The dollar is dead - long live the renminbi
Whatever happens at the G20, the days of Western dominance are at an end, says Jeremy Warner.
By Jeremy Warner
Published: 7:42PM BST 25 Sep 2009
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Comment on this article
The balance of global economic power has shifted Photo: PA Sometimes it takes a crisis to restore reason and equilibrium to the world, and so it is with the trade and capital imbalances that were arguably the root cause of the financial collapse of the past two years.
To economic purists, the changes now under way in demand and trade are inevitable, necessary and even desirable. Even so, dollar supremacy and the geo-political dominance of the West are both likely long-term casualties.
One, almost unnoticed, effect of the downturn is that past imbalances in trade and capital flows are correcting themselves of their own volition, the simple consequence of lower demand in once profligate consumer nations.
Current-account surpluses in China, Germany and Japan are narrowing, as are the deficits of the major consumer nations – primarily America, but also smaller profligates such as Britain and Spain.
The key question for G20 leaders as they meet in Pittsburgh is not bankers' bonuses, financial regulation and other issues of peripheral importance, but whether this correction in trade might be used as the basis for a permanently more balanced world economy.
In direct contradiction of US objectives, Angela Merkel, the German Chancellor, accuses Britain and America of using the issue of trade imbalances to backtrack on financial reform and bankers' bonuses. "We should not start looking for ersatz [substitute] issues and forget the topic of financial market regulation," she said before boarding the plane to Pittsburgh.
To the big export nations, the primary cause of the crisis was Anglo Saxon financiers, whose wicked and avaricious ways created a catastrophe in the financial system, which led to a collapse in world trade. Once bankers are tamed, this one-off shock can be put behind us and the world will return to business as usual.
Blaming bankers is politically popular – Ms Merkel has an election to fight on Sunday – but the idea that the world economy will return to the way it was once this supposed cancer is removed is fanciful.
A seminal shift in behaviour is being forced on the deficit nations where, despite massive fiscal, monetary and financial system support, there is a continuing scarcity of credit and a growing propensity to save. Neither of these two constraints on demand will reverse any time soon.
This, in turn, is forcing change on surplus countries, whether they like it or not. Export-orientated nations can no longer rely on once profligate neighbours to buy their goods. Against all instinct, they are having to stimulate their own domestic demand.
The most startling results are evident in China, where retail sales grew an astonishing 15.4 per cent in August. Fiscal action has succeeded in boosting consumption in Germany, too, despite mistrust of what one German politician has dubbed "crass Keynesianism".
Unfortunately for him, Germany will have to persist with its Keynesian medicine for some time yet if it is to avoid a collapse back into recession. Tax cuts and perhaps the removal of fiscal incentives to save are essential to the process of supporting domestic demand.
The challenge for a developing nation such as China is a rather different one. In China, the propensity to export and save is driven by an absence of any meaningful social security net, in combination with the legacy of its oppressive one child policy, which has deprived great swathes of the population of children to fall back on for support in old age.
What's more, most Chinese don't earn enough to buy the products they are producing, so in what has become the customary path for developing nations, they export the surplus and save the proceeds.
Yet even in China the establishment of a newly affluent, free-spending middle class may now have gained an unstoppable momentum. In any case, the country can no longer rely on American consumers to provide jobs and growth. It needs a new growth model, which means ultimately adopting the Henry Ford principle that if you want a sustainable market for your products, you have to pay your workers enough to buy them.
These trends – all of which pre-date the crisis but which, out of necessity, are being greatly accelerated by it – will eventually drive a move away from the dollar as the world's reserve currency of choice. As China takes control of its economic destiny, spends more and saves less, there will be less willingness both to hold dollar assets and to submit to the domestic priorities of US monetary policy.
None of this will happen overnight. Depressed it might be, but US consumption is still substantially bigger than that of all the surplus nations put together. All the same, that the dollar's reign as the world's dominant currency is drawing to a close is no longer in doubt.
http://www.telegraph.co.uk/finance/comment/jeremy-warner/6232623/The-dollar-is-dead---long-live-the-renminbi.html
Showing posts with label US dollar. Show all posts
Showing posts with label US dollar. Show all posts
Tuesday 29 September 2009
Sunday 13 September 2009
The dollar carry-trade
Cheap dollars are sowing the seeds of the next world crisis
After years of selling cheap goods to debt-fuelled Western consumers, China now has $2 trillion dollars of foreign exchange reserves. That's 2,000 billion – a reserve haul no less 25 times bigger than that of the UK.
By Liam Halligan
Published: 6:05PM BST 12 Sep 2009
Comments 25 Comment on this article
In a world of systemic instability, reserves mean power. Reserves mean you can defend your currency, stabilise your banking system and boost your economy without resorting to yet more borrowing – or, worse still, the printing press.
More than half of China's reserves are denominated in dollars. So when the dollar falls, China loses serious money. When you're talking about a dollar-reserve number involving 12 zeros, even a modest weakening of the greenback sees China's wealth takes a mighty hit.
In recent years, America has run massive budget and trade deficits, both of which put downward pressure on the dollar – so devaluing China's reserves. Beijing has remained tight-lipped, worried less about diplomatic niceties than the financial implications of voicing its concerns. If the markets thought China would buy less dollar-denominated debt going forward, the US currency would weaken further, compounding Beijing's wealth-loss.
American leaders have relied on this Catch-22 for some time, guffawing that China is in so deep it has no choice but to carry on "sucking-up" US debt. But Beijing's Communist hierarchy is now so worried about America's wildly expansionary monetary policy that it is speaking out, despite the damage that does to the value of China's reserves.
Last weekend, Cheng Siwei, a leading Chinese policy maker, said that his country's leaders were "dismayed" by America's recourse to quantitative easing. "If they keep printing money to buy bonds, it will lead to inflation," he said. "So we'll diversify incremental reserves into euros, yen and other currencies".
This is hugely significant. China is now more worried about America inflating away its debts than about those debts being exposed to currency risk. Economists at Western banks making money from QE still say deflation is more likely than inflation. As this column has long argued, they are talking self-serving tosh.
The entire non-Western world rightly sees serious inflationary pressures down the track in the US, UK and other nations where political cowardice has resulted in irresponsible money printing.
Following Mr Cheng's comments, the dollar fell throughout last week, hitting a 12-month low against the euro. As the dollar's "safe haven" status was questioned, gold surged above $1,000 an ounce to an 18-month high.
The US currency could well keep falling. America's trade deficit grew in July at the fastest rate in almost a decade. Imports exceeded exports by $32bn last month – a gap 16pc wider than the month before. One reason was that as oil prices strengthened, so did the cost of US crude imports.
Oil touched $72 a barrel last week. If the greenback weakens further, prices will keep going up. That's because crude is priced in dollars and global investors will increasingly use commodities as an anti-inflation hedge.
These forces could combine to send the dollar into freefall. US inflation would then soar and interest rates would have to be jacked up. Even if a fast-collapsing dollar is avoided, Fed rates may have to rise quickly if China is serious about dollar-divesting and the US has to sell its debt elsewhere. Under both scenarios, the world's largest economy could get caught in the stagflation trap – recession and high inflation.
Beijing doesn't want the US to stagnate. China has too much to lose. But even if China and US work together to avoid a meltdown, the currency markets could provide one anyway.
The dollar is now being used as a "carry" currency. Traders are using low Fed rates to take out cheap dollar loans, then converting the money into currencies generating higher yields.
"Carrying" credit in this way is currently the source of huge gains. No one knows the true scale, but the world has, of course, been flooded with cheap dollars.
This presents serious systemic danger. A dollar weighed down by Chinese divestment, then suppressed further by carry-trading, could easily spring back. Those who had borrowed in dollars would owe more, while their dollar-funded investments would be worth less. This "unwinding" could send financial shock around the globe.
This is what happened in 1998, when yen carry-trades went wrong, causing the collapse of Long-Term Capital Management and sparking a global slowdown.
So even if the Western world manages to fix its banking system, the Fed's money printing could well be stoking up the next financial crisis. The dollar carry-trade. You heard it here first.
Liam Halligan is chief economist at Prosperity Capital Management
http://www.telegraph.co.uk/finance/comment/liamhalligan/6179482/Cheap-dollars-are-sowing-the-seeds-of-the-next-world-crisis.html
After years of selling cheap goods to debt-fuelled Western consumers, China now has $2 trillion dollars of foreign exchange reserves. That's 2,000 billion – a reserve haul no less 25 times bigger than that of the UK.
By Liam Halligan
Published: 6:05PM BST 12 Sep 2009
Comments 25 Comment on this article
In a world of systemic instability, reserves mean power. Reserves mean you can defend your currency, stabilise your banking system and boost your economy without resorting to yet more borrowing – or, worse still, the printing press.
More than half of China's reserves are denominated in dollars. So when the dollar falls, China loses serious money. When you're talking about a dollar-reserve number involving 12 zeros, even a modest weakening of the greenback sees China's wealth takes a mighty hit.
In recent years, America has run massive budget and trade deficits, both of which put downward pressure on the dollar – so devaluing China's reserves. Beijing has remained tight-lipped, worried less about diplomatic niceties than the financial implications of voicing its concerns. If the markets thought China would buy less dollar-denominated debt going forward, the US currency would weaken further, compounding Beijing's wealth-loss.
American leaders have relied on this Catch-22 for some time, guffawing that China is in so deep it has no choice but to carry on "sucking-up" US debt. But Beijing's Communist hierarchy is now so worried about America's wildly expansionary monetary policy that it is speaking out, despite the damage that does to the value of China's reserves.
Last weekend, Cheng Siwei, a leading Chinese policy maker, said that his country's leaders were "dismayed" by America's recourse to quantitative easing. "If they keep printing money to buy bonds, it will lead to inflation," he said. "So we'll diversify incremental reserves into euros, yen and other currencies".
This is hugely significant. China is now more worried about America inflating away its debts than about those debts being exposed to currency risk. Economists at Western banks making money from QE still say deflation is more likely than inflation. As this column has long argued, they are talking self-serving tosh.
The entire non-Western world rightly sees serious inflationary pressures down the track in the US, UK and other nations where political cowardice has resulted in irresponsible money printing.
Following Mr Cheng's comments, the dollar fell throughout last week, hitting a 12-month low against the euro. As the dollar's "safe haven" status was questioned, gold surged above $1,000 an ounce to an 18-month high.
The US currency could well keep falling. America's trade deficit grew in July at the fastest rate in almost a decade. Imports exceeded exports by $32bn last month – a gap 16pc wider than the month before. One reason was that as oil prices strengthened, so did the cost of US crude imports.
Oil touched $72 a barrel last week. If the greenback weakens further, prices will keep going up. That's because crude is priced in dollars and global investors will increasingly use commodities as an anti-inflation hedge.
These forces could combine to send the dollar into freefall. US inflation would then soar and interest rates would have to be jacked up. Even if a fast-collapsing dollar is avoided, Fed rates may have to rise quickly if China is serious about dollar-divesting and the US has to sell its debt elsewhere. Under both scenarios, the world's largest economy could get caught in the stagflation trap – recession and high inflation.
Beijing doesn't want the US to stagnate. China has too much to lose. But even if China and US work together to avoid a meltdown, the currency markets could provide one anyway.
The dollar is now being used as a "carry" currency. Traders are using low Fed rates to take out cheap dollar loans, then converting the money into currencies generating higher yields.
"Carrying" credit in this way is currently the source of huge gains. No one knows the true scale, but the world has, of course, been flooded with cheap dollars.
This presents serious systemic danger. A dollar weighed down by Chinese divestment, then suppressed further by carry-trading, could easily spring back. Those who had borrowed in dollars would owe more, while their dollar-funded investments would be worth less. This "unwinding" could send financial shock around the globe.
This is what happened in 1998, when yen carry-trades went wrong, causing the collapse of Long-Term Capital Management and sparking a global slowdown.
So even if the Western world manages to fix its banking system, the Fed's money printing could well be stoking up the next financial crisis. The dollar carry-trade. You heard it here first.
Liam Halligan is chief economist at Prosperity Capital Management
http://www.telegraph.co.uk/finance/comment/liamhalligan/6179482/Cheap-dollars-are-sowing-the-seeds-of-the-next-world-crisis.html
Wednesday 9 September 2009
China alarmed by US money printing
China alarmed by US money printing
The US Federal Reserve's policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy.
By Ambrose Evans-Pritchard, in Cernobbio, Italy
Published: 9:06PM BST 06 Sep 2009
Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing".
"We hope there will be a change in monetary policy as soon as they have positive growth again," he said at the Ambrosetti Workshop, a policy gathering on Lake Como.
"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.
China's reserves are more than – $2 trillion, the world's largest.
"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added.
The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.
Mr Cheng said the Fed's loose monetary policy was stoking an unstable asset boom in China. "If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.
"Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down."
Mr Cheng said China had learned from the West that it is a mistake for central banks to target retail price inflation and take their eye off assets.
"This is where Greenspan went wrong from 2000 to 2004," he said. "He thought everything was alright because inflation was low, but assets absorbed the liquidity."
Mr Cheng said China had lost 20m jobs as a result of the crisis and advised the West not to over-estimate the role that his country can play in global recovery.
China's task is to switch from export dependency to internal consumption, but that requires a "change in the ideology of the Chinese people" to discourage excess saving. "This is very difficult".
Mr Cheng said the root cause of global imbalances is spending patterns in US (and UK) and China.
"The US spends tomorrow's money today," he said. "We Chinese spend today's money tomorrow. That's why we have this financial crisis."
Yet the consequences are not symmetric.
"He who goes borrowing, goes sorrowing," said Mr Cheng.
It was a quote from US founding father Benjamin Franklin.
http://www.telegraph.co.uk/finance/economics/6146957/China-alarmed-by-US-money-printing.html
The US Federal Reserve's policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy.
By Ambrose Evans-Pritchard, in Cernobbio, Italy
Published: 9:06PM BST 06 Sep 2009
Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing".
"We hope there will be a change in monetary policy as soon as they have positive growth again," he said at the Ambrosetti Workshop, a policy gathering on Lake Como.
"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.
China's reserves are more than – $2 trillion, the world's largest.
"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added.
The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.
Mr Cheng said the Fed's loose monetary policy was stoking an unstable asset boom in China. "If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.
"Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down."
Mr Cheng said China had learned from the West that it is a mistake for central banks to target retail price inflation and take their eye off assets.
"This is where Greenspan went wrong from 2000 to 2004," he said. "He thought everything was alright because inflation was low, but assets absorbed the liquidity."
Mr Cheng said China had lost 20m jobs as a result of the crisis and advised the West not to over-estimate the role that his country can play in global recovery.
China's task is to switch from export dependency to internal consumption, but that requires a "change in the ideology of the Chinese people" to discourage excess saving. "This is very difficult".
Mr Cheng said the root cause of global imbalances is spending patterns in US (and UK) and China.
"The US spends tomorrow's money today," he said. "We Chinese spend today's money tomorrow. That's why we have this financial crisis."
Yet the consequences are not symmetric.
"He who goes borrowing, goes sorrowing," said Mr Cheng.
It was a quote from US founding father Benjamin Franklin.
http://www.telegraph.co.uk/finance/economics/6146957/China-alarmed-by-US-money-printing.html
Monday 15 June 2009
Warning: Watch out for US dollar exposure in commodities trading
One word of warning on commodities. Since they are usually priced in US dollars, price moves can sometimes have more to do with dollar strength or weakness than with commodities.
In periods of dollar weakness, for example, commodity prices may rise just to keep their European and Japanese price relatively stable.
This is always an important consideration if you do not want to accidentally speculate on currencies.
Related posts:
Buying commodities. When?
Trade in a basket of commodities
CRB Index
Long periods of high growth and high inflation are rare
The recent commodity story has been all about China
Warning: Watch out for US dollar exposure in commodities trading
In periods of dollar weakness, for example, commodity prices may rise just to keep their European and Japanese price relatively stable.
This is always an important consideration if you do not want to accidentally speculate on currencies.
Related posts:
Buying commodities. When?
Trade in a basket of commodities
CRB Index
Long periods of high growth and high inflation are rare
The recent commodity story has been all about China
Warning: Watch out for US dollar exposure in commodities trading
Tuesday 2 June 2009
Geithner insists Chinese dollar assets are safe
Geithner insists Chinese dollar assets are safe
US Treasury Secretary Tim Geithner was laughed at by an audience of Chinese students after insisting that China's US assets are safe.
By Edmund Conway
Last Updated: 8:03PM BST 01 Jun 2009
In his first official visit to China since becoming Treasury Secretary, Mr Geithner told politicians and academics in Beijing that he still supports a strong US dollar, and insisted that the trillions of dollars of Chinese investments would not be unduly damaged by the economic crisis. Speaking at Peking University, Mr Geithner said: "Chinese assets are very safe."
The comment provoked loud laughter from the audience of students. There are growing fears over the size and sustainability of the US budget deficit, which is set to rise to almost 13pc of GDP this year as the world's biggest economy fights off recession. The US is reliant on China to buy many of the government bonds it is planning to issue but Beijing's policymakers have expressed concern about the strength of the dollar and the value of their investments.
Related Articles
US calls for China to have greater say in world economic affairs
We all want to get back to business but we need an election first
The trillion dollar question
Deficit will be tamed ? Geithner
Tim Geithner will put away the verbal grenades in China
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5423650/Geithner-insists-Chinese-dollar-assets-are-safe.html
US Treasury Secretary Tim Geithner was laughed at by an audience of Chinese students after insisting that China's US assets are safe.
By Edmund Conway
Last Updated: 8:03PM BST 01 Jun 2009
In his first official visit to China since becoming Treasury Secretary, Mr Geithner told politicians and academics in Beijing that he still supports a strong US dollar, and insisted that the trillions of dollars of Chinese investments would not be unduly damaged by the economic crisis. Speaking at Peking University, Mr Geithner said: "Chinese assets are very safe."
The comment provoked loud laughter from the audience of students. There are growing fears over the size and sustainability of the US budget deficit, which is set to rise to almost 13pc of GDP this year as the world's biggest economy fights off recession. The US is reliant on China to buy many of the government bonds it is planning to issue but Beijing's policymakers have expressed concern about the strength of the dollar and the value of their investments.
Related Articles
US calls for China to have greater say in world economic affairs
We all want to get back to business but we need an election first
The trillion dollar question
Deficit will be tamed ? Geithner
Tim Geithner will put away the verbal grenades in China
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5423650/Geithner-insists-Chinese-dollar-assets-are-safe.html
Wednesday 11 March 2009
Dollar defies recipe for currency collapse
Dollar defies recipe for currency collapse
The US Federal Reserve is printing money. The US government is also spending wildly today so there won’t be a depression tomorrow. It sounds like a recipe for currency collapse. Yet the dollar keeps picking up. And the trend seems unlikely to change soon. What’s going on? Well, consider the competition.
By Ian Campbell, breakingviews.com
Last Updated: 4:08PM GMT 10 Mar 2009
Start with the dollar’s predecessor as reserve currency – the pound. At $1.38, it is close to setting what would be 20-year lows against the dollar, less than a year after it set quarter-century highs.
Let us count the woes. The banks have big foreign liabilities, the deficit-ridden UK government has taken on most of the risk in the banking sector, and the Bank of England is going to add £75bn in fresh notes to the pool of sterling assets. Who wants them? Not foreign investors.
Related Articles
Authorities lose patience with collapsing dollar
Morgan Stanley warns of 'catastrophic event' as ECB fights Federal Reserve
Basket case Britain must rebuild its credibility
Hawkish ECB risks central bank fight on rates
Euro bank's hawks take a pounding
The euro, Icarus-like last summer, also looks to be heading fast for the soil. Eurozone growth is bad. Its banks are in trouble. How to avoid an unfortunate roast of Greece, Ireland, Portugal and Spain is the question. But now add Belgium, Italy and Austria, whose banks are among the worst affected by eastern Europe’s implosion.
In Frankfurt, Jean-Claude Trichet, head of the European Central Bank is not in favour of easing. In Berlin, Chancellor Angela Merkel is not keen on bailing. The zone is sinking.
Just like Japanese exports – down by an annual 46pc in January. The yen’s rise last year was in part technical. Hedge funds advocated shorting Japan. Then it became time to drop those risky yen shorts and run for cover. But Japan’s fundamentals are now exposed and none too pretty. Recession is intense.
US fundamentals are dreadful, too. But policy-making could hardly be more activist. It is in essence a huge gamble on recovery. For now, the world would rather take that gamble and buy the multitude of treasuries the US government is issuing than contemplate anything else. The reserve currency will forge ahead. Unless the world starts to think the big US wager is going to be a losing one.
http://www.telegraph.co.uk/finance/breakingviewscom/4968519/Dollar-defies-recipe-for-currency-collapse.html
The US Federal Reserve is printing money. The US government is also spending wildly today so there won’t be a depression tomorrow. It sounds like a recipe for currency collapse. Yet the dollar keeps picking up. And the trend seems unlikely to change soon. What’s going on? Well, consider the competition.
By Ian Campbell, breakingviews.com
Last Updated: 4:08PM GMT 10 Mar 2009
Start with the dollar’s predecessor as reserve currency – the pound. At $1.38, it is close to setting what would be 20-year lows against the dollar, less than a year after it set quarter-century highs.
Let us count the woes. The banks have big foreign liabilities, the deficit-ridden UK government has taken on most of the risk in the banking sector, and the Bank of England is going to add £75bn in fresh notes to the pool of sterling assets. Who wants them? Not foreign investors.
Related Articles
Authorities lose patience with collapsing dollar
Morgan Stanley warns of 'catastrophic event' as ECB fights Federal Reserve
Basket case Britain must rebuild its credibility
Hawkish ECB risks central bank fight on rates
Euro bank's hawks take a pounding
The euro, Icarus-like last summer, also looks to be heading fast for the soil. Eurozone growth is bad. Its banks are in trouble. How to avoid an unfortunate roast of Greece, Ireland, Portugal and Spain is the question. But now add Belgium, Italy and Austria, whose banks are among the worst affected by eastern Europe’s implosion.
In Frankfurt, Jean-Claude Trichet, head of the European Central Bank is not in favour of easing. In Berlin, Chancellor Angela Merkel is not keen on bailing. The zone is sinking.
Just like Japanese exports – down by an annual 46pc in January. The yen’s rise last year was in part technical. Hedge funds advocated shorting Japan. Then it became time to drop those risky yen shorts and run for cover. But Japan’s fundamentals are now exposed and none too pretty. Recession is intense.
US fundamentals are dreadful, too. But policy-making could hardly be more activist. It is in essence a huge gamble on recovery. For now, the world would rather take that gamble and buy the multitude of treasuries the US government is issuing than contemplate anything else. The reserve currency will forge ahead. Unless the world starts to think the big US wager is going to be a losing one.
http://www.telegraph.co.uk/finance/breakingviewscom/4968519/Dollar-defies-recipe-for-currency-collapse.html
Sunday 22 February 2009
There will be slim pickings if China loses its appetite for Western debt
There will be slim pickings if China loses its appetite for Western debt
Last week I argued that the idea of large Asian economies "decoupling" from the West was unhelpful. Globalization makes nations more interrelated, not less. So export-oriented nations like China and India were always going to feel the impact of a massive Western contraction.
By Liam Halligan
Last Updated: 6:11PM GMT 21 Feb 2009
Comments 0 Comment on this article
But I have to admit that China, with its massive 1,400m population, isn't doing badly. Retail sales remain strong – up 17pc in real terms. Growth has slowed, but GDP still expanded by a pretty spectacular 6.8pc during the fourth quarter of last year.
Japan – that other Asian giant – continues to suffer. Tumbling exports have sparked the worst slump in 35 years. Japanese GDP contracted 3.3pc during the last three months of 2008 – equivalent to a 12.7pc annualized drop. The Nikkei 225 index of leading Japanese shares is down 16pc since the start of 2009. Chinese shares, in contrast, have gained 25pc this year – the best return of any stock market in the world. London's FTSE-100 shed 12pc over the same period, with New York's S&P 500 down 15pc.
Optimism in China has been boosted by the government's Rmb4,000bn (£405bn) support package. Unlike Japan and the cash-strapped Western nations, China is funding its fiscal stimulus using reserves, not extra borrowing.
As the West's predicament has worsened, and China's relative strength has punched through, the political mood music has changed. Just a few weeks ago, in his first speech as US Treasury Secretary, Timothy Geithner accused Beijing of "manipulating" its currency. So what if the renminbi has appreciated more than 20pc against the dollar since 2005, undermining Chinese exports? Wanting to appear tough, "Tiny Tim" attacked China.
Last week's G7 Finance Minister's meeting in Rome produced far more measured tones. "We welcome China's fiscal measures and continued commitment to move to a more flexible exchange rate," purred the post-Summit communiqué.
Hillary Clinton also perfected her "China bashing" rhetoric as she bid for the White House. But now, as US Secretary of State, and on a visit to China, she insists "a positive co-operative relationship" between Beijing and Washington "is vital to peace and prosperity, not only in the Asia-Pacific region, but worldwide".
So, what's different – apart from US politicians no longer being in election mode? Well, behind the scenes, the Chinese government has started demanding guarantees for the $700bn of US Treasury bills on its books.
China has been keeping the States afloat for the best part of a decade, buying up vast quantities of T-bills to fund America's enormous budget and trade deficits. At any point, China could seriously damage the world's largest economy – by refusing to lend more money. So reliant is America on funding from Beijing that, by turning off the cash taps, China could spark an instant run on the dollar.
The Chinese haven't done that as it would harm their dollar-based holdings and they understand we live in an inter-dependent world.
But the ever-greater use of Asian savings to fund the "advanced" economies' deficits is unsustainable. And, as such, we're reaching the point where it will not be sustained. With Western governments intent on printing money and debauching their currencies, the big emerging market creditors – not only China, but Taiwan, Russia, South Korea and others – are now privately raising doubts about their future appetite for Western debt.
This demand drop-off will happen just as the West's dependence on such credit peaks. America and the UK are starting to issue sovereign paper like confetti, to fund highly-irresponsible "recovery programs".
The "rush from risk" that followed the Lehman collapse last September caused the repatriation of billions of dollars invested in emerging markets back to the "safe haven" of the West. That has so far allowed the US and UK authorities to get their larger debt issues away.
But the upcoming volumes are simply enormous. Last year, the US sold bonds to cover its $460bn deficit – around $200bn to foreigners, with China taking the lion's share. But America is on course to issue a staggering $2,000bn of debt in each of the next two years.
Over the same period, the UK will be flogging three times more gilts annually than during 2008. Right across the Western world, crisis-ridden governments will be issuing more and more debt.
Worried about falling currencies and rising inflation, the emerging markets – not least the Chinese – are demanding better returns to buy Western sovereign bonds. This is entirely justified. The debtor governments are weak, confused, and piling loans on top of loans with little sign of future growth.
But how will the Western world react when the creditor countries finally refuse to buy? How will America respond – with resignation, understanding, or aggression? That's the crucial question the world faces over the next three to five years. Just what happens when China stops buying US government debt?
This 'crank' sticks by his prediction that the single currency will not survive
The euro has just surged 2pc against the dollar, up from a three-month low. Why? Certainly not because the eurozone's economic prospects have improved.
New data shows a sharp drop in the 16-member states' PMI index – a bellwether for future growth. The single currency area is still contracting at breakneck speed, and now faces a 1.2pc fall in GDP during the first three months of this year.
So why did the euro strengthen? Because Peer Steinbrueck, Germany's finance minister, indicated the currency union's largest economy would consider bailing-out weaker members if they defaulted on their sovereign debts.
Since the euro was launched in 1999, those of us arguing it would eventually break-up have been dismissed as cranks. But now, by admitting it "will show itself capable of acting", Germany has acknowledged bail-outs may be needed, suggesting collapse is a genuine possibility. The only surprise is that it's taken so long for the politicians to face up to economic reality.
For some time now, eurozone countries with large budget and/or trade deficits have been forced to pay high interest rates when issuing sovereign debt. These problem nations – Portugal, Ireland, Italy, Greece and Spain – are known collectively in global debt markets by the unfortunate acronym of "PIIGS".
The gap between their average 10-year bond yield and the rate needed to sell German government debt – "the PIIGS-spread" – has just topped 200 basis points. Austria has also now joined this high-risk group – given the exposure of its banking system to the emerging markets of Eastern Europe.
German Chancellor Angela Merkel refuses to comment on whether Germany would help eurozone members in trouble. No wonder. As German exports suffer, unemployment is rising. And after years of budgetary restraint, German voters won't take kindly to paying for excesses elsewhere.
But signals coming out of the German Finance Ministry indicate a plan is anyway being hatched – for countries with better credit ratings to sell bonds and then lend the proceeds to the ailing PIIGS. In return for doing this, though, the stronger members will surely want some say over how the money is spent and when taxes will be raised to pay it back.
At that point, eurozone voters will become extremely nervous at an implicit transfer of sovereignty – and the central contradictions of monetary union will be exposed. I've predicted the demise of the single currency since long before it's launch. I'm sticking to that view.
http://www.telegraph.co.uk/finance/comment/liamhalligan/4741093/There-will-be-slim-pickings-if-China-loses-its-appetite-for-Western-debt.html
Last week I argued that the idea of large Asian economies "decoupling" from the West was unhelpful. Globalization makes nations more interrelated, not less. So export-oriented nations like China and India were always going to feel the impact of a massive Western contraction.
By Liam Halligan
Last Updated: 6:11PM GMT 21 Feb 2009
Comments 0 Comment on this article
But I have to admit that China, with its massive 1,400m population, isn't doing badly. Retail sales remain strong – up 17pc in real terms. Growth has slowed, but GDP still expanded by a pretty spectacular 6.8pc during the fourth quarter of last year.
Japan – that other Asian giant – continues to suffer. Tumbling exports have sparked the worst slump in 35 years. Japanese GDP contracted 3.3pc during the last three months of 2008 – equivalent to a 12.7pc annualized drop. The Nikkei 225 index of leading Japanese shares is down 16pc since the start of 2009. Chinese shares, in contrast, have gained 25pc this year – the best return of any stock market in the world. London's FTSE-100 shed 12pc over the same period, with New York's S&P 500 down 15pc.
Optimism in China has been boosted by the government's Rmb4,000bn (£405bn) support package. Unlike Japan and the cash-strapped Western nations, China is funding its fiscal stimulus using reserves, not extra borrowing.
As the West's predicament has worsened, and China's relative strength has punched through, the political mood music has changed. Just a few weeks ago, in his first speech as US Treasury Secretary, Timothy Geithner accused Beijing of "manipulating" its currency. So what if the renminbi has appreciated more than 20pc against the dollar since 2005, undermining Chinese exports? Wanting to appear tough, "Tiny Tim" attacked China.
Last week's G7 Finance Minister's meeting in Rome produced far more measured tones. "We welcome China's fiscal measures and continued commitment to move to a more flexible exchange rate," purred the post-Summit communiqué.
Hillary Clinton also perfected her "China bashing" rhetoric as she bid for the White House. But now, as US Secretary of State, and on a visit to China, she insists "a positive co-operative relationship" between Beijing and Washington "is vital to peace and prosperity, not only in the Asia-Pacific region, but worldwide".
So, what's different – apart from US politicians no longer being in election mode? Well, behind the scenes, the Chinese government has started demanding guarantees for the $700bn of US Treasury bills on its books.
China has been keeping the States afloat for the best part of a decade, buying up vast quantities of T-bills to fund America's enormous budget and trade deficits. At any point, China could seriously damage the world's largest economy – by refusing to lend more money. So reliant is America on funding from Beijing that, by turning off the cash taps, China could spark an instant run on the dollar.
The Chinese haven't done that as it would harm their dollar-based holdings and they understand we live in an inter-dependent world.
But the ever-greater use of Asian savings to fund the "advanced" economies' deficits is unsustainable. And, as such, we're reaching the point where it will not be sustained. With Western governments intent on printing money and debauching their currencies, the big emerging market creditors – not only China, but Taiwan, Russia, South Korea and others – are now privately raising doubts about their future appetite for Western debt.
This demand drop-off will happen just as the West's dependence on such credit peaks. America and the UK are starting to issue sovereign paper like confetti, to fund highly-irresponsible "recovery programs".
The "rush from risk" that followed the Lehman collapse last September caused the repatriation of billions of dollars invested in emerging markets back to the "safe haven" of the West. That has so far allowed the US and UK authorities to get their larger debt issues away.
But the upcoming volumes are simply enormous. Last year, the US sold bonds to cover its $460bn deficit – around $200bn to foreigners, with China taking the lion's share. But America is on course to issue a staggering $2,000bn of debt in each of the next two years.
Over the same period, the UK will be flogging three times more gilts annually than during 2008. Right across the Western world, crisis-ridden governments will be issuing more and more debt.
Worried about falling currencies and rising inflation, the emerging markets – not least the Chinese – are demanding better returns to buy Western sovereign bonds. This is entirely justified. The debtor governments are weak, confused, and piling loans on top of loans with little sign of future growth.
But how will the Western world react when the creditor countries finally refuse to buy? How will America respond – with resignation, understanding, or aggression? That's the crucial question the world faces over the next three to five years. Just what happens when China stops buying US government debt?
This 'crank' sticks by his prediction that the single currency will not survive
The euro has just surged 2pc against the dollar, up from a three-month low. Why? Certainly not because the eurozone's economic prospects have improved.
New data shows a sharp drop in the 16-member states' PMI index – a bellwether for future growth. The single currency area is still contracting at breakneck speed, and now faces a 1.2pc fall in GDP during the first three months of this year.
So why did the euro strengthen? Because Peer Steinbrueck, Germany's finance minister, indicated the currency union's largest economy would consider bailing-out weaker members if they defaulted on their sovereign debts.
Since the euro was launched in 1999, those of us arguing it would eventually break-up have been dismissed as cranks. But now, by admitting it "will show itself capable of acting", Germany has acknowledged bail-outs may be needed, suggesting collapse is a genuine possibility. The only surprise is that it's taken so long for the politicians to face up to economic reality.
For some time now, eurozone countries with large budget and/or trade deficits have been forced to pay high interest rates when issuing sovereign debt. These problem nations – Portugal, Ireland, Italy, Greece and Spain – are known collectively in global debt markets by the unfortunate acronym of "PIIGS".
The gap between their average 10-year bond yield and the rate needed to sell German government debt – "the PIIGS-spread" – has just topped 200 basis points. Austria has also now joined this high-risk group – given the exposure of its banking system to the emerging markets of Eastern Europe.
German Chancellor Angela Merkel refuses to comment on whether Germany would help eurozone members in trouble. No wonder. As German exports suffer, unemployment is rising. And after years of budgetary restraint, German voters won't take kindly to paying for excesses elsewhere.
But signals coming out of the German Finance Ministry indicate a plan is anyway being hatched – for countries with better credit ratings to sell bonds and then lend the proceeds to the ailing PIIGS. In return for doing this, though, the stronger members will surely want some say over how the money is spent and when taxes will be raised to pay it back.
At that point, eurozone voters will become extremely nervous at an implicit transfer of sovereignty – and the central contradictions of monetary union will be exposed. I've predicted the demise of the single currency since long before it's launch. I'm sticking to that view.
http://www.telegraph.co.uk/finance/comment/liamhalligan/4741093/There-will-be-slim-pickings-if-China-loses-its-appetite-for-Western-debt.html
Friday 23 January 2009
U.K. Pound Serves as Omen for Dollar
JANUARY 22, 2009
U.K. Pound Serves as Omen for Dollar
As the British pound continues to sink, its travails are a cautionary tale for the U.S. dollar.
The U.S. and the U.K. face very similar predicaments, from a deepening recession to a damaged financial system. Both are orchestrating massive bank bailouts and attempting to assist struggling homeowners. Both are ramping up government spending even as they rely on financing from overseas investors. And both countries have central banks that have slashed interest rates and opened the door to unconventional ways of stimulating the economy.
Yet their currencies have headed in opposite directions. On Wednesday, the British pound tumbled to a 23-year low against the dollar, briefly buying just $1.362, down from over $2 only six months ago. The pound also hit a new all-time low versus the Japanese yen. It got a minor boost in late afternoon trading, following a report that finance ministers from major industrialized nations will discuss the currency's weakness when they meet next month.
By contrast, the dollar managed to strengthen against a host of currencies as the financial crisis intensified last fall. It has also surged ahead in recent days, particularly versus the pound and the euro.
Unlike the pound, the dollar is being buttressed by its unique status as the world's reserve currency and the vehicle for transactions in U.S. financial markets, including Treasury bonds. That means investors often seek out the dollar as fears rise, sometimes in spite of their concerns about the U.S. economy.
"The dollar is still benefiting by default" as investors run from riskier bets, says Lisa Scott-Smith of Millennium Global Investments, a London currency manager. "The pound isn't a natural reserve currency in the way that the dollar would be."
The euro also has flagged in recent weeks, as concerns have risen over the creditworthiness of some of the more indebted countries that use the currency. But it has suffered less than the pound, a sign that investors may be gravitating toward the largest, most highly traded currencies as nearly all economies stumble.
Meanwhile, there's little light ahead for the beleaguered pound, say some currency experts. The economic news is "horrendous," says Neil Mellor, a London-based currency strategist at the Bank of New York Mellon. "There is very good reason for panic at the moment."
In one worrisome sign, investors not only dumped the pound earlier this week, but also shed U.K. stocks and government bonds, sending their yields up. Such a combination, if sustained, would raise the fear that investors are exiting from a host of U.K. assets, creating a vicious cycle that is difficult to arrest.
That's also the scenario that some worry might await the dollar and U.S. bond yields, should appetite from overseas investors wane.
These days, policy makers are inclined to let their currencies weaken "until such a time as other asset markets flag that enough is enough," says Alan Ruskin, chief international strategist at RBS Greenwich Capital. Given that the moves in British government bond yields aren't yet extreme by recent standards, "I don't think we've quite reached that point in the U.K."
In a note on Wednesday, Goldman Sachs analysts pointed out that recent moves in the pound and U.K. bond yields were more typical for emerging markets with weak fundamentals. However, they added, the analogy isn't justified over the long term. Indeed, the firm recommended that investors buy the pound as well as U.K. bonds.
While the dollar continues to benefit from its unique position in financial markets for now, it is far from clear that the resilience will last. "Right now the market is beating up on the pound, but at some point it will look for something else to pick on," says Paul Mackel, a currency strategist at HSBC in London.
The fact that the Federal Reserve stands ready to use a host of unconventional measures to flood the economy with liquidity in an effort to stimulate growth "could hurt the dollar quite badly" later this year, he says.
The U.S. and the U.K. face very similar predicaments, from a deepening recession to a damaged financial system. Both are orchestrating massive bank bailouts and attempting to assist struggling homeowners. Both are ramping up government spending even as they rely on financing from overseas investors. And both countries have central banks that have slashed interest rates and opened the door to unconventional ways of stimulating the economy.
Yet their currencies have headed in opposite directions. On Wednesday, the British pound tumbled to a 23-year low against the dollar, briefly buying just $1.362, down from over $2 only six months ago. The pound also hit a new all-time low versus the Japanese yen. It got a minor boost in late afternoon trading, following a report that finance ministers from major industrialized nations will discuss the currency's weakness when they meet next month.
By contrast, the dollar managed to strengthen against a host of currencies as the financial crisis intensified last fall. It has also surged ahead in recent days, particularly versus the pound and the euro.
Unlike the pound, the dollar is being buttressed by its unique status as the world's reserve currency and the vehicle for transactions in U.S. financial markets, including Treasury bonds. That means investors often seek out the dollar as fears rise, sometimes in spite of their concerns about the U.S. economy.
"The dollar is still benefiting by default" as investors run from riskier bets, says Lisa Scott-Smith of Millennium Global Investments, a London currency manager. "The pound isn't a natural reserve currency in the way that the dollar would be."
The euro also has flagged in recent weeks, as concerns have risen over the creditworthiness of some of the more indebted countries that use the currency. But it has suffered less than the pound, a sign that investors may be gravitating toward the largest, most highly traded currencies as nearly all economies stumble.
Meanwhile, there's little light ahead for the beleaguered pound, say some currency experts. The economic news is "horrendous," says Neil Mellor, a London-based currency strategist at the Bank of New York Mellon. "There is very good reason for panic at the moment."
In one worrisome sign, investors not only dumped the pound earlier this week, but also shed U.K. stocks and government bonds, sending their yields up. Such a combination, if sustained, would raise the fear that investors are exiting from a host of U.K. assets, creating a vicious cycle that is difficult to arrest.
That's also the scenario that some worry might await the dollar and U.S. bond yields, should appetite from overseas investors wane.
These days, policy makers are inclined to let their currencies weaken "until such a time as other asset markets flag that enough is enough," says Alan Ruskin, chief international strategist at RBS Greenwich Capital. Given that the moves in British government bond yields aren't yet extreme by recent standards, "I don't think we've quite reached that point in the U.K."
In a note on Wednesday, Goldman Sachs analysts pointed out that recent moves in the pound and U.K. bond yields were more typical for emerging markets with weak fundamentals. However, they added, the analogy isn't justified over the long term. Indeed, the firm recommended that investors buy the pound as well as U.K. bonds.
While the dollar continues to benefit from its unique position in financial markets for now, it is far from clear that the resilience will last. "Right now the market is beating up on the pound, but at some point it will look for something else to pick on," says Paul Mackel, a currency strategist at HSBC in London.
The fact that the Federal Reserve stands ready to use a host of unconventional measures to flood the economy with liquidity in an effort to stimulate growth "could hurt the dollar quite badly" later this year, he says.
Write to Joanna Slater at joanna.slater@wsj.com
Sunday 18 January 2009
Unhappy dollar slides to all-time low against euro (Nov 2004)
Unhappy dollar slides to all-time low against euro
By David LitterickLast
Updated: 12:03AM GMT 19 Nov 2004
The dollar hit an all-time low against the euro yesterday, crashing through the $1.30 level as traders dismissed US Treasury Secretary John Snow's insistence on a strong dollar as increasingly hollow.
The euro closed at $1.3024, up nearly half a cent, as dealers continued to fret over how the US will attract the necessary capital inflows to fund its deteriorating trade balance and budget deficit.
The fear is that increasing numbers of overseas investors might lose confidence in the debt-ridden US economy and place their money elsewhere.
Sterling also rose against the dollar, climbing 0.29 cents to $1.8561, while the weak dollar saw the price of gold climb $4.90 to a fresh 16-year high of $444.70 per troy ounce.
Visting London yesterday, Mr Snow reaffirmed the Bush administration's dollar policy, saying: "a strong dollar is in both the national and international interest." He denied the US government secretly wanted a weaker currency to stimulate trade, claiming: "No one has ever devalued their way to prosperity. It can't be done."
He also rebutted speculation of possible central bank intervention to slow the decline of the dollar, saying it was for the market to decide its value. "The history of efforts to impose non-market solutions is at best unrewarding and chequered," he said.
Analysts attached little credibility to Mr Snow's comments, suggesting the administration had no real appetite for tackling the decline of the dollar. The US government is considered more likely to make strong economic growth a greater priority by supporting domestic demand, increasing the pressure on the US deficit and the dollar.
Jeremy Fand, a senior trader at WestLB in New York, said: "The administration is not going to stand in the way of dollar weakness. They are playing hardball with the Europeans."
European leaders have recently become more concerned at the rise in the euro, which makes European exports more expensive and could dampen the growth of an already sluggish economy. But they have so far expressed little desire to tackle the problem. A meeting of European finance ministers earlier in the week failed to arrive at any conclusion.
Central bankers and finance ministers from the world's 20 largest economies meet in Berlin this weekend but few in the foreign exchange market believe the G20 will take action to stem the dollar's decline.
The euro was launched at the beginning of 1999 at an exchange rate of $1.17 and had plunged below 83 cents by October of the following year. Having now breached the $1.30 level, the Federal Reserve's trade-weighted dollar index has fallen by 21pc since George Bush took office in January 2001.
Dealers said investors were turning from the greenback to Asian currencies in the anticipation that the Chinese government will come under pressure from the West to remove the peg linking the yuan to the dollar, leading to an appreciation of the currency.
The dollar is expected to fall further to $1.35 in the coming months, although dealers said hedge funds and other speculators were short of the dollar, leaving open the possibility of a short-term correction.
The dollar hit an all-time low against the euro yesterday, crashing through the $1.30 level as traders dismissed US Treasury Secretary John Snow's insistence on a strong dollar as increasingly hollow.
The euro closed at $1.3024, up nearly half a cent, as dealers continued to fret over how the US will attract the necessary capital inflows to fund its deteriorating trade balance and budget deficit.
The fear is that increasing numbers of overseas investors might lose confidence in the debt-ridden US economy and place their money elsewhere.
Sterling also rose against the dollar, climbing 0.29 cents to $1.8561, while the weak dollar saw the price of gold climb $4.90 to a fresh 16-year high of $444.70 per troy ounce.
Visting London yesterday, Mr Snow reaffirmed the Bush administration's dollar policy, saying: "a strong dollar is in both the national and international interest." He denied the US government secretly wanted a weaker currency to stimulate trade, claiming: "No one has ever devalued their way to prosperity. It can't be done."
He also rebutted speculation of possible central bank intervention to slow the decline of the dollar, saying it was for the market to decide its value. "The history of efforts to impose non-market solutions is at best unrewarding and chequered," he said.
Analysts attached little credibility to Mr Snow's comments, suggesting the administration had no real appetite for tackling the decline of the dollar. The US government is considered more likely to make strong economic growth a greater priority by supporting domestic demand, increasing the pressure on the US deficit and the dollar.
Jeremy Fand, a senior trader at WestLB in New York, said: "The administration is not going to stand in the way of dollar weakness. They are playing hardball with the Europeans."
European leaders have recently become more concerned at the rise in the euro, which makes European exports more expensive and could dampen the growth of an already sluggish economy. But they have so far expressed little desire to tackle the problem. A meeting of European finance ministers earlier in the week failed to arrive at any conclusion.
Central bankers and finance ministers from the world's 20 largest economies meet in Berlin this weekend but few in the foreign exchange market believe the G20 will take action to stem the dollar's decline.
The euro was launched at the beginning of 1999 at an exchange rate of $1.17 and had plunged below 83 cents by October of the following year. Having now breached the $1.30 level, the Federal Reserve's trade-weighted dollar index has fallen by 21pc since George Bush took office in January 2001.
Dealers said investors were turning from the greenback to Asian currencies in the anticipation that the Chinese government will come under pressure from the West to remove the peg linking the yuan to the dollar, leading to an appreciation of the currency.
The dollar is expected to fall further to $1.35 in the coming months, although dealers said hedge funds and other speculators were short of the dollar, leaving open the possibility of a short-term correction.
Falling US dollar in 2004
Greenspan holds out little hope for dollar
By Edmund Conway
Last Updated: 12:33AM GMT 20 Nov 2004
The dollar hit a new all-time low against the euro yesterday as Alan Greenspan said there was little anyone could do to prevent it falling further.
The chairman of the US Federal Reserve warned the European Central Bank from intervening in the foreign exchange markets as he spoke in Frankfurt ahead of the meeting of the G20 industrialised and developing economies in Berlin this weekend.
"It seems persuasive that, given the size of the US current account deficit, a diminished appetite for adding to dollar balances must occur at some point," said Mr Greenspan, sending the Dow Jones plunging by over 100 points in afternoon trading. The dollar dropped almost three quarters of a cent against the euro to close in London at $1.3058.
Mr Greenspan said: "Current account imbalances, per se, need not be a problem, but cumulative deficits, which result in a marked decline of a country's net international investment position - as is occurring in the United States - raise more complex issues."
It is not the first time Mr Greenspan has raised concern over the US current account deficit, which amounts to 5.7pc of the country's annual output. However, he also echoed the US Treasury Secretary John Snow's warning earlier this week that he would not support central bank intervention against the falling dollar. He said intervention could have only a limited and short-term effect.
Mr Greenspan said the best action the Bush administration could take would be to cut its spending and reduce the budget deficit.
The dollar is expected to be one of the most heated topics for discussion at the meeting, since European policy-makers have complained that its weakness, and the euro's consequent expense, has hit exports and manufacturing.
Gordon Brown is expected to call for the International Monetary Fund to investigate and compare the fiscal positions of G20 members. The Chancellor is thought to believe this comparison would show the UK is well-placed compared to other major countries, despite recent criticisms about its fiscal position, and the Treasury's slimming chances of meeting his borrowing rules.
http://www.telegraph.co.uk/finance/2899997/Greenspan-holds-out-little-hope-for-dollar.html
By Edmund Conway
Last Updated: 12:33AM GMT 20 Nov 2004
The dollar hit a new all-time low against the euro yesterday as Alan Greenspan said there was little anyone could do to prevent it falling further.
The chairman of the US Federal Reserve warned the European Central Bank from intervening in the foreign exchange markets as he spoke in Frankfurt ahead of the meeting of the G20 industrialised and developing economies in Berlin this weekend.
"It seems persuasive that, given the size of the US current account deficit, a diminished appetite for adding to dollar balances must occur at some point," said Mr Greenspan, sending the Dow Jones plunging by over 100 points in afternoon trading. The dollar dropped almost three quarters of a cent against the euro to close in London at $1.3058.
Mr Greenspan said: "Current account imbalances, per se, need not be a problem, but cumulative deficits, which result in a marked decline of a country's net international investment position - as is occurring in the United States - raise more complex issues."
It is not the first time Mr Greenspan has raised concern over the US current account deficit, which amounts to 5.7pc of the country's annual output. However, he also echoed the US Treasury Secretary John Snow's warning earlier this week that he would not support central bank intervention against the falling dollar. He said intervention could have only a limited and short-term effect.
Mr Greenspan said the best action the Bush administration could take would be to cut its spending and reduce the budget deficit.
The dollar is expected to be one of the most heated topics for discussion at the meeting, since European policy-makers have complained that its weakness, and the euro's consequent expense, has hit exports and manufacturing.
Gordon Brown is expected to call for the International Monetary Fund to investigate and compare the fiscal positions of G20 members. The Chancellor is thought to believe this comparison would show the UK is well-placed compared to other major countries, despite recent criticisms about its fiscal position, and the Treasury's slimming chances of meeting his borrowing rules.
http://www.telegraph.co.uk/finance/2899997/Greenspan-holds-out-little-hope-for-dollar.html
Gold is denominated in the US currency (Nov 2007 article)
Sterling hits $2.10 as dollar is dumped
By Richard Blackden
Last Updated: 1:09AM GMT 08 Nov 2007
China has $1.33 trillion of foreign-exchange reserves
Sterling has pushed through the $2.10 barrier for the first time in 26 years after the Chinese government indicated it is prepared to diversify some of its huge foreign-exchange reserves.
China threatens 'nuclear option' of dollar sales
Dollar crunch puts gold centre stage
Oil, gold and euro surge to records
The pound stormed to as high as $2.1021 in trading in London, a level not seen since the early Thatcher era, and many currency experts now predict it go higher despite signs that the UK economy is slowing.
The greenback's renewed weakness was sparked by comments from Cheng Siwei, vice chairman of China's National People's Congress, who suggested China will diversify some of its $1.33 trillion (£660bn) of foreign-exchange reserves.
Mr Siwei told a conference in Beijing: "We will favour stronger currencies over weaker ones, and will readjust accordingly."
Besides sterling, the dollar was down against 14 of the world's 16 biggest currencies this morning, hitting the lowest since the 1950s versus the Canadian dollar, reaching a new record against the euro and its weakest in more than 20 years against the Australian dollar.
Sterling's move higher comes a day before Bank of England Governor Mervyn King and the rest of the Monetary Policy Committee are due to give their latest decision on interest rates.
While the majority of economists expect interest rates to be left at 5.75pc, the surge in the currency is likely to put parts of the country's manufacturing industry under pressure.
The flight from the dollar is helping to fuel oil's assault on the $100-a-barrel mark and investors' appetite for gold, which is denominated in the US currency. The dollar was also hit yesterday by a report that the Fed's loan officer survey reported evidence of an incipient credit crunch across broad reaches of the US economy, with banks tightening lending standards on prime mortgages, auto debt and consumer loans.
China has $1.33 trillion of foreign-exchange reserves
Sterling has pushed through the $2.10 barrier for the first time in 26 years after the Chinese government indicated it is prepared to diversify some of its huge foreign-exchange reserves.
China threatens 'nuclear option' of dollar sales
Dollar crunch puts gold centre stage
Oil, gold and euro surge to records
The pound stormed to as high as $2.1021 in trading in London, a level not seen since the early Thatcher era, and many currency experts now predict it go higher despite signs that the UK economy is slowing.
The greenback's renewed weakness was sparked by comments from Cheng Siwei, vice chairman of China's National People's Congress, who suggested China will diversify some of its $1.33 trillion (£660bn) of foreign-exchange reserves.
Mr Siwei told a conference in Beijing: "We will favour stronger currencies over weaker ones, and will readjust accordingly."
Besides sterling, the dollar was down against 14 of the world's 16 biggest currencies this morning, hitting the lowest since the 1950s versus the Canadian dollar, reaching a new record against the euro and its weakest in more than 20 years against the Australian dollar.
Sterling's move higher comes a day before Bank of England Governor Mervyn King and the rest of the Monetary Policy Committee are due to give their latest decision on interest rates.
While the majority of economists expect interest rates to be left at 5.75pc, the surge in the currency is likely to put parts of the country's manufacturing industry under pressure.
The flight from the dollar is helping to fuel oil's assault on the $100-a-barrel mark and investors' appetite for gold, which is denominated in the US currency. The dollar was also hit yesterday by a report that the Fed's loan officer survey reported evidence of an incipient credit crunch across broad reaches of the US economy, with banks tightening lending standards on prime mortgages, auto debt and consumer loans.
Wednesday 7 January 2009
Willem Buiter warns of massive dollar collapse
Willem Buiter warns of massive dollar collapse
Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, a former Bank of England policymaker has warned.
By Edmund Conway, Economics EditorLast Updated: 3:05PM GMT 06 Jan 2009
MPC founder member Willem Buiter. Photo: CHRISTOPHER COX
The long-held assumption that US assets - particularly government bonds - are a safe haven will soon be overturned as investors lose their patience with the world's biggest economy, according to Willem Buiter.
Professor Buiter, a former Monetary Policy Committee member who is now at the London School of Economics, said this increasing disenchantment would result in an exodus of foreign cash from the US.
The warning comes despite the dollar having strengthened significantly against other major currencies, including sterling and the euro, after hitting historic lows last year. It will reignite fears about the currency's prospects, as well as sparking fears about the sustainability of President-Elect Barack Obama's mooted plans for a Keynesian-style increase in public spending to pull the US out of recession.
Writing on his blog , Prof Buiter said: "There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place."
He said that the dollar had been kept elevated in recent years by what some called "dark matter" or "American alpha" - an assumption that the US could earn more on its overseas investments than foreign investors could make on their American assets. However, this notion had been gradually dismantled in recent years, before being dealt a fatal blow by the current financial crisis, he said.
"The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally," he said. "Even the most hard-nosed, Guantanamo Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed."
He said investors would, rightly, suspect that the US would have to generate major inflation to whittle away its debt and this dollar collapse means that the US has less leeway for major spending plans than politicians realise.
http://www.telegraph.co.uk/finance/4125947/Willem-Buiter-warns-of-massive-dollar-collapse.html
Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, a former Bank of England policymaker has warned.
By Edmund Conway, Economics EditorLast Updated: 3:05PM GMT 06 Jan 2009
MPC founder member Willem Buiter. Photo: CHRISTOPHER COX
The long-held assumption that US assets - particularly government bonds - are a safe haven will soon be overturned as investors lose their patience with the world's biggest economy, according to Willem Buiter.
Professor Buiter, a former Monetary Policy Committee member who is now at the London School of Economics, said this increasing disenchantment would result in an exodus of foreign cash from the US.
The warning comes despite the dollar having strengthened significantly against other major currencies, including sterling and the euro, after hitting historic lows last year. It will reignite fears about the currency's prospects, as well as sparking fears about the sustainability of President-Elect Barack Obama's mooted plans for a Keynesian-style increase in public spending to pull the US out of recession.
Writing on his blog , Prof Buiter said: "There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place."
He said that the dollar had been kept elevated in recent years by what some called "dark matter" or "American alpha" - an assumption that the US could earn more on its overseas investments than foreign investors could make on their American assets. However, this notion had been gradually dismantled in recent years, before being dealt a fatal blow by the current financial crisis, he said.
"The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally," he said. "Even the most hard-nosed, Guantanamo Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed."
He said investors would, rightly, suspect that the US would have to generate major inflation to whittle away its debt and this dollar collapse means that the US has less leeway for major spending plans than politicians realise.
http://www.telegraph.co.uk/finance/4125947/Willem-Buiter-warns-of-massive-dollar-collapse.html
Thursday 1 January 2009
A Brief History of Bretton Woods System
Delegates attend the Bretton Woods conference in July of 1944 at the Mt. Washington Hotel in Bretton Woods, New HampshireAlfred Eisenstaedt / Time & Life Pictures / Getty
A Brief History of
Bretton Woods System
By M.J. Stephey Tuesday, Oct. 21, 2008
time:http://www.time.com/time/business/article/0,8599,1852254,00.html
Bretton Woods System
By M.J. Stephey Tuesday, Oct. 21, 2008
time:http://www.time.com/time/business/article/0,8599,1852254,00.html
Since the end of World War II, the U.S. dollar has enjoyed a unique and powerful position in international trade. But perhaps no more.
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Before boarding a plane on Saturday to meet President George W. Bush, French President Nicolas Sarkozy proclaimed, "Europe wants it. Europe demands it. Europe will get it." The "it" here is global financial reform, and evidently Sarkozy won't have to wait long. Just hours after their closed-door meeting had finished, Bush and Sarkozy, along with European Commission President Jose Manuel Barroso, issued a joint statement announcing that a summit would be held next month to devise what Barroso calls a "new global financial order."
The old global financial order is, well, old. Established in 1944 and named after the New Hampshire town where the agreements were drawn up, the Bretton Woods system created an international basis for exchanging one currency for another. It also led to the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development, now known as the World Bank.
The former was designed to monitor exchange rates and lend reserve currencies to nations with trade deficits, the latter to provide underdeveloped nations with needed capital — although each institution's role has changed over time. Each of the 44 nations who joined the discussions contributed a membership fee, of sorts, to fund these institutions; the amount of each contribution designated a country's economic ability and dictated its number of votes.
In an effort to free international trade and fund postwar reconstruction, the member states agreed to fix their exchange rates by tying their currencies to the U.S. dollar. American politicians, meanwhile, assured the rest of the world that its currency was dependable by linking the U.S. dollar to gold; $1 equaled 35 oz. of bullion. Nations also agreed to buy and sell U.S. dollars to keep their currencies within 1% of the fixed rate. And thus the golden age of the U.S. dollar began.
For his part, legendary British economist John Maynard Keynes, who drafted much of the plan, called it "the exact opposite of the gold standard," saying the negotiated monetary system would be whatever the controlling nations wished to make of it. Keynes had even gone so far as to propose a single, global currency that wouldn't be tied to either gold or politics. (He lost that argument).
Though it came on the heels of the Great Depression and the beginning of the end of World War II, the Bretton Woods system addressed global ills that began as early as the first World War, when governments (including the U.S.) began controlling imports and exports to offset wartime blockades. This, in turn, led to the manipulation of currencies to shape foreign trade. Currency warfare and restrictive market practices helped spark the devaluation, deflation and depression that defined the economy of the 1930s.
The Bretton Woods system itself collapsed in 1971, when President Richard Nixon severed the link between the dollar and gold — a decision made to prevent a run on Fort Knox, which contained only a third of the gold bullion necessary to cover the amount of dollars in foreign hands. By 1973, most major world economies had allowed their currencies to float freely against the dollar. It was a rocky transition, characterized by plummeting stock prices, skyrocketing oil prices, bank failures and inflation.
It seems the East Coast might yet again be the backdrop for a massive overhaul of the world's financial playbook.
It seems the East Coast might yet again be the backdrop for a massive overhaul of the world's financial playbook.
U.N. Secretary-General Ban Ki-moon publicly backed calls for a summit before the new year, saying the agency's headquarters in New York — the very "symbol of multilateralism" — should play host. Sarkozy concurred, but for different reasons: "Insofar as the crisis began in New York," he said, "then the global solution must be found to this crisis in New York."
Tuesday 23 December 2008
****Deflation Survival Briefing
Gala Issue: Biggest Sea Change of Our Lifetime! by Martin D. Weiss, Ph.D.
Dear,
The Fed, the Treasury and all major governments on the planet are throwing the kitchen sink at this debt crisis. But their efforts are being overwhelmed by a monumental sea change — the shift from rising prices to falling prices, from booming asset values to crashing asset values, from wealth creation to wealth destruction, from inflation to deflation.
For my entire lifetime, and probably yours as well, we have been living with inflation — sometimes tame, sometimes rampant — but consistently eroding the purchasing power of our dollar.Inflation pervaded every money decision we made or thought about making, every retirement plan or business model. Inflation was factored into our leases, our employment contracts, our budgets, our investment programs.
Now, all of that is changing; and it's doing so dramatically! Suddenly, the polar opposite of inflation is taking hold in America: Deflation!
Suddenly, prices are plummeting — not just for real estate, but also for automobiles, appliances, clothing and gasoline. From peaks reached just a few months ago to the latest bottoms, the price of oil has plunged 73% ... copper has fallen 66% ... lead and nickel are down 73% ... platinum is down 66% ... and wheat is off 64%.
Even the government's slow-to-change, lagging index of inflation — the CPI — has caved in to deflation, falling by the most since the government first introduced the index in 1946. These are not numbers that denote less inflation. They are hard evidence of outright deflation! This is crucial for you: If you continue investing as you did in inflationary times, you risk losing almost everything. However, if you acknowledge this historic shift and make the right moves now, you'll have the opportunity to build substantial wealth. This inflation-deflation switch is turning the entire world of investments upside down and inside out.
It means you must consider the grave new dangers deflation brings your portfolio and, at the same time, the unique new opportunities deflation gives you to grow your wealth. This past week, during our Deflation Survival Briefing, I covered both topics with Jack Crooks, the only currency expert I'm aware of who, unlike his peers, not only warned unambiguously about deflation but also has a unique way to profit from the deflation. I assume you attended the event online from start to finish. At times, however, the sound may have been unclear, and I apologize. So here's an edited transcript for your convenience. It's a double-length gala issue especially for you, my way of underscoring the vital importance of this sea change.
Deflation Survival Briefingwith Martin D. Weiss and Jack Crooks(Edited Transcript)
Martin Weiss: Jack, the division of labor I've mapped out is this: I will focus on the dangers and protective strategies; you can focus on the opportunities and profit strategies.
Jack Crooks: That makes sense, but I think it's pretty obvious what the dangers are.
Martin: Specifically, you're referring to ...
Jack: Losing money. Losing a lot of money. Deflation means most asset prices go down. When asset prices go down, anyone who owns those assets loses money. It's that simple.
Martin: What most people don't seem to grasp is how much money — the sheer magnitude of the losses. But the Fed just released the numbers, and I want to show them to you. I want you to see for yourself the amazing drama that literally bursts from these pages. On the Web, just go to Flow of Funds, pdf page 113. From this table, I've pulled out the main numbers to walk you through this step by step, because it's probably the most important set of facts you've seen — or will see — for a long time:
The Fed tracks five key sectors that go into household wealth: real estate, corporate equities, mutual fund shares, life insurance and pension fund reserves, plus equity in noncorporate businesses. Now let me show you how the wealth destruction is spreading throughout the U.S. economy. First quarter 2007: Every single wealth sector is still growing, except one — real estate. This $53 billion loss in real estate is a time and place that will go down in history as the great turning point of our era.Second quarter 2007: Another $190 billion in real estate wealth destroyed. Third quarter 2007: Households suffer a whopping $496 billion in losses — nearly 10 times as much as in the first quarter.Fourth quarter 2007: The wealth destruction spreads to nearly all other sectors. Households lose $708 billion in real estate, the most in history. Plus, they lose $377 billion in stocks, $145 billion in mutual funds, $265 billion in their life insurance and pension reserves.First quarter 2008: The carnage deepens. Households lose $911 billion in stocks, $297 billion in mutual funds and $832 billion in insurance and pension fund reserves. Plus, the losses spread to the last major sector, equity in noncorporate businesses. Second quarter 2008: The Bush economic stimulus package kicks in, and it slows down the pace a bit. But the hemorrhaging continues. Not one single sector recovers.Third quarter 2008: Earth-shattering losses across the board, with households losing
...ANOTHER $647 billion in real estate
$922 billion in corporate equities
$523 billion in mutual funds
$653 billion in insurance and pension fund reserves
$128 billion in noncorporate businesses
Grand total: Nearly $2.9 trillion in losses — the worst in recorded history.
Grand total lost over the past year: $7.2 trillion.
Jack: And this is not just a bunch of numbers. It's a hard-nosed reality that almost everyone is up against.
Martin: Absolutely! At the peak of the housing boom, one of our associates had his home appraised at $1.4 million. Three weeks ago, he had it appraised again and it was down around $700,000. That's a 50% decline. And it's not just the high end of the market. In May 2005, another home in our area sold for $175,000; now it's listed at Realtor.com for only $64,000.
Jack: People think that since home values have already fallen so far, they must be near a bottom.
Martin: I don't agree with that view. Most of the price declines we've seen so far merely represent a recognition that the peak prices of the mid-2000s were a fantasy built upon "Frankenstein Financing" — wildly speculative credit terms such as option ARMs and liar loans. The hard-core declines in housing, driven by basic things like recession and unemployment, are just now getting under way.
Jack: How much further do you see home prices falling?
Martin: My personal opinion is that that over half of the declines are still ahead. That applies not only to housing, but also to commercial properties; not only to real estate, but also to stocks and other assets. Consumer prices just began to fall in October. Outright contractions in the economy are just now getting under way. Deflation is still in its early stages. The wealth destruction has a long way to go.
Jack: You call this wealth destruction and I don't deny the validity of that term. But another way to describe it is rampant deflation. Deflation in the value of real estate and other investments, deflation in energy, deflation at the car dealer and deflation at every mall. In each and every sector that you've described, the U.S. dollar buys more.
Martin: That's the positive side of the story. But whatever you call it, these numbers don't lie. You can see with your own eyes that it's massive and that it's spreading throughout the entire economy.
Jack: Martin, all this raises some urgent questions in my mind and probably in the minds of our readers as well. First, can the government offset this massive destruction of wealth with more bailouts, more Fed actions and gigantic economic stimulus packages? Martin: They can buy some time or they can slow down the process temporarily, as they did in the second quarter of 2008, for example. But still, my answer is a flat NO! Not even Washington can print enough money fast enough to halt this deflationary spiral; it's just too huge. And all the printing press money in the world won't do much if it's not lent or spent. Bottom line: No matter which companies Washington bails out, this is a house of cards. It's coming down. And you must get out if its way.
Jack: Still, a lot of people have big expectations for President-elect Obama's stimulus package starting next year.
Martin: The highest estimates for the Obama stimulus package are $1 trillion. But even if it's that big, it's still small in contrast to the wealth destruction we're already seeing. And it's going to take a couple of years before all of that money reaches Americans. By that time, trillions more in wealth could be lost.
Jack: Every economist I read likes to leave some wiggle room for future butt-covering, just in case they turn out to be wrong. But you're not pulling any punches, are you? Why is that?Martin: It's not needed in this situation — because of the sheer enormity and speed of the wealth destruction: $7.2 trillion just through over the past year. In contrast, the Trouble Asset Relief Program (TARP) is $700 billion. So these losses are already ten times more than the entire bailout program.
Let's compare how much is being lost vs. what the government is doing to offset it. Here's the progression we just saw:
$1.5 trillion lost in the fourth quarter of 2007
$2.7 trillion lost in the first quarter of 2008
$630 billion lost in the second quarter of 2008
$2.9 trillion in the third quarter
Now, let me demonstrate why the government's efforts are unable to offset this wealth destruction. Congress has authorized $700 billion for TARP. But the Treasury Department reports that in the fourth quarter, only $330 billion has been committed so far.
Jack: Committed or actually disbursed?
Martin: Committed.
Jack: The ol' check-in-the-mail routine, eh?
Martin: Yes. But let's assume the $330 billion is already at the banks. And let's say that in the first quarter of 2009, they are able to disburse all of the rest. That's still minuscule in comparison to the wealth destruction.
Jack: Meanwhile, the wealth destruction continues.
Martin: Right. We don't know how much. But let's assume the wealth destruction does not decelerate or accelerate. Let's just assume it continues at the same pace.
Here's what it would look like. Moreover, most of the money being funneled to the banks is not reaching consumers and businesses. Instead, it's sitting idle at the banks, to rebuild their capital, to try to offset all the losses they've sustained.
Jack: How much of the TARP money are the banks actually lending out?
Martin: We don't know.
Jack: Isn't this why Congress is so ticked off, trying to find a way to force the banks to lend out the TARP money?
Martin: Yes. But it's a tough sell. The banks are going broke. They're being asked to lend it to borrowers, who they fear will also go broke. So the resistance is great. But even if you assume that Congress can force the Treasury Department to, in turn, force the banks to loan out some fraction of the TARP money, it would still be only a fraction of the total TARP funds.
Jack: A drop in the bucket.
Martin: Absolutely! The huge red areas in this chart represent the tremendous power of deflation. The small black areas represent the impotence of government to offset the deflation.
The power of deflation is hundreds of times larger than the government's ability to counteract it. This is why the U.S. government was not able to prevent deflation in the 1930s. And it's also why the Japanese government was unable to prevent its deflation in the 1990s.
Jack: Still, most people think the government can just print more money at will. They're now talking about a total bill of $8.5 trillion. Your numbers don't seem to account for that.
Martin: Because those bigger numbers are almost entirely guarantees and swaps — not net new money added to the economy. Plus, please bear in mind one more thing: The wealth destruction we've been discussing today does not include the losses by financial institutions, corporations and governments.
Jack: Good point. But let me go to the second major question I get from readers: What's causing this and when will it end?
Martin: What's perpetuating the deflation is excess debts. Look. Debts were usually bearable. As long as people had the income to make their payments — or as long as they could borrow from Peter to pay Paul — they could keep piling up more debt, and life went on. Deflation alone is also not so bad. It makes homes more affordable, college education more accessible, and basic necessities of life cheaper.
Jack: But when you put debts and deflation together
...Martin: That's when things fall apart! That's when you get not only wealth destruction but DEBT destruction.
Jack: And we have evidence of that as well, I presume.
Martin: Yes, undeniable, smoking-gun evidence. For decades, we've almost always seen more debt piled up quarter after quarter, year after year. But then, beginning in the third quarter of 2007, all that changed. For the first time, we saw massive debt liquidation — debt destruction. It started in the commercial paper market, where corporations issue short-term corporate IOUs to borrow in massive amounts: In the third quarter of 2007, instead of growing as it almost always has, commercial paper was being liquidated at a rapid pace. That was the canary in the coal mine.
Jack: And now?
Martin: Now the debt liquidation has spread: In addition to the liquidation of commercial paper, we're seeing massive debt liquidation in mortgages and corporate bonds.Jack: How big?
Martin: The biggest ever in recorded history. Look at mortgages! The Fed reports how much in new mortgages are created each quarter at an annual rate. Ever since you and I were born, all we've even seen is net new growth in mortgages. That's how it was when we were growing up, that's how it was in recent years, and that's what we saw in the third quarter of 2007. See?
Jack: $1,005 billion.
Martin: Yes. Net net, after all mortgage paydowns, new mortgages were added at the rate of $1,005 billion per year. Almost the same in the fourth quarter of 2007. But then look: First quarter 2008 — $539 billion. Second quarter 2008 — new mortgages begin to vanish from the market. Yet, up until this point, we're just talking about a credit crunch.
Jack: In other words, less new credit.
Martin: Yes, and that's already a powerful deflationary force: Most people can't get mortgages. So they can't buy. Since there are few buyers, prices fall. That's when people think: "This is terrible. It couldn't possibly get any worse."
Jack: But it does, doesn't it?
Martin: Dramatically worse: In third quarter of 2008, the volume of mortgages going bad is so big and the volume of new mortgages being created is so small, we have a net decline in mortgages outstanding. For the first time in recorded history, we have a net destruction of debts in this sector. This is far worse than a credit crunch. It is a DEBT COLLAPSE, an unprecedented, unstoppable deflationary force.
The same kind of debt collapse also hits corporate bonds. Third quarter of 2007 — no problem. New bonds are issued at the annual rate of nearly $1,481 billion per year.Fourth quarter of 2007 — big decline, to $821 billion.
Jack: Credit crunch begins to hit.
Martin: Exactly. First and second quarters of 2008 — credit crunch hits even harder. Third quarter of 2008 — debt collapse strikes! It's the biggest net reduction of corporate bonds in recorded history, running at the annual rate of $755 billion (red bar in chart). Again, one of the most powerful deflationary forces of all time!
Jack: So what's the next stage?
Martin: A chain reaction of corporate bankruptcies.
Jack: But it looks like they're going to save companies like General Motors and Chrysler.
Martin: Even if they do, they cannot save hundreds of thousands of smaller and medium-sized companies that are going bankrupt all over the country ... tens of thousands of municipalities and states running out of money ... tens of millions of Americans who have gotten smacked with the trillions in losses I've just showed you in the household sector.
This wealth destruction and debt liquidation is classic; and despite all the government intervention, it is fundamentally very similar to the collapse we saw in 1929 and the early 1930s.
Jack: But many people believe the 1930s Depression was caused by the failure of the federal government to fight the decline. This time, they say, the government is doing precisely the opposite.
Martin: In reality, America's First Great Depression wasn't caused by what the government failed to do to stop it. Rather, it was largely caused by all the wild things the government did do to create the superboom in the Roaring '20s that preceded it. They dished out money to banks like candy. They let banks loan money to brokers without restraint. And they encouraged brokers to hand it off to stock market speculators with 10% margin. But if you want to see what happens when a government intervenes aggressively after a bust, just look at Japan since 1990. Japan lowered interest rates to zero, just like the Fed is doing today. Japan bailed out banks, brokerage firms and insurance companies, much like the Fed is doing here. Japan embarked on massive public works projects, much like President-elect Obama is proposing now.
But it did not end the deflation. And it did not prevent their stock market from making brand-new lows this year. All it did was prolong the agony — now 18 years and counting.
Jack: So precisely how much longer do you think the deflation will continue in the U.S.?
Martin: Nobody knows. But it's clear that this is not a short-term situation that will be resolved in the foreseeable future. It could take years to flush out the bad debts and restore confidence. The key is the debt liquidation. That's the main engine behind the deflation and a major element in vicious cycles that are just beginning to gain momentum. Consider the housing market, for example. The more debts are liquidated, the more prices fall ... and the more prices fall, the more people abandon their homes and mortgages, leading to more debt liquidation. This is what's happening all around the country right now — not only in housing, but also in every asset imaginable. These vicious cycles are like hurricanes striking every city and state in the country. Until they exhaust themselves, the deflation will continue.
Like you said at the outset, deflation is falling asset prices across the board. Not just falling home prices, but falling prices on land and commercial properties. Not just stocks and bonds, and commodities, but also collectibles — art, antiques, stamps and, soon, rare coins as well. There may be some exceptions. But overall, unless you have some very convincing evidence to the contrary, you must assume the value of your assets are going down and going down hard.
Jack: So what's a person to do?
Martin: If you don't need something, seriously consider selling it. Real estate. Stocks. Corporate bonds. Even collectibles if you consider them an investment.Jack: Even if it has already gone down a lot?
Martin: Don't look back at what the price was. Just look ahead to what the price will be after a massive deflation. You don't have to sell everything all at once at any price. Every time the government inspires a rally in the stock market, use that as a selling opportunity. Every time the government stimulates some activity in real estate or in the economy, grab that chance as well.
Jack: Suppose market conditions are so severe, there are no buyers. Then what?
Martin: Then, you can afford to wait for a temporary stabilization or recovery. Markets never go straight down. And even in some of the worst markets, there are ways to sell most assets.
Jack: What about antiques and art?
Martin: For the first time in many years, you're seeing a contraction in major auctions sales. For example, annual sales of contemporary art at Sotheby's and Christie's auctions in New York and London are down 17% in 2008. In the two years before that, they doubled in sales. So that's not a huge decline yet. But it's a sign.You won't get peak prices. However, if you act swiftly, you can still sell. If you wait, you'll get caught. Ditto for stamps and rare coins.
Jack: Gold is holding its value the best compared to the much larger percentages you cited earlier for other commodities. But I believe it's only a matter of time before gold succumbs to the deflation as well. What do you think?
Martin: This is hard for a lot of people to accept, but it's also hard to envision a situation in which gold defies gravity for much longer. It's still a good insurance policy against governments that could run amuck. But I suggest you reduce your holdings to a bare minimum. No matter what, the key is to pile up as much cash as you possibly can. Then put that cash into the safest place you possibly can — short-term Treasury securities. You can buy them from the Treasury Department directly, through their Treasury Direct Program. Or for even better liquidity, I recommend a Treasury-only money market fund. Our favorites are Capital Preservation Fund and the Weiss Treasury Only Money Market Fund. There are many more to choose from and they all provide the same safety.
Jack: Last week, there were some Treasury bills auctioned off at zero yield. Doesn't that discourage you?
Martin: Not in the slightest. As long as your cash is in a safe place, the deeper the deflation, the more your money is worth. My last word: Just make sure you keep it safe!
Jack: Martin, I'm going to assume that's my cue to jump in and take us beyond just safety and protection, so we can talk about turning this deflation into a profit opportunity.
Martin: Yes, please do.
Jack: There is just one thing that always goes up with deflation: The U.S. dollar! By DEFINITION, when the price of investments or goods and services goes down, the value of each dollar goes UP. That's the essence of deflation. And here's the key: When the value of the dollar goes up in the United States, it inevitably goes up abroad as well.
Martin: Please explain that connection more specifically.
Jack: Virtually everything that matters in the global economy — trade, commodities, GDP, debts — is measured in U.S. dollars. The dollar is the world's reserve currency. So just as we see domestically, when your dollar buys more, its value also rises internationally.
Martin: There was a lot of talk about other currencies replacing the dollar as a reserve currency. Jack: Talk, yes; action, no. It never happened. And now, it's going the other way: Your dollars now buy more than two gallons of gas for every one gallon they bought just a few months ago. The dollar now buys three times more oil and copper than just a few months ago. Not just 20% more or 50% more, but three times more! We're seeing the same thing happen against currencies. The dollar is in a massive, long-term uptrend against the euro, the British pound and virtually every currency in the world. Yes, we've witnessed a temporary dollar setback in recent days, but it does nothing to change the big trend.
Martin: It certainly does not change the deflation. But please give us specific reasons why the dollar is rising against currencies in particular.
Jack: There are three big reasons. The main one is that, as I said, the dollar is the global measure of virtually everything. So when there's global deflation, the dollar is the prime beneficiary. Look. We've had decade after decade of inflation and global expansion. During most of that period, the worldwide supply of dollars and dollar-based credit expanded dramatically. And those dollars became the key funding source of bubbles in nearly every major asset class — real estate, stocks, commodities, energy and metals. As the supply of dollars expanded, the dollar lost value. Now we have deflation and global contraction. So now everything is turning the other way. Despite the Fed's efforts to lower interest rates, credit — dollar credit — is drying up all over the world. The overall supply of dollars is contracting. So U.S. dollars are suddenly scarce and their value is going up.
Martin: Still many people in the U.S. don't see that. They think: "If the U.S. economy is in so much trouble, isn't that bad for the dollar?"
Jack: No, that's simply not how it works. A country's currency is never valued based on how well or how poorly that particular economy is doing in isolation. It's always measured against another country's currency. So it is always valued based on how a particular economy is doing relative to another economy. It's not the U.S. dollar vs. some other measure. It's the U.S. dollar versus the euro, the British pound, the Aussie dollar, etc. So the relevant question is never, "How well is the U.S. economy doing?" The question is, "How is the U.S. economy doing compared to the European economy, the U.K. or Australia?" In this environment, it's not a beauty contest. It's a contest of which economy is the least ugly ... which leads me to the second reason the dollar is rising: The U.S. is winning the least ugly contest hands down.
Martin: Please elaborate.Jack: Europe's banks have lent more than $2.7 trillion to the high-risk emerging markets, and those emerging markets are being crushed by deflation. Europe's banks have big exposure to Hungary, and Hungary is collapsing. They have big exposure to the Ukraine and to Russia, which are also collapsing.
Europe's economy is in much worse shape than ours. In Germany, export demand has vanished. So it's just now starting to accelerate downward. Worst of all, the Eurozone's governing bodies are a mess. You've got each member nation making its own monetary policy and each going off on a different course with its economic stimulus plans. For example, the European Central Bank wants to retain some semblance of moderation in its monetary policy. But the leaders in countries like Italy, Greece, Spain, Portugal and Ireland are scared. So they're going to whatever it takes to try to prop up demand, no matter what the central banks says.
Martin: It's adding political chaos to financial chaos.
Jack: Precisely. These are the reasons the euro has been falling and, despite a sharp rally, will likely continue to fall — probably down to parity with the dollar, or lower.
Martin: That's a huge drop — over 30% from these levels. What about the U.K.?
Jack: Worse. Their housing bust is more extreme than ours. Their reliance on revenues from a sinking financial center — London — is far worse than ours. Their consumers have more debt than almost any other developed country.
Martin: And the Australian dollar?
Jack: Solid as long as commodities were going up ... but a disaster with commodities going down! In just the last five months, the Australian dollar has lost 31% of its peak value. Other currencies tied to commodities are also getting killed: The New Zealand dollar is down 39% from its peak; the Brazilian real, 35%; the Canadian dollar, 23%.
Martin: And going forward?
Jack: Deflation means more declines in commodities. And the more commodities fall, the more these commodity currencies plunge. It's that simple.
Martin: You said you had three reasons for the dollar's surge.
Jack: The third reason is the flight to the center. Think of the world currency market as a solar system. The dollar is the sun; the other currencies, the planets. As the system expands, investors migrate from the core currency, the U.S. dollar, to the inner planets — currencies like the euro, the Swiss franc or the pound. And as the system expands even more, they migrate to the next tier of currencies, like the Australian dollar or the Canadian dollar ... and then, still further, to the system's periphery — outer planets like the Brazilian real, the Mexican peso or the South African rand. At each step of the way, they take more risk with less stable economies, use more leverage, go for bigger returns — all fueled by abundant dollar credit.
Martin: OK. What happens when the global economy contracts?
Jack: Precisely the reverse. As the global economy begins to come unglued, they rush back to the center, creating a massive flight back to the U.S. dollar. They have no love affair with the dollar. They just see the peripheral economies going down and they dump those currencies. These are the first risky investments they sell, almost invariably switching back to U.S. dollars. The U.S. economy, despite all its troubles, is still the dominant world economy. Militarily, it's the only remaining superpower. Financially, it's still the world's capital. So it's natural that when investors are running from risk, they rush back to the dollar, bidding up its value.Martin: Is this true across the board, regardless of the currency?
Jack: No. There's one notable exception: The Japanese yen. Japan is the world's second largest economy and also one of the world's largest sources of capital. So when the other currencies go down, a lot of that money goes back to Japan, boosting the yen. But the main point is this: The single most consistent consequence of global deflation is a rising dollar.
Martin: So in the midst of all these bear markets, if you're looking for a big bull market
...Jack: You've found it! It's the U.S. dollar. I think the U.S. dollar is in the early stages of a powerful bull market that could last for years. It's the single cleanest way to make windfall profits from the deflation.
Martin: A year or two ago, you were betting against the dollar, and you were right. Now you're betting on a rising dollar. That's a big change.
Jack: You're darn right it is! It goes hand-in-hand with the big sea change you've so clearly illustrated today.
Martin: Can you explain to our readers how to go about betting on a rising dollar?
Jack: There are several ways. You can place your bets in favor of the dollar, using instruments that are tied to the dollar index. So as the dollar index rises against other currencies, you profit directly. Or you can bet against foreign currencies. Remember, the flip side of a rising dollar is falling currencies. The more those currencies fall against the dollar, the more you make. I prefer betting against the currencies because that lets me choose the weakest of them all.
Martin: What instruments do you use?
Jack: I use a revolutionary investment vehicle called currency ETFs. They're simply exchange-traded funds, just like any other ETFs. The same ease of trading and flexibility, the same low commissions, the same availability through any stock broker. If you buy stocks or any other ETF, you can buy currency ETFs.
Martin: Before we get into this any further, can you give us full disclosure on the risks?
Jack: All investments have risk. If the currency goes the wrong way, you lose money. But the advantage of the currency market is that it's divorced from the stock market. The stock market could be crashing, and it would not interfere with your ability to make large steady profits in the currency market. The U.S. economy could be sinking into a depression, and it would still not interfere with your ability to make nice large steady profits in the currency market. No matter what happens in the global economy or the world's financial markets, there is always at least some major currency that's going up in value.
Martin: Please explain that.
Jack: Currencies are measured against each other. When one is going up, the other is going down, like a seesaw. Therefore, there's always at least one currency going up. There's always a bull market in currencies and, therefore, always a bull market in currency ETFs. I don't recommend currency ETFs for all of your money. But at a time when nearly all other investments are going down, it's a great place to get away from the disasters and find a whole separate world of investment opportunity.
Martin: A world that's far removed from those disasters.
Jack: Exactly. I also think that it's the ideal vehicle for average investors to profit from deflation and a rising dollar.
Martin: Specifically, which ETF do you use to profit from a rising dollar?
Jack: There's an ETF that's tied directly to a rising dollar index. The more the dollar rises, the more money you can make. And there's virtually no limit to how far it can go.
Martin: Before we end today, please name it for us. But of course, it's a two-way street. If the dollar falls, then this ETF would fall in value as well.
Jack: Of course. But there are also ETFs tied to specific falling currencies. When the dollar is rising, it means other currencies are falling. And with these ETFs, the more those currencies fall, the more money you can make. Plus, you can do it with two-for-one leverage.Take the euro, for example. If the euro falls 10%, you stand to make 20%. If the euro falls 20%, you can make 40%. And if you want to be more aggressive and buy them with 50% margin, you can double that leverage. In other words, every 10% decline in the currency gives you a 40% profit opportunity.
Martin: Do you recommend margin?
Jack: I don't think you need it. The currency market offers plenty of profit opportunity without margin.
Martin: Can you give us some specific examples without using margin?
Jack: Sure. Let's say you bet against the British pound last August. In just three months' time, you could have grabbed the equivalent of a 52% annual return on your money. The return on the euro would have been even better. If you could have bought the ETF that's designed to profit from a falling euro, you could have grabbed the equivalent of an 81% total annual return. On the Aussie, you could have made a 68% annual return.
Martin: With the way the stock market is performing and the way yields have fallen, I think most people would be happy with a lot less than that. Jack, if you can help folks make, say, 30% or even 20% per year, and you do so regularly, that would be a great service you provide.
Jack: Plus, we're not talking about speculating on some little-known stock or exoteric bond. When you buy currency ETFs, you're investing in the currency itself — CASH MONEY. You never own a single share of stock or any kind of bond.You're also not affected by financial failures. Since you never buy stocks or bonds in a bank or corporation that could default, currency ETFs help insulate you from the debt crisis. In fact, the debt crisis overseas, which is far more frightening than the debt crisis here, is driving investors into the U.S. dollar, which can actually help investors make more money in their dollar ETFs.
Martin: Since the ETFs are not investing in stocks or bonds, please explain what they are investing in.
Jack: In most cases, interest-bearing money markets. So in those ETFs, on top of the appreciation in the currency we're aiming for, you also earn interest. And with many currency ETFs, the interest yield is higher than what you can make in any U.S. money market.
Martin: Let's say you're wrong about the dollar and the dollar turns down. Then what?
Jack: In 2007, when the dollar was falling, we did very nicely. I have a service dedicated exclusively to currency ETFs, called World Currency Alert. And in it, I can recommend currency ETFs that are available now on every major currency. There's an ETF for the euro, the Japanese yen, the British pound, the Swiss franc, the Australian dollar, the Canadian dollar and more.
Sometimes we'll focus on just a couple of special opportunities; sometimes, when we have a broad movement in the currencies, we'll recommend you diversify among many different ones.
Martin: Does that require a larger investment?
Jack: No. Remember, these are just ETFs, just shares traded on the exchange. So you could buy just one share of each if you wanted to. In other words, there's virtually no investment minimum. With just $1,000, you could buy a whole range of different ETFs across several different currencies.
Martin: What kind of fees are we talking about to buy and sell the currency ETFs?
Jack: You pay a broker commission. But if you use a discount or online broker, your commission costs can be slashed to the bone.
Martin: How does this compare to trading standard ETFs, like those that focus on particular stock sectors?
Jack: I think it's a lot easier and better.
Martin: Why is that?
Jack: Instead of thousands of stocks and stock sectors, you only have to track six major currencies — the euro, British pound, Swiss franc, Japanese yen, Australian dollar and Canadian dollar. Instead of choppy and crazy stock market surges and plunges, currencies tend to give you much bigger, sweeping trends.
Martin: Because ...
Jack: Because once you get these massive macro global trends — like the deflation we talked about — turning them around is like turning a big tanker at sea. They can last for many years. It's like sailing with the Gulf Stream. You just follow the currency current as far as it will take you.
Martin: How would you characterize this current you're riding right now — the deflation pushing the dollar higher?
Jack: I've seen big currency trends before, but nothing quite like this one, nothing as powerful and large. Your numbers bring that home very convincingly, I think.
Martin: Tell us why you think investors should buy your service, and don't be bashful. I think it's safe to say that our readers want to know how to make real money from this deflation, and if you have a unique way to do this, its information they're going to want to pay close attention to. Jack: Actually, you don't need World Currency Alert to invest in currency ETFs. It's very easy to do, and like I said, they're readily available to anyone with a regular stock brokerage account. You buy and sell them just like a stock or any other ETF. You don't need any new accounts. They're extremely liquid. You just aim to buy them low and sell them high, like any other investment.Martin: What would you buy when?
Jack: Whenever you see a setback in the dollar, I would buy the PowerShares Dollar Bull ETF.
Martin: OK. So why should someone buy your service?
Jack: You don't need my service to buy them. You need World Currency Alert to make money in them, to take your profits, and to do it with some degree of consistency.
If your goal is to take no risk whatsoever and keep all your money 100% safe, then buying currency ETFs would be a mistake, because there IS always risk of loss. But if you're concerned about this deflation — or a future return of inflation — then NOT taking this opportunity is the mistake you'd be making, in my view. There's nothing, absolutely nothing standing in your way.
Martin: Except the cost of the service.Jack: No, I don't see that as an obstacle. The cost of World Currency Alert is just $295 per year. If you invested just a couple thousand in one of the trades I just mentioned, you could cover an entire year's cost very easily.
Martin: In terms of timing, when would be a good time for investors to start with your service?Jack: There's no particular time that's better than any other. Right now, we've had a setback in the dollar. So I'm looking to jump in with a new batch of recos, perhaps around the first week of the new year. So you could wait until then. The key timing issue is the price change we're going to put into place: Starting January 1, we're raising the price to $395. So don't wait until then. Because as long as you join before December 31, you save $100. Plus, there are even bigger savings if you join for two years. In fact, I think the two-year membership makes the most sense.
Martin: Because
...Jack: Because, like I said, it offers the biggest savings. And no matter what, if you're not happy, if it doesn't work for you or you just decide to change your mind, no problem — 100% money-back guarantee in the first 90 days; pro-rated refund at any time thereafter.
Martin: That's very fair. Please provide a web link for more info and to order your service.
Jack: It's http://images.moneyandmarkets.com/1195/88357.html
Or you can call 800-393-0189.
Martin: One way to look at this is like a home business to generate extra revenues.
Jack: I agree. All it takes is a couple of minutes each day, and for each minute of your time, you could be looking at a thousand or two in revenue per hour. Just remember, the price goes up January 1, 2009.
Martin: Thank you, Jack. And thank YOU, our readers, for joining us today. Let's talk again soon.Good luck and God bless!Martin
About Money and MarketsFor more information and archived issues, visit http://www.moneyandmarkets.com/Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Michelle Johncke, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com/.From time to time, Money and Markets may have information from select third-party advertisers known as "external sponsorships." We cannot guarantee the accuracy of these ads. In addition, these ads do not necessarily express the viewpoints of Money and Markets or its editors. For more information, see our terms and conditions.View our Privacy Policy.Would you like to unsubscribe from our mailing list?To make sure you don't miss our urgent updates, add Weiss Research to your address book. Just follow these simple steps.© 2008 by Weiss Research, Inc. All rights reserved.15430 Endeavour Drive, Jupiter, FL 33478
Dear,
The Fed, the Treasury and all major governments on the planet are throwing the kitchen sink at this debt crisis. But their efforts are being overwhelmed by a monumental sea change — the shift from rising prices to falling prices, from booming asset values to crashing asset values, from wealth creation to wealth destruction, from inflation to deflation.
For my entire lifetime, and probably yours as well, we have been living with inflation — sometimes tame, sometimes rampant — but consistently eroding the purchasing power of our dollar.Inflation pervaded every money decision we made or thought about making, every retirement plan or business model. Inflation was factored into our leases, our employment contracts, our budgets, our investment programs.
Now, all of that is changing; and it's doing so dramatically! Suddenly, the polar opposite of inflation is taking hold in America: Deflation!
Suddenly, prices are plummeting — not just for real estate, but also for automobiles, appliances, clothing and gasoline. From peaks reached just a few months ago to the latest bottoms, the price of oil has plunged 73% ... copper has fallen 66% ... lead and nickel are down 73% ... platinum is down 66% ... and wheat is off 64%.
Even the government's slow-to-change, lagging index of inflation — the CPI — has caved in to deflation, falling by the most since the government first introduced the index in 1946. These are not numbers that denote less inflation. They are hard evidence of outright deflation! This is crucial for you: If you continue investing as you did in inflationary times, you risk losing almost everything. However, if you acknowledge this historic shift and make the right moves now, you'll have the opportunity to build substantial wealth. This inflation-deflation switch is turning the entire world of investments upside down and inside out.
It means you must consider the grave new dangers deflation brings your portfolio and, at the same time, the unique new opportunities deflation gives you to grow your wealth. This past week, during our Deflation Survival Briefing, I covered both topics with Jack Crooks, the only currency expert I'm aware of who, unlike his peers, not only warned unambiguously about deflation but also has a unique way to profit from the deflation. I assume you attended the event online from start to finish. At times, however, the sound may have been unclear, and I apologize. So here's an edited transcript for your convenience. It's a double-length gala issue especially for you, my way of underscoring the vital importance of this sea change.
Deflation Survival Briefingwith Martin D. Weiss and Jack Crooks(Edited Transcript)
Martin Weiss: Jack, the division of labor I've mapped out is this: I will focus on the dangers and protective strategies; you can focus on the opportunities and profit strategies.
Jack Crooks: That makes sense, but I think it's pretty obvious what the dangers are.
Martin: Specifically, you're referring to ...
Jack: Losing money. Losing a lot of money. Deflation means most asset prices go down. When asset prices go down, anyone who owns those assets loses money. It's that simple.
Martin: What most people don't seem to grasp is how much money — the sheer magnitude of the losses. But the Fed just released the numbers, and I want to show them to you. I want you to see for yourself the amazing drama that literally bursts from these pages. On the Web, just go to Flow of Funds, pdf page 113. From this table, I've pulled out the main numbers to walk you through this step by step, because it's probably the most important set of facts you've seen — or will see — for a long time:
The Fed tracks five key sectors that go into household wealth: real estate, corporate equities, mutual fund shares, life insurance and pension fund reserves, plus equity in noncorporate businesses. Now let me show you how the wealth destruction is spreading throughout the U.S. economy. First quarter 2007: Every single wealth sector is still growing, except one — real estate. This $53 billion loss in real estate is a time and place that will go down in history as the great turning point of our era.Second quarter 2007: Another $190 billion in real estate wealth destroyed. Third quarter 2007: Households suffer a whopping $496 billion in losses — nearly 10 times as much as in the first quarter.Fourth quarter 2007: The wealth destruction spreads to nearly all other sectors. Households lose $708 billion in real estate, the most in history. Plus, they lose $377 billion in stocks, $145 billion in mutual funds, $265 billion in their life insurance and pension reserves.First quarter 2008: The carnage deepens. Households lose $911 billion in stocks, $297 billion in mutual funds and $832 billion in insurance and pension fund reserves. Plus, the losses spread to the last major sector, equity in noncorporate businesses. Second quarter 2008: The Bush economic stimulus package kicks in, and it slows down the pace a bit. But the hemorrhaging continues. Not one single sector recovers.Third quarter 2008: Earth-shattering losses across the board, with households losing
...ANOTHER $647 billion in real estate
$922 billion in corporate equities
$523 billion in mutual funds
$653 billion in insurance and pension fund reserves
$128 billion in noncorporate businesses
Grand total: Nearly $2.9 trillion in losses — the worst in recorded history.
Grand total lost over the past year: $7.2 trillion.
Jack: And this is not just a bunch of numbers. It's a hard-nosed reality that almost everyone is up against.
Martin: Absolutely! At the peak of the housing boom, one of our associates had his home appraised at $1.4 million. Three weeks ago, he had it appraised again and it was down around $700,000. That's a 50% decline. And it's not just the high end of the market. In May 2005, another home in our area sold for $175,000; now it's listed at Realtor.com for only $64,000.
Jack: People think that since home values have already fallen so far, they must be near a bottom.
Martin: I don't agree with that view. Most of the price declines we've seen so far merely represent a recognition that the peak prices of the mid-2000s were a fantasy built upon "Frankenstein Financing" — wildly speculative credit terms such as option ARMs and liar loans. The hard-core declines in housing, driven by basic things like recession and unemployment, are just now getting under way.
Jack: How much further do you see home prices falling?
Martin: My personal opinion is that that over half of the declines are still ahead. That applies not only to housing, but also to commercial properties; not only to real estate, but also to stocks and other assets. Consumer prices just began to fall in October. Outright contractions in the economy are just now getting under way. Deflation is still in its early stages. The wealth destruction has a long way to go.
Jack: You call this wealth destruction and I don't deny the validity of that term. But another way to describe it is rampant deflation. Deflation in the value of real estate and other investments, deflation in energy, deflation at the car dealer and deflation at every mall. In each and every sector that you've described, the U.S. dollar buys more.
Martin: That's the positive side of the story. But whatever you call it, these numbers don't lie. You can see with your own eyes that it's massive and that it's spreading throughout the entire economy.
Jack: Martin, all this raises some urgent questions in my mind and probably in the minds of our readers as well. First, can the government offset this massive destruction of wealth with more bailouts, more Fed actions and gigantic economic stimulus packages? Martin: They can buy some time or they can slow down the process temporarily, as they did in the second quarter of 2008, for example. But still, my answer is a flat NO! Not even Washington can print enough money fast enough to halt this deflationary spiral; it's just too huge. And all the printing press money in the world won't do much if it's not lent or spent. Bottom line: No matter which companies Washington bails out, this is a house of cards. It's coming down. And you must get out if its way.
Jack: Still, a lot of people have big expectations for President-elect Obama's stimulus package starting next year.
Martin: The highest estimates for the Obama stimulus package are $1 trillion. But even if it's that big, it's still small in contrast to the wealth destruction we're already seeing. And it's going to take a couple of years before all of that money reaches Americans. By that time, trillions more in wealth could be lost.
Jack: Every economist I read likes to leave some wiggle room for future butt-covering, just in case they turn out to be wrong. But you're not pulling any punches, are you? Why is that?Martin: It's not needed in this situation — because of the sheer enormity and speed of the wealth destruction: $7.2 trillion just through over the past year. In contrast, the Trouble Asset Relief Program (TARP) is $700 billion. So these losses are already ten times more than the entire bailout program.
Let's compare how much is being lost vs. what the government is doing to offset it. Here's the progression we just saw:
$1.5 trillion lost in the fourth quarter of 2007
$2.7 trillion lost in the first quarter of 2008
$630 billion lost in the second quarter of 2008
$2.9 trillion in the third quarter
Now, let me demonstrate why the government's efforts are unable to offset this wealth destruction. Congress has authorized $700 billion for TARP. But the Treasury Department reports that in the fourth quarter, only $330 billion has been committed so far.
Jack: Committed or actually disbursed?
Martin: Committed.
Jack: The ol' check-in-the-mail routine, eh?
Martin: Yes. But let's assume the $330 billion is already at the banks. And let's say that in the first quarter of 2009, they are able to disburse all of the rest. That's still minuscule in comparison to the wealth destruction.
Jack: Meanwhile, the wealth destruction continues.
Martin: Right. We don't know how much. But let's assume the wealth destruction does not decelerate or accelerate. Let's just assume it continues at the same pace.
Here's what it would look like. Moreover, most of the money being funneled to the banks is not reaching consumers and businesses. Instead, it's sitting idle at the banks, to rebuild their capital, to try to offset all the losses they've sustained.
Jack: How much of the TARP money are the banks actually lending out?
Martin: We don't know.
Jack: Isn't this why Congress is so ticked off, trying to find a way to force the banks to lend out the TARP money?
Martin: Yes. But it's a tough sell. The banks are going broke. They're being asked to lend it to borrowers, who they fear will also go broke. So the resistance is great. But even if you assume that Congress can force the Treasury Department to, in turn, force the banks to loan out some fraction of the TARP money, it would still be only a fraction of the total TARP funds.
Jack: A drop in the bucket.
Martin: Absolutely! The huge red areas in this chart represent the tremendous power of deflation. The small black areas represent the impotence of government to offset the deflation.
The power of deflation is hundreds of times larger than the government's ability to counteract it. This is why the U.S. government was not able to prevent deflation in the 1930s. And it's also why the Japanese government was unable to prevent its deflation in the 1990s.
Jack: Still, most people think the government can just print more money at will. They're now talking about a total bill of $8.5 trillion. Your numbers don't seem to account for that.
Martin: Because those bigger numbers are almost entirely guarantees and swaps — not net new money added to the economy. Plus, please bear in mind one more thing: The wealth destruction we've been discussing today does not include the losses by financial institutions, corporations and governments.
Jack: Good point. But let me go to the second major question I get from readers: What's causing this and when will it end?
Martin: What's perpetuating the deflation is excess debts. Look. Debts were usually bearable. As long as people had the income to make their payments — or as long as they could borrow from Peter to pay Paul — they could keep piling up more debt, and life went on. Deflation alone is also not so bad. It makes homes more affordable, college education more accessible, and basic necessities of life cheaper.
Jack: But when you put debts and deflation together
...Martin: That's when things fall apart! That's when you get not only wealth destruction but DEBT destruction.
Jack: And we have evidence of that as well, I presume.
Martin: Yes, undeniable, smoking-gun evidence. For decades, we've almost always seen more debt piled up quarter after quarter, year after year. But then, beginning in the third quarter of 2007, all that changed. For the first time, we saw massive debt liquidation — debt destruction. It started in the commercial paper market, where corporations issue short-term corporate IOUs to borrow in massive amounts: In the third quarter of 2007, instead of growing as it almost always has, commercial paper was being liquidated at a rapid pace. That was the canary in the coal mine.
Jack: And now?
Martin: Now the debt liquidation has spread: In addition to the liquidation of commercial paper, we're seeing massive debt liquidation in mortgages and corporate bonds.Jack: How big?
Martin: The biggest ever in recorded history. Look at mortgages! The Fed reports how much in new mortgages are created each quarter at an annual rate. Ever since you and I were born, all we've even seen is net new growth in mortgages. That's how it was when we were growing up, that's how it was in recent years, and that's what we saw in the third quarter of 2007. See?
Jack: $1,005 billion.
Martin: Yes. Net net, after all mortgage paydowns, new mortgages were added at the rate of $1,005 billion per year. Almost the same in the fourth quarter of 2007. But then look: First quarter 2008 — $539 billion. Second quarter 2008 — new mortgages begin to vanish from the market. Yet, up until this point, we're just talking about a credit crunch.
Jack: In other words, less new credit.
Martin: Yes, and that's already a powerful deflationary force: Most people can't get mortgages. So they can't buy. Since there are few buyers, prices fall. That's when people think: "This is terrible. It couldn't possibly get any worse."
Jack: But it does, doesn't it?
Martin: Dramatically worse: In third quarter of 2008, the volume of mortgages going bad is so big and the volume of new mortgages being created is so small, we have a net decline in mortgages outstanding. For the first time in recorded history, we have a net destruction of debts in this sector. This is far worse than a credit crunch. It is a DEBT COLLAPSE, an unprecedented, unstoppable deflationary force.
The same kind of debt collapse also hits corporate bonds. Third quarter of 2007 — no problem. New bonds are issued at the annual rate of nearly $1,481 billion per year.Fourth quarter of 2007 — big decline, to $821 billion.
Jack: Credit crunch begins to hit.
Martin: Exactly. First and second quarters of 2008 — credit crunch hits even harder. Third quarter of 2008 — debt collapse strikes! It's the biggest net reduction of corporate bonds in recorded history, running at the annual rate of $755 billion (red bar in chart). Again, one of the most powerful deflationary forces of all time!
Jack: So what's the next stage?
Martin: A chain reaction of corporate bankruptcies.
Jack: But it looks like they're going to save companies like General Motors and Chrysler.
Martin: Even if they do, they cannot save hundreds of thousands of smaller and medium-sized companies that are going bankrupt all over the country ... tens of thousands of municipalities and states running out of money ... tens of millions of Americans who have gotten smacked with the trillions in losses I've just showed you in the household sector.
This wealth destruction and debt liquidation is classic; and despite all the government intervention, it is fundamentally very similar to the collapse we saw in 1929 and the early 1930s.
Jack: But many people believe the 1930s Depression was caused by the failure of the federal government to fight the decline. This time, they say, the government is doing precisely the opposite.
Martin: In reality, America's First Great Depression wasn't caused by what the government failed to do to stop it. Rather, it was largely caused by all the wild things the government did do to create the superboom in the Roaring '20s that preceded it. They dished out money to banks like candy. They let banks loan money to brokers without restraint. And they encouraged brokers to hand it off to stock market speculators with 10% margin. But if you want to see what happens when a government intervenes aggressively after a bust, just look at Japan since 1990. Japan lowered interest rates to zero, just like the Fed is doing today. Japan bailed out banks, brokerage firms and insurance companies, much like the Fed is doing here. Japan embarked on massive public works projects, much like President-elect Obama is proposing now.
But it did not end the deflation. And it did not prevent their stock market from making brand-new lows this year. All it did was prolong the agony — now 18 years and counting.
Jack: So precisely how much longer do you think the deflation will continue in the U.S.?
Martin: Nobody knows. But it's clear that this is not a short-term situation that will be resolved in the foreseeable future. It could take years to flush out the bad debts and restore confidence. The key is the debt liquidation. That's the main engine behind the deflation and a major element in vicious cycles that are just beginning to gain momentum. Consider the housing market, for example. The more debts are liquidated, the more prices fall ... and the more prices fall, the more people abandon their homes and mortgages, leading to more debt liquidation. This is what's happening all around the country right now — not only in housing, but also in every asset imaginable. These vicious cycles are like hurricanes striking every city and state in the country. Until they exhaust themselves, the deflation will continue.
Like you said at the outset, deflation is falling asset prices across the board. Not just falling home prices, but falling prices on land and commercial properties. Not just stocks and bonds, and commodities, but also collectibles — art, antiques, stamps and, soon, rare coins as well. There may be some exceptions. But overall, unless you have some very convincing evidence to the contrary, you must assume the value of your assets are going down and going down hard.
Jack: So what's a person to do?
Martin: If you don't need something, seriously consider selling it. Real estate. Stocks. Corporate bonds. Even collectibles if you consider them an investment.Jack: Even if it has already gone down a lot?
Martin: Don't look back at what the price was. Just look ahead to what the price will be after a massive deflation. You don't have to sell everything all at once at any price. Every time the government inspires a rally in the stock market, use that as a selling opportunity. Every time the government stimulates some activity in real estate or in the economy, grab that chance as well.
Jack: Suppose market conditions are so severe, there are no buyers. Then what?
Martin: Then, you can afford to wait for a temporary stabilization or recovery. Markets never go straight down. And even in some of the worst markets, there are ways to sell most assets.
Jack: What about antiques and art?
Martin: For the first time in many years, you're seeing a contraction in major auctions sales. For example, annual sales of contemporary art at Sotheby's and Christie's auctions in New York and London are down 17% in 2008. In the two years before that, they doubled in sales. So that's not a huge decline yet. But it's a sign.You won't get peak prices. However, if you act swiftly, you can still sell. If you wait, you'll get caught. Ditto for stamps and rare coins.
Jack: Gold is holding its value the best compared to the much larger percentages you cited earlier for other commodities. But I believe it's only a matter of time before gold succumbs to the deflation as well. What do you think?
Martin: This is hard for a lot of people to accept, but it's also hard to envision a situation in which gold defies gravity for much longer. It's still a good insurance policy against governments that could run amuck. But I suggest you reduce your holdings to a bare minimum. No matter what, the key is to pile up as much cash as you possibly can. Then put that cash into the safest place you possibly can — short-term Treasury securities. You can buy them from the Treasury Department directly, through their Treasury Direct Program. Or for even better liquidity, I recommend a Treasury-only money market fund. Our favorites are Capital Preservation Fund and the Weiss Treasury Only Money Market Fund. There are many more to choose from and they all provide the same safety.
Jack: Last week, there were some Treasury bills auctioned off at zero yield. Doesn't that discourage you?
Martin: Not in the slightest. As long as your cash is in a safe place, the deeper the deflation, the more your money is worth. My last word: Just make sure you keep it safe!
Jack: Martin, I'm going to assume that's my cue to jump in and take us beyond just safety and protection, so we can talk about turning this deflation into a profit opportunity.
Martin: Yes, please do.
Jack: There is just one thing that always goes up with deflation: The U.S. dollar! By DEFINITION, when the price of investments or goods and services goes down, the value of each dollar goes UP. That's the essence of deflation. And here's the key: When the value of the dollar goes up in the United States, it inevitably goes up abroad as well.
Martin: Please explain that connection more specifically.
Jack: Virtually everything that matters in the global economy — trade, commodities, GDP, debts — is measured in U.S. dollars. The dollar is the world's reserve currency. So just as we see domestically, when your dollar buys more, its value also rises internationally.
Martin: There was a lot of talk about other currencies replacing the dollar as a reserve currency. Jack: Talk, yes; action, no. It never happened. And now, it's going the other way: Your dollars now buy more than two gallons of gas for every one gallon they bought just a few months ago. The dollar now buys three times more oil and copper than just a few months ago. Not just 20% more or 50% more, but three times more! We're seeing the same thing happen against currencies. The dollar is in a massive, long-term uptrend against the euro, the British pound and virtually every currency in the world. Yes, we've witnessed a temporary dollar setback in recent days, but it does nothing to change the big trend.
Martin: It certainly does not change the deflation. But please give us specific reasons why the dollar is rising against currencies in particular.
Jack: There are three big reasons. The main one is that, as I said, the dollar is the global measure of virtually everything. So when there's global deflation, the dollar is the prime beneficiary. Look. We've had decade after decade of inflation and global expansion. During most of that period, the worldwide supply of dollars and dollar-based credit expanded dramatically. And those dollars became the key funding source of bubbles in nearly every major asset class — real estate, stocks, commodities, energy and metals. As the supply of dollars expanded, the dollar lost value. Now we have deflation and global contraction. So now everything is turning the other way. Despite the Fed's efforts to lower interest rates, credit — dollar credit — is drying up all over the world. The overall supply of dollars is contracting. So U.S. dollars are suddenly scarce and their value is going up.
Martin: Still many people in the U.S. don't see that. They think: "If the U.S. economy is in so much trouble, isn't that bad for the dollar?"
Jack: No, that's simply not how it works. A country's currency is never valued based on how well or how poorly that particular economy is doing in isolation. It's always measured against another country's currency. So it is always valued based on how a particular economy is doing relative to another economy. It's not the U.S. dollar vs. some other measure. It's the U.S. dollar versus the euro, the British pound, the Aussie dollar, etc. So the relevant question is never, "How well is the U.S. economy doing?" The question is, "How is the U.S. economy doing compared to the European economy, the U.K. or Australia?" In this environment, it's not a beauty contest. It's a contest of which economy is the least ugly ... which leads me to the second reason the dollar is rising: The U.S. is winning the least ugly contest hands down.
Martin: Please elaborate.Jack: Europe's banks have lent more than $2.7 trillion to the high-risk emerging markets, and those emerging markets are being crushed by deflation. Europe's banks have big exposure to Hungary, and Hungary is collapsing. They have big exposure to the Ukraine and to Russia, which are also collapsing.
Europe's economy is in much worse shape than ours. In Germany, export demand has vanished. So it's just now starting to accelerate downward. Worst of all, the Eurozone's governing bodies are a mess. You've got each member nation making its own monetary policy and each going off on a different course with its economic stimulus plans. For example, the European Central Bank wants to retain some semblance of moderation in its monetary policy. But the leaders in countries like Italy, Greece, Spain, Portugal and Ireland are scared. So they're going to whatever it takes to try to prop up demand, no matter what the central banks says.
Martin: It's adding political chaos to financial chaos.
Jack: Precisely. These are the reasons the euro has been falling and, despite a sharp rally, will likely continue to fall — probably down to parity with the dollar, or lower.
Martin: That's a huge drop — over 30% from these levels. What about the U.K.?
Jack: Worse. Their housing bust is more extreme than ours. Their reliance on revenues from a sinking financial center — London — is far worse than ours. Their consumers have more debt than almost any other developed country.
Martin: And the Australian dollar?
Jack: Solid as long as commodities were going up ... but a disaster with commodities going down! In just the last five months, the Australian dollar has lost 31% of its peak value. Other currencies tied to commodities are also getting killed: The New Zealand dollar is down 39% from its peak; the Brazilian real, 35%; the Canadian dollar, 23%.
Martin: And going forward?
Jack: Deflation means more declines in commodities. And the more commodities fall, the more these commodity currencies plunge. It's that simple.
Martin: You said you had three reasons for the dollar's surge.
Jack: The third reason is the flight to the center. Think of the world currency market as a solar system. The dollar is the sun; the other currencies, the planets. As the system expands, investors migrate from the core currency, the U.S. dollar, to the inner planets — currencies like the euro, the Swiss franc or the pound. And as the system expands even more, they migrate to the next tier of currencies, like the Australian dollar or the Canadian dollar ... and then, still further, to the system's periphery — outer planets like the Brazilian real, the Mexican peso or the South African rand. At each step of the way, they take more risk with less stable economies, use more leverage, go for bigger returns — all fueled by abundant dollar credit.
Martin: OK. What happens when the global economy contracts?
Jack: Precisely the reverse. As the global economy begins to come unglued, they rush back to the center, creating a massive flight back to the U.S. dollar. They have no love affair with the dollar. They just see the peripheral economies going down and they dump those currencies. These are the first risky investments they sell, almost invariably switching back to U.S. dollars. The U.S. economy, despite all its troubles, is still the dominant world economy. Militarily, it's the only remaining superpower. Financially, it's still the world's capital. So it's natural that when investors are running from risk, they rush back to the dollar, bidding up its value.Martin: Is this true across the board, regardless of the currency?
Jack: No. There's one notable exception: The Japanese yen. Japan is the world's second largest economy and also one of the world's largest sources of capital. So when the other currencies go down, a lot of that money goes back to Japan, boosting the yen. But the main point is this: The single most consistent consequence of global deflation is a rising dollar.
Martin: So in the midst of all these bear markets, if you're looking for a big bull market
...Jack: You've found it! It's the U.S. dollar. I think the U.S. dollar is in the early stages of a powerful bull market that could last for years. It's the single cleanest way to make windfall profits from the deflation.
Martin: A year or two ago, you were betting against the dollar, and you were right. Now you're betting on a rising dollar. That's a big change.
Jack: You're darn right it is! It goes hand-in-hand with the big sea change you've so clearly illustrated today.
Martin: Can you explain to our readers how to go about betting on a rising dollar?
Jack: There are several ways. You can place your bets in favor of the dollar, using instruments that are tied to the dollar index. So as the dollar index rises against other currencies, you profit directly. Or you can bet against foreign currencies. Remember, the flip side of a rising dollar is falling currencies. The more those currencies fall against the dollar, the more you make. I prefer betting against the currencies because that lets me choose the weakest of them all.
Martin: What instruments do you use?
Jack: I use a revolutionary investment vehicle called currency ETFs. They're simply exchange-traded funds, just like any other ETFs. The same ease of trading and flexibility, the same low commissions, the same availability through any stock broker. If you buy stocks or any other ETF, you can buy currency ETFs.
Martin: Before we get into this any further, can you give us full disclosure on the risks?
Jack: All investments have risk. If the currency goes the wrong way, you lose money. But the advantage of the currency market is that it's divorced from the stock market. The stock market could be crashing, and it would not interfere with your ability to make large steady profits in the currency market. The U.S. economy could be sinking into a depression, and it would still not interfere with your ability to make nice large steady profits in the currency market. No matter what happens in the global economy or the world's financial markets, there is always at least some major currency that's going up in value.
Martin: Please explain that.
Jack: Currencies are measured against each other. When one is going up, the other is going down, like a seesaw. Therefore, there's always at least one currency going up. There's always a bull market in currencies and, therefore, always a bull market in currency ETFs. I don't recommend currency ETFs for all of your money. But at a time when nearly all other investments are going down, it's a great place to get away from the disasters and find a whole separate world of investment opportunity.
Martin: A world that's far removed from those disasters.
Jack: Exactly. I also think that it's the ideal vehicle for average investors to profit from deflation and a rising dollar.
Martin: Specifically, which ETF do you use to profit from a rising dollar?
Jack: There's an ETF that's tied directly to a rising dollar index. The more the dollar rises, the more money you can make. And there's virtually no limit to how far it can go.
Martin: Before we end today, please name it for us. But of course, it's a two-way street. If the dollar falls, then this ETF would fall in value as well.
Jack: Of course. But there are also ETFs tied to specific falling currencies. When the dollar is rising, it means other currencies are falling. And with these ETFs, the more those currencies fall, the more money you can make. Plus, you can do it with two-for-one leverage.Take the euro, for example. If the euro falls 10%, you stand to make 20%. If the euro falls 20%, you can make 40%. And if you want to be more aggressive and buy them with 50% margin, you can double that leverage. In other words, every 10% decline in the currency gives you a 40% profit opportunity.
Martin: Do you recommend margin?
Jack: I don't think you need it. The currency market offers plenty of profit opportunity without margin.
Martin: Can you give us some specific examples without using margin?
Jack: Sure. Let's say you bet against the British pound last August. In just three months' time, you could have grabbed the equivalent of a 52% annual return on your money. The return on the euro would have been even better. If you could have bought the ETF that's designed to profit from a falling euro, you could have grabbed the equivalent of an 81% total annual return. On the Aussie, you could have made a 68% annual return.
Martin: With the way the stock market is performing and the way yields have fallen, I think most people would be happy with a lot less than that. Jack, if you can help folks make, say, 30% or even 20% per year, and you do so regularly, that would be a great service you provide.
Jack: Plus, we're not talking about speculating on some little-known stock or exoteric bond. When you buy currency ETFs, you're investing in the currency itself — CASH MONEY. You never own a single share of stock or any kind of bond.You're also not affected by financial failures. Since you never buy stocks or bonds in a bank or corporation that could default, currency ETFs help insulate you from the debt crisis. In fact, the debt crisis overseas, which is far more frightening than the debt crisis here, is driving investors into the U.S. dollar, which can actually help investors make more money in their dollar ETFs.
Martin: Since the ETFs are not investing in stocks or bonds, please explain what they are investing in.
Jack: In most cases, interest-bearing money markets. So in those ETFs, on top of the appreciation in the currency we're aiming for, you also earn interest. And with many currency ETFs, the interest yield is higher than what you can make in any U.S. money market.
Martin: Let's say you're wrong about the dollar and the dollar turns down. Then what?
Jack: In 2007, when the dollar was falling, we did very nicely. I have a service dedicated exclusively to currency ETFs, called World Currency Alert. And in it, I can recommend currency ETFs that are available now on every major currency. There's an ETF for the euro, the Japanese yen, the British pound, the Swiss franc, the Australian dollar, the Canadian dollar and more.
Sometimes we'll focus on just a couple of special opportunities; sometimes, when we have a broad movement in the currencies, we'll recommend you diversify among many different ones.
Martin: Does that require a larger investment?
Jack: No. Remember, these are just ETFs, just shares traded on the exchange. So you could buy just one share of each if you wanted to. In other words, there's virtually no investment minimum. With just $1,000, you could buy a whole range of different ETFs across several different currencies.
Martin: What kind of fees are we talking about to buy and sell the currency ETFs?
Jack: You pay a broker commission. But if you use a discount or online broker, your commission costs can be slashed to the bone.
Martin: How does this compare to trading standard ETFs, like those that focus on particular stock sectors?
Jack: I think it's a lot easier and better.
Martin: Why is that?
Jack: Instead of thousands of stocks and stock sectors, you only have to track six major currencies — the euro, British pound, Swiss franc, Japanese yen, Australian dollar and Canadian dollar. Instead of choppy and crazy stock market surges and plunges, currencies tend to give you much bigger, sweeping trends.
Martin: Because ...
Jack: Because once you get these massive macro global trends — like the deflation we talked about — turning them around is like turning a big tanker at sea. They can last for many years. It's like sailing with the Gulf Stream. You just follow the currency current as far as it will take you.
Martin: How would you characterize this current you're riding right now — the deflation pushing the dollar higher?
Jack: I've seen big currency trends before, but nothing quite like this one, nothing as powerful and large. Your numbers bring that home very convincingly, I think.
Martin: Tell us why you think investors should buy your service, and don't be bashful. I think it's safe to say that our readers want to know how to make real money from this deflation, and if you have a unique way to do this, its information they're going to want to pay close attention to. Jack: Actually, you don't need World Currency Alert to invest in currency ETFs. It's very easy to do, and like I said, they're readily available to anyone with a regular stock brokerage account. You buy and sell them just like a stock or any other ETF. You don't need any new accounts. They're extremely liquid. You just aim to buy them low and sell them high, like any other investment.Martin: What would you buy when?
Jack: Whenever you see a setback in the dollar, I would buy the PowerShares Dollar Bull ETF.
Martin: OK. So why should someone buy your service?
Jack: You don't need my service to buy them. You need World Currency Alert to make money in them, to take your profits, and to do it with some degree of consistency.
If your goal is to take no risk whatsoever and keep all your money 100% safe, then buying currency ETFs would be a mistake, because there IS always risk of loss. But if you're concerned about this deflation — or a future return of inflation — then NOT taking this opportunity is the mistake you'd be making, in my view. There's nothing, absolutely nothing standing in your way.
Martin: Except the cost of the service.Jack: No, I don't see that as an obstacle. The cost of World Currency Alert is just $295 per year. If you invested just a couple thousand in one of the trades I just mentioned, you could cover an entire year's cost very easily.
Martin: In terms of timing, when would be a good time for investors to start with your service?Jack: There's no particular time that's better than any other. Right now, we've had a setback in the dollar. So I'm looking to jump in with a new batch of recos, perhaps around the first week of the new year. So you could wait until then. The key timing issue is the price change we're going to put into place: Starting January 1, we're raising the price to $395. So don't wait until then. Because as long as you join before December 31, you save $100. Plus, there are even bigger savings if you join for two years. In fact, I think the two-year membership makes the most sense.
Martin: Because
...Jack: Because, like I said, it offers the biggest savings. And no matter what, if you're not happy, if it doesn't work for you or you just decide to change your mind, no problem — 100% money-back guarantee in the first 90 days; pro-rated refund at any time thereafter.
Martin: That's very fair. Please provide a web link for more info and to order your service.
Jack: It's http://images.moneyandmarkets.com/1195/88357.html
Or you can call 800-393-0189.
Martin: One way to look at this is like a home business to generate extra revenues.
Jack: I agree. All it takes is a couple of minutes each day, and for each minute of your time, you could be looking at a thousand or two in revenue per hour. Just remember, the price goes up January 1, 2009.
Martin: Thank you, Jack. And thank YOU, our readers, for joining us today. Let's talk again soon.Good luck and God bless!Martin
About Money and MarketsFor more information and archived issues, visit http://www.moneyandmarkets.com/Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Michelle Johncke, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com/.From time to time, Money and Markets may have information from select third-party advertisers known as "external sponsorships." We cannot guarantee the accuracy of these ads. In addition, these ads do not necessarily express the viewpoints of Money and Markets or its editors. For more information, see our terms and conditions.View our Privacy Policy.Would you like to unsubscribe from our mailing list?To make sure you don't miss our urgent updates, add Weiss Research to your address book. Just follow these simple steps.© 2008 by Weiss Research, Inc. All rights reserved.15430 Endeavour Drive, Jupiter, FL 33478
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