Is the US Dollar 'Doomed'?

[RichKid]

Re: US DOLLAR... a crystal clear outlook

Marc Faber recently said that the USD was doomed and that we should all frame copies of dollar bills to show our grandchildren. This particular debate started in a USD charting thread but has been moved here because of the wide ranging discussion.

It shows the USD is on a downtrend aren't it?

If it didn't before it certainly would now (btw it did show bearish EW counts for those who don't follow EW).

Here's what Marc Faber thinks of it, quite a funny guy (my emphasis, not that you need it with picturesque words like his):

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..............ALAN KOHLER: Did you notice that Steven Roach, the chief economist of Morgan Stanley, who has been a bear for a very long time, seems to have changed his tune now, saying he's feeling better about the world than for a long time. Do you think that the fact that Steve Roach has kind of thrown in the towel is a sell signal or do you think he's onto something?

MARC FABER: Well, Steve is a good friend of mine and he gave already a sell signal two years ago. He suddenly turned bullish about bonds and since then the bond market has been weak. And I agree with him that we are in a global boom but it doesn't change the fact that it is an imbalanced boom and it's driven largely by credit creation in the US, leading to overconsumption, leading to a growing trade deficit, current account deficit, the accumulation of reserves in Asia and a global boom. But it is nevertheless an imbalanced boom and one day there will be a problem, certainly with the US dollar. The US dollar is a doomed currency. Doomed? Doomed. Will be worthless. Actually each one of your listeners should buy one US Treasury bond and frame it - put it on the wall so they can show their grandchildren how the US dollar and how US dollar bonds became worthless as a result of monetary inflation.

ALAN KOHLER: You made at least three great calls - you warned of the 87 crash just before it happened, you warned investors to get out of Japan in 1990 and out of Asia in general in 1997. So what specifically is your call right now?

MARC FABER: I think we are in a bear market for financial assets. There's a bear market where the Dow Jones, say, would go from here - 11,000 to 33,000. It would go up in dollar terms but the dollar would collapse against, say gold or foreign currencies. That's what I think will happen with Mr Bernanke at the Fed because he has written papers and he has pronounced speeches in which he clearly says that the danger for the economy would be to have not deflation in the price of a fax machine or PC, but deflation in asset prices. And so I believe that he is a money printer. If I had been a university professor, I would not have let him pass his exams to become an economist. I would have said, "Learn an apprenticeship as a money printer."

ALAN KOHLER: (Laughs) So, a big mistake putting him in charge of the Fed then?

MARC FABER: I think it's very dangerous, very dangerous...........
http://www.abc.net.au/insidebusiness/content/2006/s1632456.htm

 

[ducati916]

Re: US DOLLAR... a crystal clear outlook

et al

It would seem that Dr Faber is being cited, as providing the argument for "the death of the greenback" and the long term potential of gold in particular, and commodities in general.

My first issue would be in his listing cash as an asset class Cash is a medium of transaction, as such it is a commodity, and open to price fluctuation based on supply and demand dynamics. Hence, as he argues, money in the form of a fiat currency that exceeds the growth of GDP will devalue.

It would also seem that he is quite happy to embrace the theory of equilibrium, and the law of large numbers.

Into that philosophy, he interjects the phenomenon of speculation.

Therefore, under equilibrium theory we have the central value or intrinsic value, that is distorted to the upside and the downside by speculation.

The key therefore must be in either "timing" or "pricing" or of course just roll 'em and hope for the best.

His argument regarding the purchasing power of the US$ would seemingly hinge upon the expansion of the money supply, exceeding that of the GDP, causing a massive devaluation, or more accurately a loss of purchasing power.

His argument for gold is based on this assumption. That the US$ loses so much purchasing power as to become in essence worthless, therefore, prudent investors & speculators will migrate to gold, or possibly silver to protect themselves from this imminent disaster.

Let's examine the numbers;

CPI from 1921 to 2006 = 2.8% inflation rate
CPI from 2000 to 2006 = 2.8% inflation rate
CPI from 1980 to 1999 = 4.1% inflation rate

PPI from 1921 to 2006 = 2.4% inflation rate
PPI from 2000 to 2006 = 4.5% inflation rate
PPI from 1980 to 1999 = 2.1% inflation rate

Gold from 1921 to 2006 = 3.5% inflation rate
Gold from 2000 to 2006 = 16.1% inflation rate
Gold from 1980 to 1999 = (-4.5%) deflation rate

DJIA from 1921 to 2006 = 6.32 inflation rate
DJIA from 2000 to 2006 = 0.0% inflation rate
DJIA from 1980 to 1999 = 14.5% inflation rate

GDP from 1947 to 2005 = 7.11% inflation rate
GDP from 1999 to 2005 = 7.08 inflation rate
GDP from 1980 to 1999 = 6.8% inflation rate

M1 from 1959 to 2006 = 4.8% inflation rate
M1 from 2000 to 2006 = 3.6% inflation rate
M1 from 1980 to 2006 = 5.8% inflation rate

The long term series best illustrate the central value, or intrinsic value of the asset class.
Under equilibrium theory, fluctuations above and below will over a long enough period of time return, due to the law of large numbers and equilibrium theory thus returning to the central value.

We as investors, obviously cannot invest in 85yr time horizons if we plan to reap the reward.
Therefore, 10yr to 20yr horizons may be closer to the norm.

Speculators are operating in shorter again time frames, and thus lose the benefits of time to a certain degree (the degree of accuracy)

We can see that currently;

Gold is far above it's central value, after falling far below it's central value in 1980 to 1999. Obviously speculation is rife. Investment value is non-existant at these valuations.

We can also see that the argument of buying gold in times of inflation, are just nonsense.

In the 1980 to 1999 time series;

CPI was above the central value....inflationary
PPI was slightly below.
M1 money supply was expansionary....inflationary
GDP was below central value,....stagnant

Gold.......dived into the grave.

Currently,

CPI is on it's central value, the fear being that it will fluctuate above this value.

PPI is far above it's central value, and should be inflationary to the economy, but currently it is not. This point I believe is central to the explanation of the current environment. The increase in the PPI should drive an increase to the CPI thus offsetting the price increase to the producer to the consumer.

If the PPI increases are not passed to the consumer via the CPI, then profitability of industry must fall, as profit margins are by definition contracting

Currently through the reporting of Q1, the earnings have increased on aggregate in the US by 13%

The increase in PPI (commodity prices) has not impacted profit margins. That is simply because the US is operating a monopsony, and China is absorbing the increases in PPI, but is unable to pass them forward into the CPI.

The result is a reallocation of capital from low margin commodity manufacturing in the US to China, with an increase in high margin products and services to the US.

This switch from manufacturing to a service based economy has been underway for some time, but until it becomes fully integrated, may run deficits, hence the Current account deficit.

GDP is pretty much on target.

Interestingly, M1 money supply is actually below central value. Therefore the arguments put forward regarding the Fed printing money to devalue the currency are incorrect.

The large increase in world M1 originates in large part from Japan, and is responsible for the asset class speculation prevalent particularly in gold and currency.

The US$ as the world reserve currency, will always be on one side of speculative operations, and thus will fluctuate quite violently.

S1


quote:
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Interesting read although he is wrong about the
worst performing asset group in 1970's. It was not bonds it was stocks.

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Again it depends upon the "timing" or "pricing" of your purchase. Inherent within corporate bonds, and Treasuries was the ubiquitous call provision, which destroyed the returns due to purchases of bonds at rates approaching 16%.

Thus even when you were right, you might have been wrong.

The time to be bullish on gold was 1998.
If you have just turned bullish, then you must be operating in a speculative time frame. The volatility will I suspect increase now. If so, that indicates a top or topping process.

jog on
d998

 

[tech/a]

Re: US DOLLAR... a crystal clear outlook

Hmm

 

[money tree]

Re: US DOLLAR... a crystal clear outlook

the USD in the long term is doomed.

but as for right now.......

being long USDJPY pays very good interest
being short USDJPY costs a heap

therefore, we should see USDJPY rise from here

there are far too many people calling for a USD crash right now. Thats a bottom signal right there.

Im short AUD and long USDJPY

 

[noirua]

Re: US DOLLAR... a crystal clear outlook

the USD in the long term is doomed.

but as for right now.......

being long USDJPY pays very good interest
being short USDJPY costs a heap

therefore, we should see USDJPY rise from here

there are far too many people calling for a USD crash right now. Thats a bottom signal right there.

Im short AUD and long USDJPY

Hi money tree, I'm a bit concerned about your use of the word " doomed " as far as the US Dollars is concerned. Some thought the Aussie Dollar was doomed once and that was only three or four years ago.

 

[money tree]

Re: US DOLLAR... a crystal clear outlook

The U.S cannot currently, and never will be able to, service its debt. Let alone repaying it. It cant even cover the interest bill.

Their only hope is hyperinflation.

 

[noirua]

Re: US DOLLAR... a crystal clear outlook

The U.S cannot currently, and never will be able to, service its debt. Let alone repaying it. It cant even cover the interest bill.

Their only hope is hyperinflation.

Are yes, the American debt is US$8.365 trillion ( about $28,008.82 for each citizen ), as of this morning. The present limit for debt, approved by Congress, is US$9 trillion. The value of the gold reserves in Fort Knox ( 5,051 tons ) was only US$104 billion.( Valued at US$700 per troy ounce, although it is valued at US$42.22 per ounce officially )

How much is Alaska worth, bought from Russia for US$1 million. I suppose we should look at all of the assets owned by the Federal Government.

It is said that pension fund assets owned by Americans are worth considerably more that the national debt and share ownership, in addition, is worth many times more than the national debt.

 

[tech/a]

Re: US DOLLAR... a crystal clear outlook

The U.S cannot currently, and never will be able to, service its debt. Let alone repaying it. It cant even cover the interest bill.

Their only hope is hyperinflation.

I tend to agree---its a balancing act just to contain it.

Maybe that hype about rescouse grabbing (Afganastan,Iraq) isnt that far away from some truth.

 

[ice]

Re: US DOLLAR... a crystal clear outlook

The U.S cannot currently, and never will be able to, service its debt. Let alone repaying it. It cant even cover the interest bill.

Their only hope is hyperinflation.

Generally I agree, but never bet against a man carrying a loaded gun.


ice

 

[Knobby22]

They could always raise taxes to reduce debt.

As the US dollar falls, then this would help them export and compete e.g. against our farmers and steel makers.

The US has always been a debtor nation, which gives them advantages such as lower currency.

I tend to think the fall of the US economy will be slow and long. The US will become less important as time goes by, rather like what happened to England.

If they got a good President, the inherent strength of the US could cause a quick turnaround. Big money may ensure this happens. I think George will be remembered as an awful president with a poor understanding of the world and the obvious mistakes he made will be remembered for about 20 years before they are repeated.

 

[ducati916]

The U.S cannot currently, and never will be able to, service its debt. Let alone repaying it. It cant even cover the interest bill.

Their only hope is hyperinflation.

Nonsense.

the American debt is US$8.365 trillion

Which is current total long term debt
Therefore, interest payments are; $0.418 per annum

GDP = $12.766 Trillion
Therefore debt service = 3.2% of GDP
Taxed at 38% = revenue of $4.85 Trillion
Coverage rises to 8.6% of taxed GDP

What is of concern are the underfundings for;
Medicare/Medicaid
Social Security
Pensions
Tax reforms

These structural problems are problems, and must be addressed otherwise there will be huge social problems within the US.

I tend to think the fall of the US economy will be slow and long. The US will become less important as time goes by, rather like what happened to England.

Disagree.
England lost hold of her Empire, that changed the supply side of the equation, thus her COG's rose, squeezing profit margins. Further, the loss of captive markets in which to sell, with attendant monopoloy advantages rather squeezed the demand side of the equation.

None of which really applies to the US.
They rose to dominance on the back of two world wars, that spared their productive infrastructure, but they have never really lost that throttle hold since. They rose not through military conquest, but by economic stranglehold.

China will be gobbled up by the US over time.
Opening their doors to FDI was the first nail in the coffin.
"97-"98 was all about the "Tiger" economies. They crashed and burned.
China is a classic boom & bust scenario playing out.

They could always raise taxes to reduce debt.

As the US dollar falls, then this would help them export and compete e.g. against our farmers and steel makers.

Correct.

A Communist government moving into a capitalistic economic model. They will experience all the usual booms and busts that all the more mature capitalistic economies have encountered.........can't happen, Japan, an economic giant in the 1980's suffered deflation for the best part of 20yrs.

Area's of the Chinese economy are already bankruptcies waiting to happen. Steel is one major industry that reports losses quarter after quarter......propped up by government subsidy.

Why do you think the Chinese are fighting tooth and nail to keep the yuan "cheap"?

1....Will a further slide in the US$ push up interest rates? Not really, barring a rise in "protectionism" bills from Congress. Thus the cost of imported goods as evidenced by the CPI, are not going to scare away foregin investment.

2...Will make US exports increasingly competitive in the global marketplace. Exports grew at 10%+ in 2005, and are growing at 11.8% in the first two months of 2006. The US exports $100 billion a month, India doesn't even export $100 billion in a year. Thus US Corporate foreign earnings will take a good bump. (50% of foreign earnings are in Europe 25% from Japan)

3....When China & India open their countries to FDI, the US will be all over them like a rash.
The potential to the US is large.

4...A weaker dollar, will change unit costs, thus placing emphasis on corporate structure, Europe may well have a wave of restructurings, that the US has already been through.

5....A second divergence; the US$ has fallen in the face of rising oil prices.
Odd?
It would imply that the oil producing nations are diversifying out of the US$ into non-dollar investments. Interest rates of the nominal variety have risen with the inflation premium.
What has happened to the "real rate"? The one that indicates economic strength or weakness?



jog on
d998

 

[Knobby22]

Nonsense.

A Communist government moving into a capitalistic economic model. They will experience all the usual booms and busts that all the more mature capitalistic economies have encountered.........can't happen, Japan, an economic giant in the 1980's suffered deflation for the best part of 20yrs.

Area's of the Chinese economy are already bankruptcies waiting to happen. Steel is one major industry that reports losses quarter after quarter......propped up by government subsidy.

Why do you think the Chinese are fighting tooth and nail to keep the yuan "cheap"?


jog on
d998

I disagree somewhat.
In the short term, yes, China will experience a bust however they have three major advantages over the "Tigers" long term.

1. Natural resources that need infrastructure to develop
2. Huge populations with attendant internal economy that will grow over time. In history, China was often the superpower.
3. Bribery, threats, assasinations, so effectively used by the US to gain economic control in Latin America, Africa and parts of Asia, will be far less effective in weakening China.

The centralised economy experiment has not been played out yet. It is not Russian communism. They country heads have proven to be very thoughtful and adaptable over long term decisions for the country. Their politicians are not as easily tricked as ours!

They are wary of foreign capital and are not obverse to taking control of chunks of it. Their methods of population control will enable them to do things the US cannot contemplate easily, though both nations effectively control their media and are effectively one party states.

In short, I don't think China can be written off so easily long term.
And it is the US that are fighting tooth and nail to make the yuan "expensive"

(Think 1984)

 

[ducati916]

knobby

I disagree somewhat.
In the short term, yes, China will experience a bust however they have three major advantages over the "Tigers" long term.

1. Natural resources that need infrastructure to develop
2. Huge populations with attendant internal economy that will grow over time. In history, China was often the superpower.
3. Bribery, threats, assasinations, so effectively used by the US to gain economic control in Latin America, Africa and parts of Asia, will be far less effective in weakening China.

What natural resources?
As to their huge population........this population is a rapidly ageing population, it is older than the US & Europe and their per capita wealth is exponentially lower than the West. This nullifies pretty much their numbers advantage.

Within the US currently, they are arguing about Mexican immigration, however they have access to a young population, and a numerous one.
So in regards to population, China is actually carrying a large potential liability that will hit before the US.

Save for Ghengis Khan, China has always been introverted.
They have never had to compete on the world stage.
Their learning curve will not be fast enough.

No need for James Bond............cash is king.

The centralised economy experiment has not been played out yet. It is not Russian communism. They country heads have proven to be very thoughtful and adaptable over long term decisions for the country. Their politicians are not as easily tricked as ours!

Somehow I doubt that.
Since when has a government managed to control their own economy, never mind the world economy?

They are wary of foreign capital and are not obverse to taking control of chunks of it.

Incorrect.
Their banks, have already been bought up by Citibank etc.
Control the flow of capital & credit..........take over.
As soon as the Chinese allowed FDI, the game was over in the long term.

1984........big brother.......except big brother is not the government, it is the mega-corporation.

jog on
d998

 

[noirua]

I doubt myself that the US debt, as high as it is, really matters that much when we compare the whole value of the United States. Even if debt reaches US$9 trillion this year, it only amounts to a small percentage of the whole country. Afterall, everyone knows they could pay up if they really had to.

The US is playing a careful and clever game as they make the astute oiler, George W Bush, look to be a fool, he certainly is not. Higher inflation in the States, gives the opportunity to raise interest rates, whilst not allowing the GreenBack to rise that much. This looks likely to heighten the fall in commodities and allow the US recovery to continue in a less troublesome inflationary scene.

The view that the US debt is ineradicable, should be proven to be untrue in the long term and I believe they will surprise, as they prove people wrong - including Dr Doom - when they say, the US has found their debts insuperable.

 

[wavepicker]

The rally that began in Dec 2004 was at the completion of a clean 5 wave structure. Since then we have had an upward rally (Wave A) and a decline which is in progress at present or has just finished (wave B). One more leg up to new recovery highs( more than likely to the 100 level in the US Dollar Index) is required(wave C) to complete the upward rally before the long term US Dollar bear re asserts itself.

If the stock market tanks it, people will choose US Dollars first ( at least initially) but this will change later.

So to summarize the in my opinion the US Dollar is not doomed in the short term, deficit or no deficit, however in the long term it looks like it may definately be a different story.

Cheers

 

[rederob]

Knobby
Ducati needs to change his avatar to a turkey so that he be saved by the US President on Thanksgiving Day.
His call on the US dollar will be as accurate as his call on gold, which failed after a few months despite a longer term time frame.
All the economic mumbo jumbo - sorry, precise economic analsis - in the world cannot prevent the US from disappearing down the hole it has been digging for itself in recent decades.
It is fanciful to think that 3 billion people in Asia will not have the economic might in years to come, to oust the 300 million in USA from global dominance.
The US has an energy dependence that makes it susceptible to ongoing inflationary pressures: Despite its foray into Iraq, it has to now partner Canada for the bulk of its oil imports.
While it is possible for the US to meet its debt obligations, in doing so it will expose its fragile economy to the world, and they will not like it. They may not like it already, as rumour after rumour is touting the euro as a safer haven for cash holdings than the greenback.
I believe the writing has been on the wall for a good few years now, and all we are seeing are the early death throes of the giant of the 20th century.
China's domination of production and consumption in many areas is world-leading. Where are they slowing down?

 

[MARKETWAVES]

THE US MAY NEVER BE ABLE TO SEVICE ITS DEBT ......

BUT AT SAME TIME ......
MONEY WILL ALWAYS BE THERE FOR THE SPACE PROGRAM
- AINT THAT THE SAD, SAD TRUTH !
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THINK ABOUT WHAT THE SPACE PROGRAM REALLY COSTS ?

 

[MARKETWAVES]

HERE'S THE DOLLAR

There appears to be alot of support ..........( Longer term )
and it has 16 interset rate hikes in it thanks to the Fed to help prop it up.
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Can the US Dollar push down
Below this Tripple bottom looking support line ?

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If we break below this 80.00- it would be the looking like ................

Well , just watch this line ..... and hope we don't break below it !

 

[MARKETWAVES]

The rally that began in Dec 2004 was at the completion of a clean 5 wave structure. Since then we have had an upward rally (Wave A) and a decline which is in progress at present or has just finished (wave B). One more leg up to new recovery highs( more than likely to the 100 level in the US Dollar Index) is required(wave C) to complete the upward rally before the long term US Dollar bear re asserts itself.

If the stock market tanks it, people will choose US Dollars first ( at least initially) but this will change later.

So to summarize the in my opinion the US Dollar is not doomed in the short term, deficit or no deficit, however in the long term it looks like it may definately be a different story.

Cheers

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HERE IS A VISUAL REPRESENTATION OF WHAT I THINK WAVE PICKER IS ATTEMPTING TO EXPLAIN IN THE ABOVE POST ...

I don't agree with this Wave count ..... but respect his point of view .
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( The low of Dec 2004 is not looking like a end of wave 5 )
If I may respectfully say so ......

 

[wavepicker]

-------------------------------------------------------------------------

HERE IS A VISUAL REPRESENTATION OF WHAT I THINK WAVE PICKER IS ATTEMPTING TO EXPLAIN IN THE ABOVE POST ...

I don't agree with this Wave count ..... but respect his point of view .
-------------------------------------------------------------------------
( The low of Dec 2004 is not looking like a end of wave 5 )
If I may respectfully say so ......

Marketwaez,

as far as I am concerned this looks like a clean impulse. Whether or not we get a new low and thus an irregular correction (as anything is possible) nobody knows. Under Elliott parlance a new low would still be part of the upward correction that started in December of 2004 and a rally after could easily carry to 100.

What is your take on this? What is your current wave count and what are your technical reasons for this wavecount?