Wednesday, September 19, 2007

American economics and the USD

This whole post started with the following post on MyMoneyBlog.
Hedging Against The Dollar: Opening A Foreign Currency Bank Account vs. Buying A Currency ETF » My Money Blog

Look guys, I've mentioned this before and there are some great links already posted. The US economy has some serious issues and barring a massive war to claim vast booty and slaves, the purchasing power of the dollar will decline.

What does this mean? It means that means that more Chinese people will be able to afford the 10th generation iPod and less American people will be able to afford the same iPod. Peter Schiff pretty much nails it: as the value of the USD goes down and goods become relatively more expensive, other buyers with stronger currencies will swoop in and buy those goods.

Why is this happening? That's very complex, but here's a very simple explanation: You are fat and in debt. (same thing) You import more goods than you export and you've been doing it for years. You bring in 10 bananas each worth a dime but you're only bringing 90 cents to the deal. You then give out an IOU for the other 10 cents.

This basically means that you owe people lots of money (40% of the US national debt is foreign-held), but people aren't going to just take cash, b/c the value of that cash keeps dropping. They want stuff. They want oil, gold, food, they want services (skilled american workers), etc.

Cash is just trust. The US handed out a bunch of IOUs for cash, but they're not worth anything if nobody can cash them in for stuff. Of course, the world has been accumulating these IOUs, but they haven't been able to cash in b/c all of the American stuff is so expensive. But that's part and parcel with the whole import/export thing. For USD $100 I can buy 2 Russian programmers for 3 days or I can buy one american programmer for one hour. I can buy one bottle of "American pharmaceutical" or 10 bottles of "Indian Pharmaceutical" (both made from the same stuff).

Nobody wants to buy American stuff b/c it's too expensive; but everyone has these American IOUs that they want to cash in. Of course, everyone's in on the deal now and nobody thinks that these American IOUs are any good. So the solution is simple: the American economy will suffer until they can start paying off the debts and letting people cash in their IOUs. Again, money is just trust. It's pieces of paper or computer bytes with promises attached. The world does not trust the American economy, it does not trust that the American IOUs are worth anything. Until the dollar drops to the point where other countries can "get their money's worth" when they cash in the IOUs, then the dollar will continue to drop.

Jonathan: you said: As long as I can still buy what I need with the dollar, I don’t care if it trade 3:1 with the Euro.

But this is what you're missing, if the Euro goes 3:1 you won't be able to buy what you need with your dollars. Your salary will be the same, but the cost of the iPod will double. Your food will be more expensive as foreign markets start buying your produce with the money you owe them.

Yeah, yeah, this is happening right now on a small scale, we call it inflation. But you've just seen minor inflation, almost a side effect of the reserve banking system. Underneath all of this, the citizens of the US (whose very birth certificates back the money that is printed) are in debt to the world and they continue to live beyond their means. The US consumes more energy and gas than it can produce, while hinging its entire economy on those very resources. US labour is too expensive for all but the western european countries and manufactured goods are likewise too expensive. The only thing the US can "afford" to export is the food, but nobody else really needs the food at American prices.

When the whole thing falls, then you'll see real inflation, gas & food will suddenly cost twice as much and you won't be making any more money. Once it's fallen, you won't be able to "buy what you need with your dollars", your purchasing power will be drastically reduced. This is the cost of globalization, the world is catching up and the US is at the top of the ladder, so the only place left to go is down.

The US is the richest country in the world living a lifestyle on credit. Take all of these "credit card debt ruined my life" stories and scale that out to a whole country. That's what going to happen to the US. We're already seeing record foreclosures which means that people are being forced to sell their biggest asset/investment, in some cases their only real investment. People are skipping vacations to make extra money, they have their kids working at 16, then 15, then 13 & 12 just to keep up the pace. Elderly people are coming back to work greeter jobs at Wal-Mart and the workforce continues to churn harder and harder to keep up.

These are not the signs of prosperity, prosperous people work less not more. These are the signs of a people stretched too thin and ready to pop.


Michael Lacy said...

"The US consumes more energy and gas than it can produce, while hinging its entire economy on those very resources."

How many other countries do this very same thing? Don't get me wrong we in America are on the verge of a shxt storm that needs correction. You make some good points but it’s hard to see because of your obvious anti American remarks.

Gates VP said...

Hey Michael, thanks for the reply.

I'm not trying to be anti-American, I'm trying to be Crystal Clear about the reality of the situation, which does make me sound like an ass. I am Canadian as my profile notes, and if it's any consolation, we're going to be taking some of this ride with you, b/c we've been making the same mistakes.

The only difference is that we have extra resources, we have stuff we can cash in. However, most of it is going to the US right now. If the USD keeps dropping we're going to have to find new trade partners, but there really aren't that many, so we'll be suffering as well.

And there is so much more going here that I can't possibly explain in a single post.

telly said...

"Jonathan: you said: As long as I can still buy what I need with the dollar, I don’t care if it trade 3:1 with the Euro.

But this is what you're missing, if the Euro goes 3:1 you won't be able to buy what you need with your dollars. Your salary will be the same, but the cost of the iPod will double."

Is this kind of like how everything has gotten so incredibly cheap here in Canada due to our rising dollar? Yeah, something like that.

I'm Canadian (and have been accused of being Anti-American once or twice :o) and I still agree with micheal lacy on this one. Tread lightly, we're not much better in Canada. Oil & resources will carry us for only so's happened before...

Evan said...
This comment has been removed by the author.
nobleea said...

Gates, I agree with almost everything you've said. As a country, you cannot continue to spend more than you earn. There only a few ways to get out of this hole...declare bankruptcy (not really going to happen), increase taxes (won't happen to the extent necessary), or inflate your currency by printing more and more of it (thereby making your old debt 'cheaper' in current dollars).

None of this is new information...Goldbugs have been predicting this for a while (gold and USD often go in opposite directions).

It will only take one or two countries diversifying out of their US$ holdings to torpedo the currency for a long time. China could do it as they hold a lot of the US debt. Saudi arabia or any other gulf state could decide to price their oil in euros instead of greenbacks.

Telly, things that are made in the US have/will be getting cheaper in Canada. But the CAD$ hasn't appreciated greatly against the other currencies in the world. So if an iPod is made in Taiwan, it will cost the same in Canada, while the price increases in US$.

Gates VP said...

But the CAD$ hasn't appreciated greatly against the other currencies in the world.

Exactly, we're in the same boat here, we'll be taking some of this ride. As to the reason we're still paying more for books, well, it's two-fold.

1. Greed/Business: Hey if they can keep charging Canadians more, they will.

2. Production Cycles: The finished goods we're buying today was (mostly) produced 6 months ago. At that point everything was priced differently. Based on the industry, the markets tend to lead by 3-12 months.

As of March 1st, we were trading at $0.85 or paying, $1.17 CDN for one USD. So the goods we're buying now were probably made at a 15% price differential. Unless consumers start "really complaining" (i.e.: not buying books, crossing the border to buy cars), then NA companies are going to hold off on any "price adjustments" b/c they don't want to lose money.

cautious said...

Hi guys, I dont think there is an anti american sentiment here.I is more an anti-central bank paper(fiat money)position.I essentially agree on the fiat money issues here but long term ( which seems be getting shorter by the day)I am afraid you will find all fiat money is going to have issues. The euro could be unhinged by france in the near future .Central banks all over the world are having huge issue with CP market and we are already having bank runs like the one in red rock in england. (google this stuff)whatever we see on the surface there is an Iceburg of bad things going on right now.
I was first warned of the sub-prime mess 2 years ago ....When I tried to warn people they thought I was an alien( chicken little syndrome)The glassy -eyed so called investment advisors I spoke to said " gee you are looking too carefully at the day to day market,we look at the broader picture", with that I said "OOOOOOOKKKK! and shut up.I have met many people who have quietely sold everything, paid off all debt and downsized bigtime and bought cheap rural because they see the storm coming(monetary,politcal,economic)there are no safe investments but they are invested in physical gold(confiscation),and paid for assets and real property.they also jump in and out of markets briefly to take advantage of calculated opportunities while living out there daily lives. I think that this is the only defensive posture possible at this time.There is no best country or place to live( I have looked ALOT)) ,each will have issues ultimately,but a simpler debt free life for me was the choice.I wish eveyone the best of luck in these difficult decissions.

Gates VP said...

Hey Cautious, thanks for the post. I really wish I could write a good post that wasn't anti-North American and anti-reserve banking, b/c I really don't have anything against fiat currency per se.

I'm not really angry that the fiat system exists, I kind of feel that it's a necessary evil. I'm just really angry that nobody seems to understand the grand implications of the fiat system, of the concept of paper and digital numbers as "trust enforced by law".

Maybe it's just too abstract, but even the pros don't really seem to understand it. But maybe it's just too big. I mean, look at the original poster: Jonathan.

He's a bright guy, he writes tons of articles and he's probably indirectly helped dozens of people deal with their debt problems. This is a guy who writes about personal finance daily, and he doesn't quite "get it", what chance does everyone else have?

Maybe if I have an issue with fiat currency, that's the issue: people don't get it, people simply don't understand the reserve banking system and they don't understand what it means. So when you try to explain the whole concept of "crushing inflation", it just doesn't make any sense.

cautious said...

Precisely, Gates vp Having been exposed to the securites course this is not something even considered. and so instantly you step outside the broker or advisors comfort and knowledge zone.
You must first want to study the history of money and do your own due diligence on the subject. From the money traders in Christ's time ,to the money sticks in England ,to the beginings of central banking Bauers(rothschilds) the history of money is the history of power and politics and great evil.
It is exactly like being a murder detective find out who has to gain the most by what is happened and you will invariably find the authors of the change regardless of whatever modified history(older)or media smoke shows(newer) are created to dispell.
The biggest problems we face presently are two fold First there are alot more signifigant players and markets than in the past and so I beleve that we see different groups with different vested interests playing there cards while others in the game watch calculate and make there corresponding moves. But what is a bigger problem is no group or power can really exert decent safety controls when the markets become unhinged from the tracks from this world wide debt crisis and de-leveraging . .A wild solution has been forwarded that the central banks would capitalize ALL debt... but thats not in the cards for now. The classic example of the danger of leverage is called LTCM (google) It almost took out the entire market a few yrs back until the reserve boys stepped in (for an undiclosed fee). Now we are in a situation 10000 time worse.
This is the real danger now. Nobody knows where the game is headed but and the global uncertainty is incredible!Banks etc dont want you to know any of this but at this point it is impossible to hide with the events world wide.The gravity of the situation is so much worse. Currency plays are only a very small part of the equation but one that is most visible to us the general public.
So presently the CDN dollar has appreciately ~18% against it american counterpart but unlike what a previous poster has said it Has also has appreciated against other currencies as well( google)just not to the same degree.In other words our dollar is in play right as is Canada as a whole.
Now these gains are not based on reality and are subject to the same downward forces as up.Remember this IS a fiat money.
So question is what do we do with our new world wide bubble er buying power during this small window of opportunity ? Or Hey is this really all being played out so we end up with the Amero and the Euro (sorry couldnt resist the conspiracy overtones) LOL!

Gates VP said...

Yeah, I know the LTCM one, quite the story :) As to the conspiracy overtones, I thought that was par for the course whenever anyone spoke of reserve banking.

Of course, looking crazy doesn't help our case. So many people are far enough removed that we sound kind of crazy just explaining the truth, let alone the suppositions.

I remember trying to explain the actual nature of the National debt/deficit to a fellow programmer. He had a university degree, excelled at a mentally challenging job and had some early grey hairs to attest to his "experience".

But I just couldn't get him to understand the deficit. "They invent money?", "Doesn't the trading between countries just balance out?"

I already sounded like a nutjob, and I was just trying to explain the truth. I'm pretty sure that the key to this whole "educate the world" process is actually to feed it to people slowly until they start to catch on whilst maintaining all measure of truth. The whole thing sounds crazy enough as it is, conspiracies don't make it better :)

cautious said...

Hi Gates, today is Friday Oct26

As of today the concensus seems to be at this point that if the fed drops rates again
the stock market will goe up and US dollar down.It is interestng that the USD is
quickly aproaching an inversion point with the Euro ..
Oct 2000 the 1USD was 1.17 Euro
USD is now 1USD to .69Euro
If the fed rate goes to cut .5 % we will soon achieve the 1USD to .585
compete reversal ..
Interstingingly enough the CDN dollar also had its high point against the
Euro in Oct 10 2000 and it was
1Cdn to .7757 Euro
This has never been achieved since then..even with all the recent
appreciation the cdn dollar is still in Oct 2007only
1Cdn to .7219 Euro
It is remarkakable if you look at all the other currencies as the CDn dollar
had massive gains over 10 years against many like 50% against sing dollar
100% angainst malasian ringit 40% against swiss frank and 200% against the
thai baht .

It almost looks and feeds nicely into ....the Amero conspiracy.. like someone is trying to destroy USD through depreciation
and the cdn dollar through appreciation!
Both Populations will cry out for action for when these currency shifts have their obvious decimating affects on their respective countires..Actually it is quite simple yet brilliant..

cautious said...

AS a follow up on previous observations and to re-iterate previous coment

Canadians are very wealthy in a world wide sense right now as our real
estate bubble continues ..... my situation 150% with very high sales and a 13% rise this year in my area which if you factor in the over 20% in world wide appreciation of cdn currency means our housing on the west coast has gone up over 32% to an international buyer from last yr (staggering!) Simply put this means if we sell our homes we have 32%more buying power
.. . This will change dramatically when the strong
currency kills CDN exports and our biggest export market (the US) goes into recession.I am now seriously considering selling all property I own, the farm all possesions etc... buying gold maple leafs as they have only appreciated 10% to cdns as per currency rises and store me my family and my gold offshore ....I will not buy property any where for now only rent .The patriot act in the US calls for consficaction of gold by executive order and in Canada something similar exists under crisis situation. (AKA curency crisis )This might be used prior to introduction of amero .. We may not reach that for awhile and maybe never perhaps...... as unlike in 1929 the common people dont own gold as it is not in
circulation. ....but it would seem prudent to be prepared now just in case!

what think ?...I am over-reacting Gee starting to feel like Mel gibson (LOL!) Guess I should pick up the national Enquirer to find out the truth(ha!)


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