Today, we listen to the markets.
The poor old greenback has dropped 4% against the euro and the yen since October. Now, at $1.33 per euro and nearly $2 per pound sterling, the U.S. currency is at its lowest point in almost two years. For an American, London has gotten even more expensive. But for a Londoner, Florida has become an even greater bargain.
What is the currency market telling us? Maybe nothing. Markets squawk from time to time for no apparent reason. But sometimes they whisper something important.
We listen carefully. We turn our ear. We bend our heads. And what do we hear?
“Beware the falling dollar,” says Fortune magazine.
Fortune didn’t need to tell us that. What astonishes us about the dollar is not that it loses its value, but that it still has any. The U.S. trade deficit is reaching up towards $1 trillion. No nation has ever run so deeply in the red for so long. For every dollar of output, the country loses about eight cents. For every $100 worth of movies, backhoes, and beef cattle it sells…it spends $108 on flat-screen TVs, oil, and imported sushi. If it were a real business, it would have gone broke long ago.
But the United States is not a business. It is the world’s biggest economy…with the world’s biggest supply of nuclear weapons. And it is the guarantor of 21st century globalisation…and also the provider of its most common means of exchange – the aforementioned U.S. dollar. The U.S. economy, and its money are at the very center of the new imperial cycle that has dominated global markets since the early ’90s.
“Yes, but the dollar is the weak link…” the currency markets whisper. “Foreigners don’t have to keep it in their vaults. And they don’t have to take it at $1.33 per euro or $650 per ounce of gold.”
Ah…that’s it, isn’t it? The United States can set up puppet governments in third world hellholes; it can whip any conventional military force on the entire planet; but it can’t force investors to take dollars at par.
For the moment no one in the US seems particularly concerned about the falling dollar. Ben Bernanke is instead focusing on the threat of inflation, implying that he will raise rates. This, of course, would help support the dollar. Hank Paulson is still talking about the ‘strong dollar’ policy initiated by Robert Rubin, in whose footsteps he walked at Goldman and now at the U.S. Department of the Treasury.
“Little risk for the United States as the dollar weakens,” says a weekend headline in the International Herald Tribune. Most American policy experts see the dollar’s decline as a good thing, the paper tells us. It makes Florida vacations less expensive to Europeans, bringing in tourist money. And it makes GM and Ford products even better bargains; good news for Detroit.
Even Nancy Pelosi, the next Speaker of the House, has nothing bad to say about the falling dollar. In fact, she thinks the dollar should fall – against the Chinese yuan in particular. She believes the yuan is artificially high, thus keeping Chinese imports artificially cheap…and thus making American workers artificially unemployed.
We stop and think. We wonder. What species…what kingdom…what phylum…do these people belong in? Pelosi walks on two legs just like we do, so she must be a vertebrate. She breathes in and out. She is said to be a warm-blooded mammal. But then, what is wrong with her brain?
Every currency in today’s magnificent faith-based international monetary system is managed – and it is therefore manipulated by its managers. It is therefore artificial…for nature alone never could have created a piece of paper like the U.S. dollar and set it up to be worth precisely $650 of gold to the ounce. Both the dollar and the yuan were artificially created…and now are artificially valued…by manipulations of all sorts – including central bank lending rates, margin requirements, currency market interventions, capital restrictions, trade barriers and so forth. Worth $650 today…an ounce of gold could be worth $670 tomorrow; who knows.
All these artificial inventions – combined with the natural movements of the markets themselves, driven as they are by the delusions, misapprehensions, and profound ignorance of investors – are what determine the current price of money. For an economist to say that one is ‘too high’ or ‘too low’ is the sort of guesswork the markets laugh at. But when a soon-to-be Speaker of the U.S. House of Representatives says such a thing, it is the gods themselves who must roll on the floor and clutch their stomachs.
We listen carefully to get an opinion from the currency markets. What do they think of the woman? ‘She is a moron…’ comes the whispered wisdom.
Madam Pelosi’s judgment concerns not the ‘correct’ price of the currency – if there were such a thing. Instead, it is merely a vain wish; she believes the world would be a better place if the yuan were not so cheap. Why so? Because then U.S. goods would be cheaper for the Chinese to buy…and Chinese goods would be more expensive for Americans to buy. This would have the effect of reducing the U.S./China trade imbalance. But how would people be better off? Every increase in the yuan would turn up as an increase in Wal-Mart’s prices. Every Day Low Prices would be a little less low the day after the yuan went up. Who pays these prices? Well, the same people who vote for Nancy Pelosi.
Again, we turn to the currency markets for a judgment:
“Don’t worry…the yuan will go up against the dollar…but Americans won’t like it very much.”
The currency market is telling us that the dollar is going down. Bernanke and Paulson are telling us that the dollar will remain strong. Meanwhile, the bond market is telling us not to pay any attention to Pelosi, Bernanke or the currency market. Bond yields are generally falling. If either inflation or a falling dollar are a genuine threat – bond investors don’t see them.
“Forget the falling dollars,” say the bond buyers. “What is falling is the U.S. economy.”
The bond market may have a point. GDP growth declined from 2.6% in the second quarter to 2.2% in the third. Last week came news of the first setback for manufacturing in the United States in three years. Housing is soft…and getting softer, apparently. And now – thanks to the falling dollar – oil is on the rise again, up 7% in the last two weeks. Gasoline at the pumps is rising. And the yield curve is still inverted – traditionally a good advance indicator of recession.
Under these circumstances, it is unlikely that the Fed can support the dollar with higher interest rates. So, if the dollar continues to fall – look out below!