rate you’ll be making the the same or less of a payment than if you had just bought it at the lower price and financed at the higher rates. This works out OK as long as you don’t have to move.
 
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