Thursday, April 4, 2013

The US Greenback: Cash or Trash?

From the liberal left to the war-mongering Neocon right, America's political establishment has adopted as a fundamental principle Dick Cheney's Doctrine that "deficits don't matter".

Or rather the principle they have adopted is that deficits do matter — a lotsince without them it would be impossible to pursue the War on Terror or provide food stamps and healthcare to the tens of millions of Americans whose jobs have been exported to the Third World by profit maximizing American corporations, such as Apple, IBM and Microsoft.

The price of endless wars and mass welfare, so the new thinking goes, is endless and unimaginably huge deficits covered by money printing.

Money printing, or quantitative easing as it is more politely termed, is thus broadly accepted as the necessary financial laxative for America's insufficiently productive economy.

But not everyone agrees.

Place No Trust in Financial Markets

According to Reagan Administration budget Director, David Stockman, writing in the New York Times, not only has printing a flood of money failed to revive  the  Main Street economy, it has inflated another unsustainable Wall Street bubble, and when that bubble bursts, "America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth."

What to do?

"Get out of the markets," says David Stockman, "and hide out in cash."

Place Your Trust in the Dollar? You Have to Be Kidding

But according Paul Craig Roberts, who was also a high official of the Reagan Administration, in cash is just what you don't want to be because ad-lib money printing is about to cause a rout of the greenback.

Inteviewed by Rob Krall of OpEdNews, Roberts said:

The dollar is one of the biggest bubbles in history.  The Federal Reserve is creating over a trillion new dollars annually, but the demand for dollars is not rising by a trillion annually.  And so, sooner or later, this has to affect the price of the dollar, that is, the exchange value.  And we already see the important nations moving to decouple from the dollar.

We have the BriCs: this is China, Russia, Brazil, India, South Africa.  Altogether now, that's probably about half the world's population.  And it's probably half of the traded goods (laughs).  And so they're setting up a system in which they settle their trade with one another in their own currencies.  The dollar is no longer used as a reserve currency.  They're setting up their own version of an IMF.  They're just going to bypass all the Western institutions.  We see in China and Asia the rise of an Asian currency bloc, which is being organized around the Chinese currency.  We see deals with Japan and China to settle their trade with one another in their own currencies. 

So the demand and use for the dollar is about to rapidly constrict.  We'll have a situation where the Feds are not only creating a trillion new dollars more than the demand is growing, but the demand will be shrinking!  And so the thing will blow up.  And when the dollar bubble pops, so does the bond market bubble, the stock market bubble.  We will have the biggest economic catastrophe in the history of the world, and there is no solution.  The United States will go from being a so-called superpower to a nothing! 
"Where to Hide?

So how best to avoid the deluge, by hiding out in cash or stocking up on canned beans and ammunition?

Or is the panic premature?

In 1782, in correspondence with Adam Smith about British reverses in the American War of Independence, John Sinclair, heir to the earldom of Caithness wrote: "If we go on at this rate, the nation must be ruined." to which Smith replied: "Be assured, my young friend, that there is a great deal of ruin in a nation."

At the time, the British Empire had more than 150 years to run and had not yet reached its apogee. Today, America's position is perhaps not dissimilar to that of Britain in 1782.

Is the Dollar Weak?

Among the few known uses of gold.
The dollar is not as good as gold. Which is to say that it increases in quantity far more rapidly than gold and, in itself, is even more useless than a lump of shiny soft metal, which might at least serve as a doorstop or if suitably worked, adorn a dusky maiden.

But is the dollar doomed? Might the greenback someday be worth less than the paper its printed on?

What, for example, if China or someone else got mad at the US for printing so much cash and sold all their US treasuries. Well nothing, really, except that the US Fed would print another $trillion or so and buy up the unwanted paper. That would leave the Bank of China or Japan or whoever the seller might be with dollars they didn't want, which they would sell for, well, they would sell for what?

Do they think Euros, or Yen or Renminbis offer a better store of value? It seems unlikely.

The EU has a much higher cost structure than the US and is much less flexible in adapting to the globalized market.

The Japanese are swallowing the quantitative easing purgative with abandon, and are openly avowing the intention to boost inflation, so what's to like about the yen?

As for China's currency, it's printed as fast as the Americans turn out greenbacks, or faster.

So the dollar, which was up today by 3% against the Yen and up against the pound, the Euro and the Canadian loonie, looks at least as good as most other forms of paper money you might hold.
So What Will Hold Its Value?

Cash: For the foreseeable future manufactured stuff and services that can be off-shored or computerized, will continue getting cheaper, which means money will hold its value or increase relative to the cost of many things. This trend will be sustained not only through global wage arbitrage, but as the result of advancing technology and the replacement of workers with robots.

Real Estate: In the long run real estate will escalate in nominal value, since the supply relative to the money in circulation continually falls. But real estate markets are cyclical, so prices can fall for many years after a boom or a bubble. Moreover, real estate improvements, as opposed to land, are like all artifacts, subject to depreciation. And as innovative technologies are applied to construction, the dollar cost of real estate improvements could plummet.

Commodities: Supplies of most commodities can still be greatly increased through the application of new extraction and processing technologies. Prices, therefore, will likely remain stable, although prices of individual commodities are susceptible to political action, e.g., China's controls on the export of rare earth elements, or Americas military interventions in the global energy supply chain.

Stocks:  American financial markets are prone to panics and excursions, but even the panic of 2008 caused no permanent damage to those who were invested in sound assets and kept their nerve. Those stocks are now higher than ever.

Bonds: It's possible that US bonds will sell off if inflation picks up, but why should it? Government statistics show US unemployment near 8%, while other measures suggest a real rate of unemployment at least twice that. And exporters of the American economy have now hit their stride. Whatever American workers can do for ten, twenty or thirty dollars an hour, the Third World can do for one, two or three dollars an hour. If its tradable, it has to be a lot cheaper than it was ten years ago. That's indicative not of inflation,but  of deflation.

So for those scared by stocks and GIC's the bond market will likely continue to give a better return than cash under the mattress.

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