dollars to dough-nuts

I should preface this by saying I'm not an economist (although I did read a great book about economists). I've been concerned this whole century (heh) about the long term outlook for the US dollar.  It's ironic, since I've been looking into a business strategy that depends on a stable dollar. This now from the head of the IMF:

The head of the International Monetary Fund, Rodrigo Rato, warned Monday of a potential "abrupt fall" in the US dollar that could roil the global economy.

[...]

The outgoing IMF managing director spoke here as the European single currency hit a new high of 1.4347 dollars and global equity markets plunged amid renewed fears a US credit crunch could pitch the world's biggest economy into recession.

"The uncertainty ... comes from downside risks that are much higher than they were six months ago. The turbulence in the credit markets is a warning that we cannot take the benign (global) economic environment of recent years for granted," Rato said on the final day of the annual meetings of the IMF and the World Bank.

"We still do not know the full effects of the decline in the housing market and the subprime problems of the US economy. Further disruption in financial markets and further falls in housing prices could lead to a global economic downturn," he said.

In addition to the housing market, there is the possibility of the global oil trading switching from basing all transactions in the dollar to the Euro. The fact that almost all countries buy and sell oil using US dollars has probably artificially propped up the dollar for a decade or more. With the dollar suffering  already against the Euro, it seems like it just makes sense if you step back and look objectively. Saddam Hussein insisted on being paid in Euros instead of Dollars though, and, well, he's dead now. But I don't think we can invade and kill everyone. The petro-Euro is still looming.

There's also the massive debt China holds over the US that they could liquidate at anytime.  Over a trillion dollars in foreign reserves, $700 billion of it in the form of Treasury bonds. There are reports that China is now using this to their political advantage.

It's a sad state of affairs. In today's Wall Street Journal there was a piece about the housing market. There are movements to get the government to bail out the mortgage industry and the people who took out  loans they couldn't really afford to buy houses during the insane recent speculative market years. As much as I don't want to see the economy tank, this really annoys me. Lenders and lendees both made bad financial decisions and now want to have the taxpayers bail them out.

It seems like no one wants to face reality anymore. We're a nation of credit abusers and poor financial planners and the piper is eventually going to get paid.

Comments

[Tom Taylor]

I've been saying for a few years now that the U.S. economy is going to completely tank soon. I don't mean next year (although it could), but probably within the next 10 or so years. When your economy hinges so drastically on investments by China, Japan and Middle Eastern countries it is just a matter of time before disaster strikes. The world trades in dollars, but there are 15 countries that trade exclusively in euros. When a couple of countries pull out of the dollar, we're screwed.

The big question is what do you invest in if you expect a dollar collapse? If you simply hide money under your mattress, it's going to become the equivalent to having a case full of Confederate money. The same can be said for any money in the bank or invested in mutual funds or the stock market. Do you take a chance and invest in euros? Gold?

I think I am going to invest in toilet paper. That stuff was like gold in communist Russia! They stood in line for days to get a roll of the really bad stuff. Charmin. That's where it's at!

[Dav Yaginuma]

Tom, that is the big question. I seriously thought about putting what savings I had in 2001 into gold. That would have been a good idea. Of course, now that gold has hit a 27 year record high, I'm not so sure it's still smart. But that's what I thought also in 2000 when a 1 bedroom condo in San Francisco was going for about $350k: that's ridiculous, surely it can't go higher than that! Those condos are now more in th $6-700k range.