Good Afternoon!
"Try not to become a man of success but a man of value."
Albert Einstein |
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The U.S. dollar has been falling this year. In the past six months, the dollar has slipped 11.5 percent on a trade weighted basis. Angst is increasing around the world as critics of the Obama administration worry about the future of the American dollar as the world's reserve currency.
In the early 1970's, OPEC (Organization of Petroleum Exporting Countries) agreed that all oil would be sold in U.S. dollars. In fact, today almost all commodities are sold in U.S. dollars. That forces countries to hold large reserves of dollars for trade purposes. Other countries have been conducting secret meetings (so the rumor goes) to discuss the case for replacing the U.S. dollar as the world's reserve currency. You would expect that a currency of such esteem would be defended and be rock solid.
The dollar is anything but solid and is certainly not being defended. "It is very important to the United States that we continue to have a strong dollar," said Tim Geithner recently. As the Secretary of the Treasury, he is parroting what his predecessor, Hank Paulson vigorously expounded last year. Yet, no action has been forthcoming. Instead, Mr. Geithner continued, "We recognize that the dollar's important role in the system conveys special burdens and responsibilities on us and we are going to do everything necessary to make sure we sustain confidence." The ever-increasing chasm between action and talk is what has the world on edge. In short, international confidence is waning as world leaders grapple with the impact of the dollar on their own countries.
A weak dollar benefits our country's exporters. Companies like Microsoft, Intel, Proctor and Gamble are very pleased with the administration's course of action. Other countries flock to buy their products because they are cheap relative to their home currency. Most important is the obvious which is lost on Washington but certainly not by other nations. By allowing the dollar to continue slipping and sliding over the abyss, the government can pay their debts with cheaper money. That brings up another problem.
Other countries are becoming more anxious and concerned about our debt. For some odd reason, our politicians have lost sight of a very important concept and that is the timely management and repayment of debts. In recent years, debt has become the new source of money. When we need money to spend, we simply borrow it and that is supposed to increase the net worth of Americans.
If you remember from previous emails, all money is created by banks. The government has no printing presses! The only thing the government does is mint coinage, a very small amount indeed relative to printed paper. By lending money, the banks create money. When interest rates are extremely low as they have been for almost a decade, there is a huge demand for cheap loans. The increase in loans then creates more and more money as the appetites increase. That is all well and good, which led Dick Cheney to remark that, "deficits don't matter."
Poor Mr. Cheney. In his eight years as Vice President, he never came to realize that deficits have to be paid back. Debts cannot be rolled over and ignored forever. That is becoming clearer by the day as world leaders grapple with the ever increasing debt which is driving the dollar south. Creditors are squawking. China owns about half of our treasury bonds, notes and bills. They have been sending loud and clear messages that they will not stand for the sinking greenback forever.
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So what might happen? For one thing, there are rumors that a lot of those dollars may return to the U.S. in the form of real estate purchases. Our housing and commercial real estate markets are struggling. Some experts are predicting a further drop of 11% to 20% in housing prices before they stabilize later next year. Commercial loans are starting to come due and need to be refinanced but with many properties "underwater", it is likely that the default rate will soar. Commercial property prices have plummeted 47% in Manhattan this year. Since China owns about a trillion dollars of our bonds, they could become buyers of real estate. Converting cash to real estate would give them a large percentage of our real property. This would not only protect them from the declining dollar but would put them in position to really strike it rich when the inevitable storm of inflation hits.
The other thing they could do is buy up the stock of our public companies. They could buy one of our weak, struggling banks or set their sites on a high tech firm. This would allow them a foothold in our economy which would give them a stronger voice while shedding dollars that are becoming increasingly worth less with each passing day.
While America may be banking on an export-led recovery, that hurts those countries dependent on exports. The Eurozone is heavily dependent on exports. As the dollar sinks, they are getting anxious as well. Germany recently reported a surprise fall in exports. China has suffered less just because they have pegged the renminbi to the dollar. Other Asian countries are working to try to slow the dollar's decline which is damaging their ability as major exporters to pull out of the recession.
For now, all is well on Wall Street. The declining dollar is causing money to flow into stocks and commodities. The entire recovery of the stock market, in recent weeks, can arguably be traced to a weak dollar. As risk appetites increase, stocks are rising despite very anemic economic numbers. Since a weak dollar also could imply some inflationary pressures, commodity prices are responding as well. Oil has jumped to its highest level this year and gold is bumping against all time highs. When Wall Street is happy, the Federal Reserve Board is happy, the politicians are happy and the Obama administration is happy.
They are happy for now but they need to watch out. These things can end badly as it did in the Carter administration of the late 1970's. Countries could eschew our bonds which will drive up interest rates. This could stunt the recovery, put the brakes on home buying and cause lending to dry up even more than it has this year. Inflation could skyrocket and continue the erosion of American's net worth. Most at risk will be the retirees living on a fixed income and the baby boomers seeking to retire at a time when so few are financially prepared.
Mr. Geithner, do as you say and defend our dollar. Yes, we all know that the stock market will get damaged and Wall Street will suffer when the dollar strengthens but the potential damage from inaction is simply not worth the cost to everyday American families. Please don't lose sight of the backbone of our country.
By: Robert M. Vance, MS, ChFC, CLU, CFP®
© Vance Capital Management, LLC
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It's a slow day in a little Vermont town. The sun is beating down, and the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit...
On this particular day a rich tourist from back east is driving through town. He tops at the motel and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs in order to pick one to spend the night.
As soon as the man walks upstairs, the owner grabs the bill and runs next door to pay his debt to the butcher.
The butcher takes the $100 and runs down the street to retire his debt to the pig farmer.
The pig farmer takes the $100 and heads off to pay his bill at the supplier of feed and fuel.
The guy at the Farmer's Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her "services" on credit.
The hooker rushes to the hotel and pays off her room bill with the owner.
The hotel proprietor then places the $100 back on the counter so the rich traveler will not suspect anything.
At that moment the traveler comes down the stairs, picks up the $100 bill, states that the rooms are not satisfactory, pockets the money, and leaves town.
No one produced anything. No one earned anything.
However, the whole town is now out of debt and now looks to the future with a lot more optimism.
And that, ladies and gentlemen, is how the United States Government is conducting business today.
P.S. Except for the Prostitute, everyone else had to pay income tax on this single $100 bill.
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Thanks for reading another Vance Advance
Working for your Wealth and Peace of Mind,
The Vance Capital Management Team |
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