WATCH THE U.S. DOLLAR...IT WILL REFLECT ALL OF THE FINANCIAL WORLD'S EVENTS, PROBABILITIES AND FEARS.
IF THE DOLLAR FALLS SLOWLY, OR RISES SLIGHTLY, EVERYTHING WILL BE O.K... and the weak U.S. dollar will be a problem not only for the Americans whose global standard of living is being eaten away, but also for foreign holders of U.S. bonds, and for the export competitors of the U.S. who will have to be more efficient in order to compete.
IF THE DOLLAR FALLS TOO RAPIDLY, AND THE DECLINE IS DISORDERLY... then the dollar is a problem for everyone, most especially for the U.S.
TO BE THE WORLD RESERVE CURRENCY YOU MUST BE RESPONSIBLE
The U.S. has gained hugely over the last six decades by having the U.S. dollar as the global reserve currency. This was due to the fact that the U.S. and Europe were victorious in WWII and the U.S. had the strongest and one of the most responsible economic policies. All of that has changed.
For the past five years the U.S. economic policy has not been responsible...our deficits are unsustainable...and the Bush administration has been the most economically irresponsible of any in the White House in decades.
May I suggest that a read of the "Rise and Fall of the Great Powers" by Paul Kennedy who cogently explains how every great power eventually destroys itself by extending its reach as a military power and taking the role of policeman beyond the limits of its finances.
The book is history not prediction. It was written in the mid to late 1980's. After reading it, we noticed the behavior of the Soviet Union who at the time was making the same mistakes that had led to the decline of the former great powers. Because of the insights obtained from this book it was easy to see the unraveling of the Soviet Union before most observers recognized it. In reality, the Soviet Union was really a group of third world countries with a big, inefficient and costly military. The Soviet Union failed for the same reason Rome and many other empires failed...hubris, military overexpansion, and irresponsible economic policies. Can we think of any major power today who suffers from the same plight?
On top of the problem of funding ongoing wars, the U.S. and Europe will have to bail out billions of sub-prime mortgages, CDO's, SIV's and etc. that are the result of irresponsible banking organizations...a different kind of hubris, but hubris nonetheless.
IT'S OBVIOUS WHY THE DOLLAR HAS BEEN WEAK...BIG DEFICITS NOW AND BIG BILLS TO COME TO PAY FROM THE WORLD FINANCIAL CRISIS AND THE ONGOING WARS
This lesson has not been lost on foreign governments, sellers of raw materials and financial speculators. They have decided that the U.S. dollar was overvalued and have dumped it; decreasing its value.
THE BATTLE NOW IS TO HAVE THE DOLLAR DECLINE IN A MORE ORDERLY MANNER...THE DECLINE OF THE LAST TWO WEEKS HAS BEEN TERRIFYINGLY DISORDERLY, AND COULD LEAD TO MARKET PANIC
Global government officials now have the job of jawboning the dollar higher, or at least slow down its decline. The U.S. Secretary of the Treasury has for the first time said something to defend the dollar, and the head of the European Central Bank has denounced the decline in the dollar as "brutal".
We expect more and more supporting statements and threats of intervention to let others know that the dollar will not fall precipitously. It may rally for a time as these pronouncements are made.
The U.S. wants the dollar to decline, but they want it to happen in an orderly manner. The effect of a lower dollar is to increase U.S. exports, but it also diminishes the U.S. public's standard of living and the value of their savings and investments on a global basis. All of this happens without the public knowing it right away.
We do not think these statements of support for the dollar change anything, but may cause some short sellers of dollars to cover their positions, and may discourage others from abandoning the dollar as soon as they otherwise might.
Until problems such as the triple deficits and irresponsible government spending are corrected, the dollar will not be strong for a prolonged period.
Thanks for listening.
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