“No, this time I think we’re headed down…” We were having dinner with the staff of MoneyWeek magazine. Its editor, Merryn Somerset Webb, was explaining why she thinks the tide really has turned. “This time, they’re trapped by the dollar. The world has shown it is ready to dump the dollar. They can’t increase liquidity they way they used to.”
Property in England is going down. Retail sales in the United Kingdom just went down for the first time in 9 months.
In the past, each time we approached a correction, the Fed has been able to use monetary policy to increase the world’s liquidity. They cut rates and made money easier to borrow. Meanwhile, the foreigners were willing to take dollars, hold them, and lend them back to the United States at low rates. Foreign central banks bought up dollars, printing their own currencies to make the purchases. The result was that there was always a lot of cash and credit available.
But everything comes to an end – bull markets and credit expansions too. Until now, when things began to fall, we got a new wave of inflation to lift them up. And each time, the dollar held steady. Sometimes, it even rose. But now, the world has had enough of dollars. When the Bernanke Fed cut rates, global investors signalled that they would leave the dollar and take refuge in other currencies, gold and commodities. Another rate cut would be dangerous.
Oil producers are already discussing, sotto voce, pricing their goo in other currencies. The Saudi foreign minister let the cat out of the bag in a private discussion that inadvertently was broadcast to the press room. If the world knew we were talking about abandoning the dollar in the oil market, he said – or words to that effect – it might cause the dollar to collapse.
Well, now the world does know. And in India, the tourist board has gotten tired of watching its dollar receipts fall in value – against the rupee, no less. Henceforth, it said, visitors to the Taj Mahal and other tourist sites must have rupees to gain admittance.
Bloomberg reports that that old sage, Alan Greenspan, says the decline of the buck has no “real impact”. Obviously, it depends on how far down the dollar goes.
As near as most Americans can tell, the fall of the dollar is a good thing. The United States is going to enjoy an export boom, say the experts. What does that mean?
Markets and Money