Wednesday, October 24, 2007

Goodbye dollar, hello inflation

The dollar is no longer the world's reserve currency. This is the statement you heard twice in one day if you were checking out the news on Bloomberg over the past 24 hours.

First, we heard it from economist Clifford Bennett of Sonray Capital, who said the Euro was the world's new reserve currency and that this idea was now universally recognized.

Next we heard it from investor Jim Rogers, who has been bearish on the dollar and the state of the US economy/fiscal outlook for quite some time.

What's notable about Rogers' latest call on the dollar is that he's once again backed his convictions with his actions; yesterday, Rogers announced that he is shifting his personal assets out of the dollar and into the Chinese renminbi.

Here's an excerpt from, "Jim Rogers Shifts Assets Out of Dollars to Buy Yuan".

"Jim Rogers, chairman of Beeland Interests Inc., said he is shifting all his assets out of the dollar and buying Chinese yuan because the Federal Reserve has eroded the value of the U.S. currency.

``I'm in the process of -- I hope in the next few months -- getting all of my assets out of U.S. dollars,'' said Rogers, 65, who correctly predicted the commodities rally in 1999. ``I'm that pessimistic about what's happening in the U.S.''

Rogers, delivering a presentation late yesterday at an investors' meeting organized by ABN Amro Markets in Amsterdam, said he expects the Chinese currency to quadruple in the next decade and that he is holding on to commodities such as platinum, gold, silver and palladium."


If you'd like to listen to an excerpt from Rogers' presentation to investors in Amsterdam, it is reproduced here courtesy of Bloomberg.

What's the rationale behind these calls for the dollar's eventual demise?

As Marc Faber recently noted in a lengthy interview with Bloomberg (and in seperate interviews with CNBC), the recent widespread bearishness might represent a contrarian buy signal for the dollar in the short-term, but this does not exactly cancel out the US currency's long-term problems.

In summary, expect continued deterioration in the dollar's purchasing power and increases in inflation over the longer term. Inflation will not be confined to the US; it has appeared and will continue to appear in countries across the globe.

Every government will try their damnedest to paper over their monetary inflation with ridiculous explanations and reconfigured price indexes which purport to show "low inflation". Still, worldwide inflation is here and it is only a question of which fiat currency will depreciate at the fastest rate against relatively hard currencies and gold.

For more on inflation and government statistics, see FSN Broadcast of October 13, 2007 with guest John Williams of Shadow Government Statistics.

Keep reading Finance Trends Matter for more news and commentary.

26 comments:

cq said...

I remember a while back there was talk of using the euro instead of the dollar for oil prices. That was small a news story for about a week but I dont remember the mass public taking notice (no surprise). Do you know/have you heard anything more on that?

With my recent trip oversees, it was apparent how low the dollar is. Simple things were so expensive when you converted them from the euro- something I just gave in to NOT doing.

David said...

Yes, there were persistent rumors that the Iraq war was undertaken to stop Saddam Hussein's regime from pricing oil in euros (which would have removed one of the "dollar standard's" last major legs of support).

I think the same stories were circulating about Iran back in 2005 and early 2006. Search the blog for previous posts on this, using keywords "Iran" "oil" "euros".

Anonymous said...

http://www.presstv.ir/detail.aspx?id=28261§ionid=351020102

The Central Bank of Iran says the process of converting the country's dollar reserves to other foreign currencies has been completed. Therefore they are an extreme enemy of the evil Bush Empire ... the Buschur nuclear power plant being built in Iran by the Russians is primarily going to be used for converting seawater to fresh water. Desalination requires vast amounts of electricity!

LoneWolf

Anonymous said...

As I recall, he did shift over from dollars to euros in the late '98 or '99, and ended up scoring a windfall as the euro started to move up.

Iraq, North Korea, and Iran were the vanguard of divesting from the dollar, prompting many to speculate that was the reason for "Axis of Evil" propaganda so early after 9/11.

There were a lot of stories Iranian Oil Bourse starting two years ago when Iran announced their oil market would accept other currencies, especially the euro.

Don Robertson, The American Philosopher said...

Economists are a nefarious and too easily bought breed of empirical soothsayers to give much credence to an article. And Wall Street pundits cling like deer ticks to the bellies of all these economists. Economists are universally like politicians, continually lying with what will please or thrill a crowd.

I consider the notion that the EURO has become the new reserve currency just a tad bit of economic wizard's puffing. Someone is looking into their crystal ball. But they see nothing, really. This article is an, I told you so! before it's happened, and long before it could even possibly happen.

One must consider the condition of Europe only sixty years ago, and ask, is this where I want to bet with my hard earned or easily inherited equity? What would Daddy say?

Well then, by all means follow the common stench with your nose! You'll step in it soon enough.

That's what the article is saying, Step in it, Fool.

The dollar will be the last currency standing.

The protectionist EU has yet to come fully to grips with China's entry into the globalization manufacturing contest of all our economies.

The dollar is there in force though.

For, China is not rich. China is populous.

Now consider. For the entire Bush Administration, all the world's more fragile economies have been kept afloat by US economic policies that seem insane and make virtually no sense, other than to keep the world's economies afloat.

And consider further. Betting against the dollar looks like a no brainer to this crowd of easily conned lemmings. Right? So, following the crowd seems an easy thing to do, doesn't it.

But, how many of you have ever actually even held a EURO or a Yuan in your soft hands with all the nails chewed so short?

And what happens... What is really going to happen, when the unraveling of the worldwide credit bubble picks up a full head steam?

And it is likely to pick up a full RedBall Express head of steam when the fed is forced to yank again in the levers to ease inflation.

I'll tell you what is all too likely to happen.

You will see war in Europe again.

You will see revolution in China again.

And the dollar will again be the last currency standing.

Pray that day never comes, and that this is all an aberation, the dollar, and the collapse.

And, don't be a fool.

Don't bet on it.

Because if you're even half right, you and everyone else will lose virtually everything for sure then.

Don Robertson, The American Philosopher

Bob said...

I was in Germany when the 'war' started ~~ the dollar and the Euro were about the same! Now the Euro costs about $1.45. In 2003 the Canadian Dollar was worth $.65 cents ~~ now it is worth more than the dollar.
Your doing a helluva job Dubya!!

Bob said...

I just remembered ~~ I believe it was in July of last year that there was an article in a financial magazine (Fortune?) that Darth Vader (5 deferment Chaney) was putting his money in EURO's!!

Dusty said...

So interesting that all seem to be in great worry about the 'dollar'. Currencies come and go. It's the political base that will determine the future of the USA. Currently supported by a tribe of christian overseers, cloaked as business leaders, I would be surprised to see an election in the USA next year. The rule, or law, (call it what you will) is in place to allow the executive branch full authority over the population. Now that's something for Americans to consider. Any attack, by military force, on Iran, will bring immediate global conflict. It is Iran's release of the American dollar to the Euro which is the thorn in America's butt. Religion, economy and politics are the 'Big Three' when it comes to control of countries and people. All history speaks volumes to this fact. America is on the barbeque and does not know it. How sad. They had such a bright future. Too far down the hill now to turn back. There's so much more to be said but, what's the use.

Veronica Guy said...

Cq said:

I remember a while back there was talk of using the euro instead of the dollar for oil prices. That was small a news story for about a week but I dont remember the mass public taking notice (no surprise). Do you know/have you heard anything more on that?

Iran wants euros for its oil. It doesn’t want the $US anymore. It wants to start its own oil bourse and cut the Yanks right out.

China has started redeeming its US currency reserves. I think there may be two reasons for this. One is practical and fiscally careful. The other is a show of strength at what China could do to the US economy if it wanted.
Cheers
V

David said...

Regarding the oil for euros angle of the Iranian oil bourse issue, let me include a link to an earlier post on this topic from March 2006.

It's been a while since I've read anything on this topic, so please read as you see fit and come to your own conclusions.

I think the real issue here is that ALL fiat currencies end up going the way of the dodo, it's just that their rates of decline may vary.

Anonymous said...

Why not put your money in LibertyDollars that are backed by Gold for the certificates and they have pure gold, silver, and copper coins.

The New Ron Paul Liberty Dollars are out.

Ron Paul is the last chance we have of stopping a depression that will make 1929 look like nothing. It will take 60 years or more to recover from it if we ever "really" do.

More than likely we will fall into chaos and never be "America" again. (although we haven't been "america" for many years now) ..

Veronica Guy said...

David,

In February 2007, I came across an article in the Arab News. Now I am not confident to post shortened links so I hope this long one works:-).

http://www.arabnews.com/?page=7§ion=0&article=92187&d=15&m=2&y=2007

I have a continuing dialogue with a woman in my neck of the woods about this sort of stuff (and heaps more as well).

If other OPEC countries follow Iran’s lead changing from the Petrodollar to a Petroeuro, then the US is in deep trouble. This, I think, is why BushCo courted Australia and Canada to join his little nuclear cartel as both countries (especially Australia) has large high grade uranium deposits.

I don’t pretend to encompass the really large agendas, but I find it all a fascinating scenario. You know much better than I:-).

Cheers
V

jomama said...

Gold and silver to soon become the
world's reserve currencies...again.

Bhakta said...

An economist I am not. Sadly a USA citizen I am, but have lived in Asia for the last 25 years. What I find in the people here is very simple joy to see the big bully going down at last. GWB has so alienated the majority of the populations that they may still fear the USA, but they certainly do not respect it, and when they see their money increasing the the USA sinking they are very satisfied. Personally, I agree with Dr Marc Faber that the only safe place to store your money is in gold, farm land and oil which cannot be printed on a press!

Anonymous said...

You want to here a good one. The Israeli's want us to give them the Euro instead of the USD when we pay them their welfare check. Can you believe the nerve of them.

David said...

Veronica Guy,

Tried the link you posted, but it didn't work for me. Anyway, I think I know what you're saying about the defense/nuclear alliances, but believe me I'm far from knowledgeable in this area.

I do recall a previous post here on Australian uranium sales and discussion on who they would or would not sell to.

Seems at that time, they did not want to sell uranium to India, despite its recent pact with US on nuclear development.

And in fact, Australia was gearing up to sell to the Chinese, a potential US foe. So I'm not sure where that leaves us.

Anonymous said...

Yes, the Israelis want their massive "subsidy for the rich" paid in Euros. (Please don't compare it with welfare, which is supposed to help those in need -- even if it gets abuses in rare cases.)

And guess what? They will probably get away with it. Why? Because when it comes to Congress, what AIPAC says, goes.

Condi Rice has already said "yessir" and the Dems in Congress are even more bought and paid for when it comes to the Middle East:

http://www.wakeupfromyourslumber.com/node/3689

David said...

I've included the latest comment but I'm going to stop with the off-topic political comments/scenarios.

Already had to nix a couple of comments that were really off-topic and inflammatory.

The discussion has been great for the most part. Keep it coming and on-topic. Let's cool out, everyone.

Anonymous said...

I do believe that the US is headed toward massive inflation. I also believe that the rest of the economic world is decoupling from our weak dollar/economy and will get along nicely without the US consumer debt or our failed policies. Most large US companies are earning much more in overseas sales than in the US. They're not stupid and know where the growth is.

And using the US dollar to purchase oil has advantages, not to the US, but to those nations using dollars to purchase oil. Yes, the world is a happier place now that the US empire is falling into financial chaos.

Anonymous said...

It is not the President's fault for any collapse of the dollar. The "dollar" is printed by the Federal Reserve, a private bank, set up to protect the private banks. They don't even print United States currency, but Federal Reserve Notes. So, until you understand what the Fed is, you will NEVER, EVER get this story straight.

Anonymous said...

Hasta Vista to U.S. Dollar!
Go Euro!
Euro will be next international reserve currency.

imsmall said...

FAST WEALTH AND BITTER BREAD

The oil prices start to soar
While Real Estate has hit the floor,
The Stock Market is jittery,
The future prospects bitterly
Surveyed on Wall Street and Main Street,
As all alike know they must eat
Their bitter bread, their bitter bread,
Who let fast wealth get to their head.

So China props the dollar up,
But will not fill your beggar´s cup
When she determines not to prop you--
So will not common sense then stop you
From your spendthrift indulgences?
No priest nor prophet comes to bless
Your bitter bread, your bitter bread,
Who let fast wealth go to your head.

It was a fond, elusive dream,
Illusory as it would seem,
But, though superb ambitions went
Before, it was all fraudulent,
This hope, sans rolling up one´s sleeves
To profit--them delusion leaves
But bitter bread, such bitter bread,
Who let fast wealth fill all their head.

Anonymous said...

U.S. exports hit an all-time high in September and the trade deficit has fallen to its lowest point in more than two years. The apparent cause for the jump in exports: The weakening dollar makes them cheaper.

Bottom-line: The U.S. has traditionally run a massive trade deficit, which means month-to-month the U.S. spends far more money on goods manufactured overseas than are spent on U.S. exports. Much of the reason for this has been due to the high cost of U.S. export products internationally (computers, cars etc.).

A weaker dollar is very good for US exporters and can be great for the US economy. However, a weak dollar is very, very, very bad for large Asian/European exporters and other large US trade partners that are used to competing with higher priced U.S. goods putting those
goods at a price disadvantage.

Generally a weak currency is not necessarily a bad thing; China has deliberately attempted to maintain a currency weakness that ensures that their exports are cheaper in the U.S. than U.S. domestic goods. If they were to change that and base their currency on the Euro (or a basket of strong currencies for instance) they would undermine their ability to maintain a favorable price point in the U.S thus harming their own export based economic expansion.

Stijn said...

You are forgetting one thing: the relative size of the US economy compared to the rest of the world's combined economies is shrinking. Globalization is a fact and European companies for instance, are exporting to Asian countries and vice versa, not just to and from the US.

When Asian countries export to Europe instead of the US their profit actually goes up, because the euro's they are receiving are worth more than the dollars. Ofcourse US export will go up, but it also means US will have to roll up it's sleaves once again.

Bob said...

Even with the devaluation of the dollar, our balance of trade worsens!

The United States economy should parallel the economy of Germany. Yet, Germany has increased it's balance of trade quite a bit over the last couple of years while the United States looses ground! Without our 'arms' sales how much worse would it be? Why does the United States have to spend as much on defense as the rest of the world put together! We, as a people are being ripped off by the military industrial complex by our Corporate owned government! With half of our Air Force and about one third of our Navy we could still wipe out the rest of the world militarily!

Wake up America!!

Dusty said...

The 'post' by Anon (sic) hits the nail square on the head. Until folks get the lesson on how the Fed operates, your comments are, at best, frivolous. Think (1) Fed, (2) World Bank, (3) any other major association of bankers. Then of course, read Wealth of Nations...again if you've read it before. Then Machiavelli, then Shakespeare and on and on. Samuel Clements had a rather good handle on all of this matter as well...for those of you who can only read English.
Dusty