Everyones Favorite Whipping Boy (the dollar) Takes Center Stage
The decline in the U.S. dollar index took center stage this week as headlines across the financial press were dominated by talk of a potential dollar crisis.
In what was the most intense plethora of dollar-related headlines to hit the press since late 2004/early 2005 when the dollar last made a major low, the fear-laden headlines were almost too many to count. Here are some headlines collected from the Financial Times in just a three day period:
"Dollar hit by weak business activity," "U.S. dollar weakens despite Fed comments," "U.S. economy fears spark greenback sell-off," "Markets rocked by sharp slide in dollar," "France calls for 'vigilance' in face of weakening dollar," "Greenback suffers from hangover," "Dollar rallies after early slide but more losses are predicted," and "The buck stops where? (How a tattered dollar could quickly lose further allure)."
Another headline appearing in the FT this weekend, "Declining yields reinforce bearish sentiment on dollar," suggested that the decline in U.S. Treasury yields "helped reinforce bearish sentiment on the dollar." (If anything, declining yields are a sign that inflation is under control. It's amazing how even potentially bullish development are taken as negative signs for the dollar.)
Adding to the growing "fear collage" of dollar headlines was a letter to the editor appearing atop the editorial page of the Financial Times on Friday. The headline reads, "Rapid dollar decline is likely to destabilize the global economy." It made the usual dollar-bear case for a collapsing dollar by pointing out the large holdings that foreign investors have in U.S. dollar-denominated assets, especially since 2001. As the editorial stated, "A rapid sell-off of dollar-denominated assets by central banks would force down the price of U.S. securities resulting in large losses. A secondary effect would be a 'run for the exit' in the foreign exchange market as central banks sold off their dollar holdings. The editorial also pointed out that a "contagion" of a weakening U.S. economy would negative impact Chinese growth, as well as the industrial economies of Germany and other Asian and European countries.
In making the case for a dollar-related contagion similar to the "Asian Contagion" of 1997-1998, this proves exactly the point why a major dollar collapse isn't likely to occur. Simply put, there is too much at stake for the central bankers to blow it by allowing the dollar to fall below longer-term support. The global economy is close to being fully integrated and for a major and sustained weakness in the dollar to be allowed at this point would be unthinkable from a global investment standpoint.
Another point that can be made is that while the dollar may be considered "weak," it's actually favorable for U.S. businesses and greatly assists the export trade. Don Hays recently made this sound observation: "Every time the dollar declines, it makes the U.S. more competitive on international trade, and that is the customer the world is aching for. The export/import story is already showing a change in directions as export growth is moving up fast - faster than import growth. This will take a while to catch up on a nominal basis, but it will happen as U.S. prices continue to show the massive gain in productivity gains by U.S. manufacturers over the last 20 years."
Indeed, the world's economies are addicted to the U.S. consumer and the global economic expansion currently underway would come to a screeching halt without him. But even the U.S. with its long-term trend of being a net importer is starting to flex economic muscles in the export area. Economist Ed Yardeni points out that in September, U.S. exports and imports were up 16.7% and 13.4% year over year, respectively. According to Yardeni, export growth was the highest since 1995. Indeed, the many similarities between 1995 and today, economically speaking, are quite startling. Don't forget that 1995 was the start of the economic super-boom that extended into the late '90s and was also the start of the acceleration phase of the stock bull market of the second half of that decade. And where was the U.S. dollar index in '95 when that terrific growth phase began? Right where it is now!
Here's a somewhat amusing theory that has crossed my desk concerning the dollar's latest slide: It has been argued that perhaps one of the reasons the dollar index has dropped is for the purpose of providing a cathartic relief for the bears. The bears, of course, have been exceedingly frustrated by the rising stock market of the past few months and have been chomping at the bit for *any* reason at all to start growling and prowling again. (The bears must from time to time be given a vent for their bearishness, otherwise they become discouraged and drop out of the game, and since the bears are needed to countervail a bull market, they are occasionally thrown the proverbial bone by the market insiders). So to satisfy their thirst for validation for their eternal pessimism, the dollar index has been allowed to slide closer to its long-term trading range floor.
This theory may sound too far-fetched to believe, but there can be no denying the bears have latched on to the latest dollar slide with a passion not seen since late 2004/early 2005.
There's an old saying we're all familiar with that goes "the more things change, the more they stay the same." That's another way of saying history repeats. And if U.S. economic history teaches one recurring lesson it is that dollar-related panics and crises in the past 120 years have come around more times than most care to count.
One such dollar crisis occurred during the last 120-year cycle bottom of 1894. Back in the mid 1890s, the U.S. was suffering the effects of its worst industrial depression that had existed up to that time. The depression began with a bank panic in 1893 and progressed from there with crashing stock prices, railroad bankruptcies and massive unemployment. The famous Coxey's Army was organized to march on Washington to protest unemployment and lobby the government for an increase in the money supply.
The leading banker of the day, J.P. Morgan, was in the thick of things with his attempts at reorganizing the bankrupt railroads as well as shoring up the U.S. dollar, which was perceived as being weak and subject to collapse by foreign investors (sound familiar)? Enlisting the help of the help of the Rothschild bank through its American agent August Belmont Jr., Morgan and his fellow banking clique members were determined to keep the dollar afloat at all costs. The amount of dollar-denominated investments the bankers and foreign investors had in the U.S. was in the billions and, as a Morgan telegram to his fellow bankers stated, "We all have large interests dependent upon maintenance [of] sound U.S. currency."
That was over 100 years ago and not much has changed since then. Dollar crises have come and have been averted each and every time. Banking and other monied interests still have massive investments in the U.S. that require protection of the dollar's value. And you can bet your bottom dollar that these powerful interests will exercise their considerable pull to avert a true dollar catastrophe if the need ever arose.
Economist and lecturer Stuart Crane had an interesting theory about the major cycles in the dollar. In one of his lectures delivered back in the 1980s he said, "I've been torn for a long time on the subject of monetary crisis, whether [the financial insiders] want to destroy the dollar or whether they're desperately trying to support it and save the monetary system. In some weeks their actions seem to be one but in other weeks their actions are the complete opposite...at least that's how it appears when looking from the outside. I finally came to this conclusion: it's both! There are those who want to preserve [the dollar] and there are those who want to destroy it."
He went on to describe how attempts at inflating the economy often lead to a diminished value for the dollar. But before the dollar's value can become absolutely wrecked on the foreign exchange, a reversal is made and the dollar is rescued. (Remember the "strong dollar policy" of Robert Rubin's Treasury Department under President Clinton in the late '90s and how it dovetailed with deflation at that time? Contrast this with the reflationist efforts of the Bush team from 2002 onward and see how this theory might come into play).
Crane's assessment of the dollar cycle is the most cogent of all the dollar-related theories being thrown around today. The dollar bears have a lot in common with the stock market bears in that they see the so-called "forces of nature" as being in control over market oscillations. What they fail to comprehend is that the combined money power of the financial regulators, which includes the Fed, controls the markets. That includes the currency markets and it is they who determine the fate of the dollar. In other words, the PTBs (Powers-That-Be) *are* the so-called "forces of nature."
Question: Why would the "forces of nature" desire to purposely wreck the U.S. economy, which is the chief engine of growth behind the emerging global economy, by crashing the dollar? Why tear down the super-structure that has taken them years to construct and which has been the major goal of the entire financial Establishment for decades? For what purpose? Has it occurred to anyone that maybe, just maybe, the dollar bears are being set up once again for another false alarm (just like in late 2004/early '05)? Something to think about...