What Happens to the Dollar When It’s Just Not Funny Anymore?
Thursday, February 25, 2010
The demise of the euro and pound has been disguising the dollar’s troubles. But now that fig leaf is falling away.
Sometimes the markets seem like a real battle between the macroeconomic and the micro-cephalic. Right now in jolly old England, Labour and its allies are positing that “too strong an effort to reduce runaway deficits will result in a savage reaction (really: that’s the phrase they used) that will destroy the British pound.”
I’m not quite sure if this is a serious argument or that sort of off-beat Brit humor so cleverly voiced by John Cleese, Peter Cook et al., wherein well-dressed idiots tell you with a perfectly straight face that up is down and the sun rises in the west.
Their theorem is sobering enough: “Attempting to slow the descent of the pound (and the inherent inflation that will dog consumers) by reducing debt (guesstimated to reach £178bn this year) and rectifying the imbalance between excess specie-in-circulation and GDP would endanger tax revenue, imperil Britain’s sovereign rating, destroy the recovery of the banking sector and (perhaps most importantly) put millions of Labour Party workers out on the street. Foolish policies like these would therefore cause a loss of faith in Britain’s economic managers, thus tanking the pound.”
That’s Just So Wrong!
Maybe they are right about some of that. It might very well be like trying to go from 120 mph to zero without doing a header into the windshield. (If these are Brits we’re talking about, should that be “zed?” Or maybe kph?)
The idea that fighting inflation could lead to all sorts of troubles is at least arguable. Probably wrong, mind you. But arguable nonetheless.
But to the statement “fighting inflation will lead directly to inflation” is just ludicrous on its face.
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Is a Bad Joke Still Funny If You Say It With an Accent?
There are two somewhat intertwined reasons why we might care about Britain’s attempts at economic black comedy.
The first is the fact that excess debt and inflation overseas has been forcing the U.S. greenback higher when compared to the pound and euro. This comparative rise has allowed American economic managers to claim that their similarly destructive habits are not adversely impacting the dollar. Whining currency and deficit hawks are admonished to “just look at the charts: the dollar has done nothing but go up for weeks now!”
With fears of a dollar collapse so neatly disposed of, the Fed is free to tell Congress that banking rates will remain at “zed” for the foreseeable future, and the White House is free to toss billions more at the housing market.
Problem is, while it is possible for politicians to jawbone the euro, pound or dollar a few tenths of a percent one way or the other on any given day, real inflation is not so readily vanquished by such puffery.
Hot Air vs. Economics
Thus we see the Producer Price Index (measured as a whole, and including those annoying “non core” items like food, rent, the electric bill and gasoline) rising month after month, and threatening to spill over into consumer prices at any moment. Indeed, we are lauding eight straight months of “recovering” home prices, without realizing what this curve will eventually mean for holders of dollars.
And thus we read of the Chinese steadily selling off U.S. debt until for the first time in decades they are no longer the primary holders of same. (That pleasure has reverted to the Japanese, who love 3% sovereign bonds, because they are three times more lucrative than anything that can be got at home.)
Sooner or later, the fig leaf of “we stink less than the other guys” simply must fall away from the dollar, leaving its horrid decrepitude revealed for all to see. Yesterday Justice wrote of “Bending Trends.” Well, here are two “Hockey Stick Formations” that seem to indicate that said fig leaf is hanging by its last thread.
H. E. Double Hockey Sticks
These are short-term futures charts of the U.S. dollar measured against the usual “other currencies” and gold measured against the U.S. dollar. And while in general, I prefer to use slightly longer-term histories to judge such things, in this case these more sensitive charts reveal sudden and perhaps significant shifts away from the dollar (and perhaps most all of these politically debauched currencies) and back to that most familiar long-term safe harbor, gold.
Rest assured that we are not the only ones looking at these charts. There will no doubt be much talk from various capitals as politicians blame and bankers deny. But in the end, this return to gold is the only action that makes any sense.
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