Monday was a holiday in America – Labor Day. In global markets the dollar went nowhere and oil went up. Oil is above $70 again… its most recent rise attributed to hurricane winds blowing towards the Gulf of Mexico.
The risk of economic recession is increasing, according to a Bloomberg report. Both business and personal spending are being curtailed by tightness in the credit channel. At the top end, some half a trillion dollars worth of deals are said to be stuck… unable to get financing. At the bottom, ordinary homeowners are facing up to ‘life without refinancing’. It’s not exactly that they are being forced to live within their means; instead, they are just discovering what their means are.
GDP in the United States is growing at a reasonable pace , but the growth is not showing up in paychecks. Our old friend, Scott Burns, reports that wages grew less than inflation during eight of the nine years between ’88 and ’96. Then, in the most recent 10 years, wages beat inflation in almost two of every three years. But the gain was so slight – just $10.61 per week for the whole period – that is was probably erased by rising health care premia. Incomes have been stagnant for at least a generation, says Scott.
Recession is inevitable. And with economic recession will come a lower dollar, say George and Helen Pardee, writing in the Financial Times.
“Now is the time to sell the dollar,” they say.
“One of the surest bets over the last 35 years was betting against the U.S. dollar,” wrote our old friend Gary Scott recently. Gary reminded us that he practically invented the carry trade; more than three decades ago, he began borrowing in one currency and putting the money on deposit in another, pocketing the difference. He called it the ‘ multi-currency sandwich .’ He continues to do it today… using fairly low risk, long-term placements and working with a Danish bank. The way Gary does it, the ‘carry trade’ looks less like wild speculation and more like prudent money management.
Why would the dollar be an especially weak currency? “Because its issuer is especially strong,” is our answer. The dominant imperial power always has a financial advantage. In the modern world, it provides the reserve currency that is used for international trade and global banking. Oil is still (mostly) priced in dollars. So are gold and other key commodities. People use dollars like they use English, to get around in the world. Other nations have to support their own currencies. But the dollar gets much of its support from abroad. Foreigners use it to make billion-dollar multi-national LBOs… and to buy illegal drugs on the street corner.
Americans are also the biggest shoppers in the world… which gives every exporting economy on the planet an incentive to hold the dollar up against its own currency, lest a rival steal a march on it. There is a bias in favor of the dollar, in other words, that goes beyond its actual financial strength.
Our general rule here at Markets and Money is that a man will always seek to hustle something for nothing – as long as he can get away with it. Having the world’s reserve currency permits the United States to get away with the grandest larceny in history. It has spread its paper all over the globe, and as the dollar goes down in value, the foreigners lose money. Too bad for them; they should have known better.
Charles de Gaulle, aided by his sharp economics advisor Jacques Reuff, did know better. Back in the ’60s he noted the ‘exorbitant privilege’ that the dollar enjoyed. He instructed his treasury officials to lug their dollars to Washington and ask for them to be redeemed in gold. This action by the French led to what looked to the Nixon Administration like a run on U.S. gold. On August 15th, 1971, the Nixon government effectively reneged on nearly two centuries of good faith and promises, refusing to honor its paper. Henceforth, it told the world – you’re on your own; your dollars are worth only what you can get for them on the international market.
For a while, it looked as though Americans wouldn’t be able to get away with much more inflation. The world was on to the scam. The dollar was falling sharply. But then Paul Volcker came along and restored faith in the greenback. Soon the coast was clear again.
Still, the dollar slips and slides and America faces an economic recession. You could buy a euro, soon after it first came out, for just 88 cents. Now, it will cost you $1.36. A gallon of gas… a bushel of wheat… a year at Yale… everything is rising against the dollar.
“Our government just flips a switch, and out pops more money,” says Strategic Investment ‘s Dan Amoss. “This kind of behavior is detrimental to our future financial stability.
“Who cares if you have a million dollars tomorrow, if you have to spend $5 to buy what cost $1 today?”
Markets and Money