According to the press, the world’s prettiest face, Gisele Bundchen, wants to be paid in euros for U.S. modeling gigs, and in his new video, the rapper Jay-Z triumphantly holds euros – not dollars – in his upraised fist. The day after Thanksgiving 2007, anxious retailers started opening their doors before dawn to draw shoppers. Overseas visitors, meanwhile, are packing the streets of New York City, scooping up bargains. “I just saved $2,000 on this Rolex,” said one shopper from Great Britain, waving her new watch at a reporter’s camera. And no one’s laughing now at the Canadian loonie, which reached parity with the U.S. dollar in September 2007 – for the first time since 1976.
Pretty faces, angry rappers, desperate U.S. retailers, happy shopaholic tourists, and Canadians who have finally turned the tables on us…we wondered what on earth is happening, as 2007 drew to a close and this new edition of The Demise of the Dollar goes to press.
Although Gisele has denied making any such claim about her payment currency of preference (and has stated that she is happy to earn salaries in a variety of currencies), the fact that this story spread like wildfire through media outlets from Bloomberg and CNBC to E! News and People speaks volumes. The dollar has little credibility on the streets of New York – or pretty much on any street around the world. The twilight of the Great Dollar Standard Era is upon us. The euro is now worth almost 50 percent more than the U.S. dollar, and in Great Britain, you can get two U.S. dollars for every British pound.
In 2007, the famous refrain in the poem by Emma Lazarus describing the flood of foreigners streaming to U.S. shores needs to be updated to “Give me your tired, your rich, your huddled masses yearning to shop free.” Seven out of every $10 that fuels our gross domestic product (GDP), the measure of a nation’s productivity and hence security, comes – not from goods and services that we produce and sell – but from shopping. We’re addicted to cheap credit.
American consumers face the spectre of losing value in their retirement savings, finding out they cannot live on a fixed income, and suffering from chronic hyperinflation. These changes are unavoidable. Today, the problem is compounded because the U.S. dollar’s value is falling. It all involves productivity changes in the United States. We have not competed with the manufacturing economies in other countries, and that is why our credit (i.e., our dollar) is suffering.
Any number of things could create a sudden, wrenching drop in the dollar’s value. Consider the following three possibilities:
1. Foreign countries drop their U.S. dollar reserves. We depend on foreign investment in our currency to bolster its value or, at least, to slow down its fall. When that thinly held balance changes, our dollar loses its spending power.
At a November 2007 meeting of the Organization of Petroleum Exporting Countries (OPEC)’s 13-member cartel, Iranian President Mahmoud Ahmadinejad, whose country already receives payment for 85 percent of its oil exports in nondollar currencies, urged other countries to follow suit and “designate a single hard currency aside from the U.S. dollar…to form the basis of our oil trade.” “The empire of the dollar has to end,” chimed in Venezuela’s Hugo Chavez; his state oil company changed its dollar investments to euros at his order – er, request.
Rumors are circulating that the Bank of Korea, after selling off $ 100 million worth of U.S. bonds in August 2007, is getting ready to sell $1 billion more, and if Washington forces trade sanctions, China, which threatened recently to cash in $900 billion of U.S. bonds, will probably follow suit.
In Russia, Vladimir Putin’s dream of a stock market to trade the country’s natural resources in rubles is not so far-fetched; in 2005, Russia, the world’s second-largest exporter of oil, followed South Korea’s lead and ended the dollar peg. And once again, Sudan is hinting that it will impose trade or financial sanctions against companies that do business with the United States – only this time, the words just might have teeth. As other countries follow suit, the dollar – and your spending power – drops. What does this mean? You will need more dollars to buy things than it takes today.
2. Oil prices increase catastrophically. We – and our real inflation rate – are at the mercy of Middle East oil. In 2005, we couldn’t imagine what would happen if the price of oil were to double – or triple; but that’s exactly what has happened in 2007 as oil kept flirting with $100-a-barrel prices. Our vulnerability is not imaginary. For example, if terrorists were to contaminate large reserves with nuclear radiation, the supply of oil would drop and prices would rise. We are all aware of our vulnerability and dependence on oil, but we don’t like to think about it. Rising oil prices affect not only what you pay at the pump, but many other prices as well: nonautomotive modes of travel, the cost of utilities, and local tax rates, for example. It all adds up to unquestioned “pain at the pump” for American consumers. By September 2007, gasoline averaged $ 2.78 a gallon – double 2002’s price. “Pain at the pump” leads to “pain in the pocketbook,” as consumers know. You’re not seeing double in the checkout line at the grocery store – costs really are double. There was a 5.6 percent increase in 2007, compared with 2.1 percent for all of 2006.
3. The double whammy of trade and budget deficits. We’re living beyond our means. It’s as simple as that, and something is going to give. The federal budget deficit – annual government spending that is higher than tax revenues – adds to the national debt at a dizzying rate, making our future interest burden higher and higher every day. Our trade deficit – bringing more things in from foreign countries than we sell to the same countries – has turned us into a nation of spendaholics.
We’ve given up making things to sell elsewhere, closed the store, and gone shopping. But we’re not spending money we have; we’re borrowing money to spend it. In 2006, the trade and budget deficits doubled the deficits of 2001. Any head of a family knows that this cannot go on forever without the whole thing falling apart – and yet, that is precisely what we are doing on a national scale.
Even as our economy burns, our political leaders fiddle. They point to economic indicators to prove that our economy is strong and getting stronger. This information would be valuable…if only it were true.
Politicians like to measure the economy with esoteric indicators. For example, we are told that consumer confidence is up. Well, confidence is all well and good, but what if it isn’t accurate? Yankee optimism has achieved a lot in the past 200 years, but it alone is not going to prevent the current dollar crisis from getting worse and worse.
Does this mean that the United States is finished? No, but it does mean that our long history of economic power and wealth is being eroded from within. For most people, the real state of our economy is measured in one way: jobs. Sure, the number of jobs rises every month, but the complete truth is not as reassuring. We are losing high-paying jobs in manufacturing and replacing them with low – paying jobs in health care, retail, and other menial job markets. Our mantra of “Yankee ingenuity can accomplish anything” is gradually being replaced with a new mantra: “Would you like fries with that?”
The Daily Reckoning Australia