The View From The Golden Dome

Views on the week's events plus some of mine.

The U.S. dollar is in trouble. There is talk about other currencies supplanting the dollar as the world standard. The Chinese own more of our debt than any other nation, and on a political whim, could send our interest rates soaring to double digits on a sneeze. What do we do?


Before we get on to light topics, a brief history of the US Dollar and its importance post WW2.

“In the aftermath of World War II, the relatively stable-valued US dollar was the only major currency in which international exchange could freely take place.  The dollar’s role was formalized under the Bretton Woods monetary agreement of 1944.  Other nations set official exchange rates against the dollar, while the US agreed to exchange dollars for gold at a fixed price on demand by central banks.

This system functioned well for a brief period.  However by about 1958 the initial worldwide dollar shortage had turned into an overabundance.   With the too rapid growth of dollar credits around the world, gold backing of the dollar proved unsustainable.  The Bretton Woods agreement collapsed in 1973, but it enthroned the dollar as the international medium of exchange.  This unique role of the dollar continues to the present day.

The rapid growth of the industrialized economies after World War II created a growing demand for dollar balances around the world.  The more of its own currency a central bank issued, the more dollars it wanted as underpinning for its currency.

During the Bretton Woods period, the US ran large current account surpluses.  That would have drained dollars from abroad, but long-term capital outflows in the form of grants and direct investments by the US were greater than its current surpluses.  The result was a build up of dollar assets by foreign firms and central banks.  In effect, the US was lending long more than it was borrowing short, thereby satisfying the world’s growing demand for dollar liquidity, even while it remained a net creditor.”

When the world went off the British pound as the standard, as agreed at Bretton Woods, the exchange rate was £1 = $4.03. A couple of years later, the pound was devalued by 30.5% to $2.40. Now, it’s about $1.65.

What does this mean for us as consumers. Our dollar is declining in value because Washington has the printing presses rolling 24/7. Oil prices are skyrocketing for three basic reasons: the turmoil in MENA, the DC printing presses, and our sick economy. Our economy still is in the tank, especially in California, but there are signs of recovery in some states. Washington thinks they can legislate the economy back to health. Well, maybe they can but I’m not holding my breath.  I don’t ever recall seeing our legislators be proactive. Typically, they over react and close the barn door long after the horses have escaped, as they are doing now.

How are they going to pull this one out of the hat? Picture this. Right now, if a European country, say Belgium,  wants to buy something on the world market, it is quoted in US dollars. Belgium has to go out and buy US dollars (assuming they don’t have a dollar reserves) on the open market. They can’t buy that commodity when they don’t have the money. On the other hand, when the US wants to buy something, it is already quoted in US dollars. If we don’t have the cash, Washington sets up another printing press.

If the dollar is not the world standard, then it would mean that the US would have to buy the new standard, call it the yuan, with available reserves. The US would not be able to print dollars to buy yuan, because that would devalue the dollar’s purchasing power. And cause interest rates to skyrocket in the US. We would have to produce goods at home. What a novel concept. Produce at home. Create jobs. Export goods. Grow our economy.

What does this mean for us today, because the scenario is playing out now. It means that manufacturing has to come back. It means that we may have to live within our means. It means that credit will continue to be tight, and continue the economic death spiral that we are in. It means that government spending will have to be cut drastically. It means that taxes have to go up (I hate that too!). And it means that the largesse prevalent from 1990 – 2007 will be a memory – good to some and bad to others. Bottom line, our country is going to have to suck it up in order to survive! When our troops come back and muster out, what are they going to do? Live on welfare. Service jobs are not going to cut it, my friends. And neither will $45/hr production line jobs. I wonder what will give first? We are in an interesting time.

And this Friday, the world will be watching the festivities in London. For the second time in our lifetime (ok – my lifetime), there will be a fresh addition to the Royal gene pool in England. Kate and Will tie the knot on Friday, and forecasts are that more than a billion people will tune in to watch the pomp and celebration. I will wait to see the pundits comment on Betty’s dress. Betty = Queen Elizabeth. C’mon, Queenie has never been known to be anything but dowdy in her attire. But the jewelry will be out. The Crown jewels are priceless so we will get a play by play on those. Kate makes Diana look plain, and it would be totally wrong for me to say that she’s hot. So I won’t say it. I am sure that the British commentary will be absolutely positive, and some American cable channel will have discourse on the habits and dress of the Brits. I can’t remember which one though.

Hey – have a great week ! And remember, call me if you have any questions about mortgages, purchase or refinance, or if you would like a referral to a great real estate agent in your neighborhood. My number is 818.305.4695.

 

Les

Berman’s Factoids of the Week

It takes 1500 – 1800 gallons of water to produce a pound of beef, 500 – 800 gallons of water to make a T-shirt, and 8 – 16 gallons to burn a 60 watt bulb for 12 hours (think hydro electric). Maybe Rudi Gernreich had the right idea !

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June 7, 2011 - Posted by | Uncategorized

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