The dollar is not going to crash. In fact, many economists
believe that the dollar will rally when the Fed ends its quantitative easing
program (QE) sometime in early 2010.
The Fed is on track to buy nearly $2 trillion dollars of
mortgage-backed securities, US Treasuries and agency debt. In other words, the
Fed is printing money and pumping it into the housing market to keep the market
from collapsing. This keeps interest rates low, but it also weakens the dollar.
When the program ends, long-term interest rates will rise and the dollar will
strengthen.
There is also a correlation between stock prices and the
dollar which should be considered. As equities have soared, the dollar has
plunged. That’s because investors have become less risk-adverse than they were
after Lehman Bros. collapsed. Now they have resumed speculation. Still, the
S&P 500 is up over 60 percent since March 9, which is “too much too fast.”
According to John Hussman, “90 percent of stocks (are) suspended above their
50- and 200-day moving averages for as sustained a period as we have now
observed.” (Hussman Funds Weekly Market Comment) That suggests that stocks are
wildly overbought and that the market will soon correct, perhaps, violently.
Also, there is no shortage of investors and central banks
willing to buy US debt which supports the greenback. Consider this report in the
Oct. 19 Bloomberg: “Investors can’t get enough Treasuries even as the U.S.
budget deficit climbs beyond $1 trillion, the government sells a record amount
of debt and the dollar declines to the weakest level since August 2008.
“Foreign buyers increased their holdings for a fourth
consecutive month in August, to an all-time high of $3.45 trillion, according
to Treasury Department data released Oct. 16. U.S. demand is being spurred by a
rising savings rate and concern the economic recovery may falter. Fixed-income
funds have attracted 18 times more money than stock funds this year, according
to data compiled by Morningstar Inc. and Bloomberg.” (Bloomberg News)
Long-term, it is likely to be tough sledding for the dollar,
as government spending increases and fiscal deficits keep piling up. But in the
short-term, investors believe that deflation is the biggest problem facing the
economy. The surge in US Treasuries proves that point.
The notion that the dollar will crash, has become an article
of faith among doomsayers, Libertarians, survivalists, leftists and goldbugs.
(I’m as guilty as anyone) But is the theory supported by the facts?
First of all, “crash” is an ambiguous term. I take it to
mean a plunge in the value of the currency to a hyper-inflationary range. What
we are seeing now, however, is the Fed managing the value of the dollar downward
to increase exports and reduce the real value of household and financial sector
debt. That is not a crash; it is a planned demolition with the intention of improving
the US’s position vis-à-vis its main trading partners. It is a type of currency
warfare which is making the dollar more competitive at the expense of people
who save. It’s exactly what Bernanke wants.
All the Zimbabwe talk is pure nonsense.
The reserve currency system is inherently unfair and invites
all kinds of abuses. It gives the United States greater access to credit and
elevates the dollar above all the other currencies. The dollar should be
dethroned as the de facto international currency so that there can be greater
parity between the currencies.
Those who believe that a “dollar crash” will bring the
government to its senses or change the system are mistaken. It won’t happen.
Real structural change requires political activism and a vision of a system
that is more equitable then the one presently in place. There’s no substitute
for hard work.
Mike
Whitney lives in Washington state. He can be reached at fergiewhitney@msn.com.