Skip navigation

Monthly Archives: March 2009

China called for the creation of a new currency to eventually replace the dollar as the world’s standard, proposing a sweeping overhaul of global finance that reflects developing nations’ growing unhappiness with the U.S. role in the world economy.

Mr. Zhou argued, without mentioning the dollar by name, that the loss of the dollar’s de facto reserve status would benefit the U.S. by avoiding future crises. Because other nations continued to park their money in U.S. dollars, the argument goes, the Federal Reserve was able to pursue an irresponsible policy in recent years, keeping interest rates too low for too long and thereby helping to inflate a bubble in the housing market.

Dollar denominated reserve holdings world

“The outbreak of the crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system,” Mr. Zhou said. The increasing number and intensity of financial crises suggests “the costs of such a system to the world may have exceeded its benefits.”

How China Sees the world

Matt Stiles, who writes at Stockhouse.com, who also happens to identify with the Austrian school of economics, argues why these hyperinflation fears are way overblown, and why we won’t see a Zimbabwe scenario here:

It is often said that we live with a “fiat currency” or with “paper money.” This is not entirely accurate. A very small portion of our total supply of money and credit is in the form of physical currency. It depends on how you count it, but regardless, it is under 10% of the total. This is what differentiates our monetary system with that of Zimbabwe or Weimar Germany circa 1920’s. Their economies were based on nearly 100% physical currency because nobody would accept the promises of government in order to issue credit.

The vast majority of our money supply is in the form of electronic credit. Electronic credit can be destroyed, while physical notes issued by a central bank cannot. This is why deflation is possible in a credit based monetary system, but not in a paper based monetary system.

All in all, the central banks are not nearly as powerful as they’d have you believe. The amount of the total money supply that is controlled by them is minimal. They won’t tell you that. They’d prefer you to think that just by them moving their lips they can affect the entire economy’s decision making processes. It simply ain’t so.

This begs the question: why is gold going up? Who knows. It has a mind of it’s own. But if it really only moved due to inflation concerns, it wouldn’t have declined 75% over two inflationary decades (80’s, 90’s) would it? If inflationary concerns were real, we would see TIP yields rising along with the gold price. They’re not. We’d also be seeing other typical inflation hedges rising – like property prices. That is obviously not the case. A better explanation is that gold is rising because of increased instability.

Will the U.S. Dollar collapse?

Closely tied to the belief in imminent hyperinflation and a skyrocketing gold price is the misplaced belief that the U.S. Dollar is on the brink of collapse. Essentially, they are one and the same. Many of my arguments against hyperinflation are the same against a dollar collapse. But there is even more evidence stacked against such an occurrence.

Ultimately, the Dollar will end up at zero – but that is not going to happen any time soon, and I would argue is likely decades away. Until then, the massive amounts of deleveraging will increase our appetite for dollars to pay back debt. There is too much credit in the system, and as we rid ourselves of it slowly, we need to acquire dollars. A large portion of the credit derivatives I mentioned above are denominated in dollars even though the underlying asset may be priced in another currency. This is a theoretical short position on the dollar. A “carry trade” in other words. It must be unwound, just like the Yen carry trade.

This is what is meant when we call the U.S. Dollar the world’s “reserve currency.” Most people hear the word “reserve” and automatically conclude that because many other countries hold the dollar as their primary currency in their foreign exchange “reserves,” that is what is meant by “reserve currency.” It is not. Total foreign exchange reserves of dollars are far smaller than total foreign credit contracts denominated in U.S. Dollars (reserves worldwide are “only” ~4.6 Trillion). It is the reserve currency because it is the default currency for international trade and commerce in general. In order for that to change, 100’s of trillions in contracts would need to be re-written. Not practical.

As such, demand for U.S. Dollars will persist.

Additionally, the U.S. Dollar is not alone in its state of affairs with an overindebted government and central bank getting itself in all sorts of trouble. In fact, nearly every other currency has the same issues facing it. And even though the numbers aren’t quite as dire elsewhere, they are far more likely to collapse than the U.S. Dollar due to the reserve status. Fair? No. But neither is life.

In summary, there are many multiples more debt than capital in the world economy. Debt is being liquidated and will continue to do so until it reaches a sustainable level relative to capital. The process of this debt liquidation puts a higher value on dollars relative to debt, thus ensuring an oversupply of dollars is impossible.

When the Federal Reserve announced last week that it will buy up to $300 billion in treasury bonds—a move that conjures up images of dollars rolling hot off the presses—it produced the second-worst week for the U.S. Dollar against the Euro since the its creation a decade ago.

Historically, the two move in tandem. When the dollar falls, gold prices rise. For example, when the dollar fell in 1982 and 1983, gold rose from $294 an ounce to $514 an ounce in just nine months—an increase of 74%. It happened again from 1985 to 1987, when a drop in the dollar propelled the price of gold from $282 to $502 over 21 months—an increase of 78%.

If the dollar enters its next down phase, the United States could easily suffer a flight of capital. Not only will you see each dollar buy less, but, more importantly, there could be less demand for dollars, as foreign investors slash the flow of dollars from Asia, Europe and the Middle East … as our biggest debtors start to pull their money from U.S. Treasuries.

One such ETF that isn’t on a whole lot of peoples’ radar but ought to be should the dollar take a dive is the PowerShares Deutsche Bank G10 Currency Future Harvest Index-tracking Fund (NYSE:DBV). It protects against the volatility of month-to-month monetary fluctuations at home and abroad; allows you to capitalize from the strongest currencies—and stay away from the weaker ones—on a quarterly basis; and could potentially double your money in six years.

Another ETF newcomer to the currency scene actually shorts the U.S. Dollar: PowerShares DB US Dollar Index Bearish Fund (NYSE:UDN) is composed solely of short USDX futures contracts designed to replicate the performance of being short the U.S. Dollar against the Euro, Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.

A favorite choice for a pure gold play is SPDR Gold Shares ETF (NYSE:GLD). If you’re not familiar with it, you should be.

Buying TIPS a good strategy:

By buying TIPS, Mr. Worah says the Fed wants to curb the risk of persistently falling consumer prices, or deflation, by putting a floor on the break-even rate, the yield spread between nominal Treasurys and TIPS. The gap is a gauge of investors’ inflation expectations and is closely watched by the Fed.

“The Fed understands that they need to keep inflation expectations on the positive side,” says Mr. Worah. “The Fed will step in to buy TIPS if it (the break-even rate) falls below a certain level, which makes investing in TIPS safer than it was.”

Investor can add the TIPS asset class to their portfolio by buying the etf TIP.

TIP chart

The invisible man: single guys are focus of new study

by Thomas F. Coleman

Meaningful information about the economic, social, and political concerns of unmarried Americans has been hard to find. Republicans focus on “family values” while Democrats chant “working families” and the federal government spends hundreds of millions of dollars to promote marriage.

Single people have pretty much been left out of the national political debate and have generally been ignored by university researchers. Public opinion polls have not shown much interest in unmarried Americans either.

Although a considerable amount of media attention has focused on single women recently, not so for single men. It’s almost as if they are invisible.

So I did a double take recently when I came across an 83-page report entitled “The State of Unmarried America: A Demographic, Lifestyle, and Attitudinal Overview of America’s Emerging Majority.” The report, released in February 2006, was published by Women’s Voices-Women Vote and is based on a national survey conducted by Greenberg Quinlan Rosner.

Although two thirds of the report focuses on unmarried women and their concerns, I was surprised that it contained a major segment on unmarried men. This is the first time that any major policy report has paid attention to this largely ignored segment of the American population.

According to the report, unmarried men represent 19 percent of all adults – some 37.6 million Americans — and about 40 percent of all adult men in the nation.

They are a growing segment of society. Since 1960, when unmarried men accounted for only five percent of adult Americans, their numbers have grown to nearly one-fifth of all adults today.

Among unmarried men, 67 percent have never been married, 23 percent are divorced, 6 percent are widowed, and 4 percent are separated. Only 5 percent of unmarried men have children under 18 living at home – a much lower percentage than for married men, married women or unmarried women.

Unmarried men are not as economically advantaged as their married counterparts. About 38 percent of unmarried men live in households with incomes under $30,000 a year, compared to less than 20 percent of married men. Only 20 percent of unmarried men have household incomes of $75,000 or more compared to more than 33 percent of married men.

A quarter of unmarried men do not have health insurance, more than twice the uninsured rate of married people. Just half own their own homes – 19 percent fewer than the general population.

As a whole, two-thirds of unmarried men are less than 45 years old. Some 30 percent are 18 to 24 years old, compared to just 2 percent of married men. This seems to have an effect on their mobility.

Unmarried men are twice as likely as married men to have lived in their current home for less than six months, and only 47 percent of unmarried men have lived in the same place for five years or more, compared to 63 percent of married men.

Unmarried men also have fewer ties to organized religion than married men. Only 20 percent go to church every week, compared to 36 percent of married men and 38 percent of unmarried women. About half of unmarried men never go to church, compared to only 31 percent of married men.

Unmarried men are not turning out for elections in proportion to their numbers. Perhaps this is due to their lack of resources and fewer binding ties — single men make lower wages, are more likely to rent than own a home, and are less likely to be raising children.

While only 44 percent of unmarried men voted in 2000, about half voted in 2004. This six percent increase in turnout among unmarried men was twice the increase in turnout among married men.

The report suggests that Democrats would benefit the most if they could mobilize unmarried men and get them to the voting booth in larger numbers.

Some 61 percent of unmarried men believe the nation is on “the wrong track,” compared to 45 percent of married men who hold this same view.

So what do unmarried men want the government to do to get on the right track? Reducing the deficit is a major priority. But so is greater government investment in education, child care, and social security.

Now that we know more about the demographics and concerns of unmarried men, will either party try to win this group over to their side for the congressional elections this year or the presidential elections 2008?

All in all, 19 million unmarried men were not registered or did not vote in the 2004 presidential election. The question is whether either the Democrats or Republicans really care.

The Fed is effectively printing money by buying debt issued by the U.S. government, and then recycling all proceeds from this investment back to the Treasury.

In terms of policy, it is equivalent to the quantitative easing strategies employed by Japan during the 1990s to end deflation and a decade of miserable economic performance.

Quantitative easing was needed, with rates already at zero and deflation a genuine threat, Federal Reserve Bank of St Louis President James Bullard said in a presentation at a policy workshop at the Bank of France in Paris.