Why the Dollar's Reign Is Near an End(online.wsj.com)
online.wsj.com
Why the Dollar's Reign Is Near an End
http://online.wsj.com/article/SB10001424052748703313304576132170181013248.html?mod=WSJ_hp_mostpop_read
5 comments
We just approved a short term spending bill to push off the government shut down. Yay, us.
However it should be noted that if the government shuts down for long enough, we won't pay our bond obligations. This would be serious. Very serious. In fact the last time there was a shut down there were two, with a small gap in the middle as everyone agreed to a temporary emergency measure that avoided missing bond obligations.
This time around as shutdown looms, we'll see whether Congress keeps this in mind. They are playing a game of chicken. But if the game of chicken results in the USA failing to pay our bond obligations on time, even once, we instantly lose the perception that US treasuries are absolutely risk free investments. If that happens, our desirability as a currency goes down, our interest rates go up, and our dollar is likely to drop relatively quickly. The real nightmare is that this becomes an accelerating spiral.
The odds of this scenario is unlikely. Washington is full of grandstanding politicians, but those politicians do have intelligent advisers. The consequences of this one are rather dramatic and well understood. But occasionally I worry about it.
However it should be noted that if the government shuts down for long enough, we won't pay our bond obligations. This would be serious. Very serious. In fact the last time there was a shut down there were two, with a small gap in the middle as everyone agreed to a temporary emergency measure that avoided missing bond obligations.
This time around as shutdown looms, we'll see whether Congress keeps this in mind. They are playing a game of chicken. But if the game of chicken results in the USA failing to pay our bond obligations on time, even once, we instantly lose the perception that US treasuries are absolutely risk free investments. If that happens, our desirability as a currency goes down, our interest rates go up, and our dollar is likely to drop relatively quickly. The real nightmare is that this becomes an accelerating spiral.
The odds of this scenario is unlikely. Washington is full of grandstanding politicians, but those politicians do have intelligent advisers. The consequences of this one are rather dramatic and well understood. But occasionally I worry about it.
To the extent that people are talking about a shutdown, it has been with the idea that a resolution will be passed to pay our bond and entitlement obligations while everything else is shut down.
It should be pointed out that we have enough income to cover those things in the absence of other discretionary spending, so that does not require more debt.
A government shutdown will not be accompanied by the financial fireworks that people are anticipating. Personally I'm all for this style of shutdown. The savings are immense and quick and I daresay a lot of people will be quite shocked to learn just how little we need all those government services. I'm not saying we don't need them at all, just that we need them far less that people think. We managed to live without them for quite a while, after all.
It should be pointed out that we have enough income to cover those things in the absence of other discretionary spending, so that does not require more debt.
A government shutdown will not be accompanied by the financial fireworks that people are anticipating. Personally I'm all for this style of shutdown. The savings are immense and quick and I daresay a lot of people will be quite shocked to learn just how little we need all those government services. I'm not saying we don't need them at all, just that we need them far less that people think. We managed to live without them for quite a while, after all.
In the mid-90s the Republicans believed that people would be surprised at how little they missed government services. Then the news was full of things like people whose vacation plans were ruined by the fact that national parks were closed. Or people whose travel plans were disrupted because they couldn't get visas. Or people who were being laid off because their employer was running out of money due to the shutdown. People blamed the Republicans for it and it was a disaster.
Sure, most people weren't impacted. But news organizations are in the business of finding human interest stories. And all of the human interest stories that you can find around a government shutdown are pretty bad. There will be a backlash. The only question is who the public decides should be blamed. Given that people hate Congress more than anyone else in the government, I would bet they'll blame Congress. (Again.)
As for the savings that you are hoping for, that is not so clear either.
First there is a direct cost to shutting down the government. People have to put their paperwork in order. You need to hire more security guards. And so on. An estimate I heard on NPR is that the last time the cost of shutting down the government was estimated at half a billion.
But then you don't even save that much money. Much of the work that government does is work they are mandated to do. If nobody does it, the paperwork piles up. When they start up again it is piled high, and you need to have people work overtime or hire more until you've worked through the backlogs. In the end you've done similar work, paid similar money for it (actually you may have paid more for overtime), and haven't really saved a lot of what you thought you did.
Sure, most people weren't impacted. But news organizations are in the business of finding human interest stories. And all of the human interest stories that you can find around a government shutdown are pretty bad. There will be a backlash. The only question is who the public decides should be blamed. Given that people hate Congress more than anyone else in the government, I would bet they'll blame Congress. (Again.)
As for the savings that you are hoping for, that is not so clear either.
First there is a direct cost to shutting down the government. People have to put their paperwork in order. You need to hire more security guards. And so on. An estimate I heard on NPR is that the last time the cost of shutting down the government was estimated at half a billion.
But then you don't even save that much money. Much of the work that government does is work they are mandated to do. If nobody does it, the paperwork piles up. When they start up again it is piled high, and you need to have people work overtime or hire more until you've worked through the backlogs. In the end you've done similar work, paid similar money for it (actually you may have paid more for overtime), and haven't really saved a lot of what you thought you did.
The dollar demise seems to be in vogue nowadays thanks in no small part to QE I and II. I guess it makes for good headlines, especially when gold is over $1430.
To those of you that may be interested in financial commentaries outside of mainstream I suggest the following:
- Mish [1] - The automatic earth [2] - Max Keiser [3] - Jesse's Café Américain [4]
These can be classified more or less so in three different camps: inflationist, deflationist, and stagflation. But inflation/deflation here does not mean price increase, but credit expansion/contraction. Also, these blogs are all against the status quo, hence their non-mainstream designation. For that there is WSJ.
For starters, at the automatic earth [2], Illargi and Stonleigh give very detailed analysis of the current situation taking into account credit availability and peak oil for example. They argue that we will hit a deflation period (i.e., credit contraction) before any hyperinflation destroys the dollar.
Mish [1] is also in the deflationist camp and provides excellent commentary on current financial news. US centric but with good international coverage.
Max Keiser [3] is an inflationist. I believe that he has called correctly gold and silver trends (up and up) for the past decade. He’s a very vocal anti-to-big-to-fail commentator. I think that he’s currently spearheading a movement to get people to buy silver bullion in order to put JP Morgan out of business given their alleged silver shorts. Mish, while a good friend of Max, disagrees and thinks that JP Morgan is most likely well hedge against silver.
Jesse [4] provides a thoughtful market analysis, especially with gold and silver. He thinks that the US is going into stagflation for quite a while.
[1] Mish's Global Economic Trend Analysis
http://globaleconomicanalysis.blogspot.com/
[2] The Automatic Earth
http://theautomaticearth.blogspot.com/
[3] Max Keiser — Markets Finance Scandal
http://www.maxkeiser.com/
[4] Jesse's Café Américain
http://jessescrossroadscafe.blogspot.com/
To those of you that may be interested in financial commentaries outside of mainstream I suggest the following:
- Mish [1] - The automatic earth [2] - Max Keiser [3] - Jesse's Café Américain [4]
These can be classified more or less so in three different camps: inflationist, deflationist, and stagflation. But inflation/deflation here does not mean price increase, but credit expansion/contraction. Also, these blogs are all against the status quo, hence their non-mainstream designation. For that there is WSJ.
For starters, at the automatic earth [2], Illargi and Stonleigh give very detailed analysis of the current situation taking into account credit availability and peak oil for example. They argue that we will hit a deflation period (i.e., credit contraction) before any hyperinflation destroys the dollar.
Mish [1] is also in the deflationist camp and provides excellent commentary on current financial news. US centric but with good international coverage.
Max Keiser [3] is an inflationist. I believe that he has called correctly gold and silver trends (up and up) for the past decade. He’s a very vocal anti-to-big-to-fail commentator. I think that he’s currently spearheading a movement to get people to buy silver bullion in order to put JP Morgan out of business given their alleged silver shorts. Mish, while a good friend of Max, disagrees and thinks that JP Morgan is most likely well hedge against silver.
Jesse [4] provides a thoughtful market analysis, especially with gold and silver. He thinks that the US is going into stagflation for quite a while.
[1] Mish's Global Economic Trend Analysis
http://globaleconomicanalysis.blogspot.com/
[2] The Automatic Earth
http://theautomaticearth.blogspot.com/
[3] Max Keiser — Markets Finance Scandal
http://www.maxkeiser.com/
[4] Jesse's Café Américain
http://jessescrossroadscafe.blogspot.com/
This argument's been made since Bretton Woods was ended by Nixon in 1971.
A few years ago, I was convinced that the euro would take over reserve currency status from the dollar eventually, but cracks are showing in the euro now - there's competing interests in the European governments for what to do with the currency. The euro will look strong during booms, but look shakier during busts.
As for China - maybe in 15-20 years. They're liberalizing and trending upwards at a fantastic rate, but nobody trusts the Chinese government to do right by the currency instead of their own interests.
This doesn't mean it's a good idea to hold a bunch of liquid dollars right now. But barring something really crazy, I think USD holds reserve currency standard for at least the next decade or two.
A few years ago, I was convinced that the euro would take over reserve currency status from the dollar eventually, but cracks are showing in the euro now - there's competing interests in the European governments for what to do with the currency. The euro will look strong during booms, but look shakier during busts.
As for China - maybe in 15-20 years. They're liberalizing and trending upwards at a fantastic rate, but nobody trusts the Chinese government to do right by the currency instead of their own interests.
This doesn't mean it's a good idea to hold a bunch of liquid dollars right now. But barring something really crazy, I think USD holds reserve currency standard for at least the next decade or two.
The decline of the dollar is a choice that we are making by spending with wild abandon with no heed to the consequences (and indeed, somehow managing to convince quite a lot of us that we have some sort of moral imperative to bankrupt ourselves because not spending like drunken sailors is somehow morally wrong... to be honest I have a hard time following this argument, it's long since become unmoored from even Keynesian economic theory which at least had some basis in reality and is now just some vaguely moral imperative to spend spend spend). If we, you know, stop that, there isn't really a credible competitor on the horizon that could dethrone the dollar for quite a while. We're not talking about competition because the other currencies are really all that strong, we're talking about the end of the dollar as a reserve currency because we are behaving like idiots.
This makes sense, except that we've been spending with wild abandon since (at least) Reagan. If we've managed to keep it afloat that long, why is it so improbable that we might continue to do so for another decade or two (or longer)?
(I'm not sure myself either way, just playing devil's advocate.)
(I'm not sure myself either way, just playing devil's advocate.)
There's been a sea change in the "wild abandon" in the past few years: http://www.businessinsider.com/us-federal-government-outlays... (Look carefully at the X and Y axes; that's not a traditional chart and time is not X or Y. But it's one of the more interesting ones I came up with.) Bush started it, Obama made pretty sounding noises about fixing it but has doubled down on it, and shows no signs of stopping even though the "recession" excuse is fading away.
Interest on the debt, currently it's about 200 Billion (10% of tax receipts). In 2020, it will be 800 Billion (40% of the federal budget), if you add in medicare and SS then boom you're over 100%. Exponential growth while slow at the start, can relatively quickly become quite large.
http://investmentwatchblog.com/interest-expense-on-the-us-de...
http://investmentwatchblog.com/interest-expense-on-the-us-de...
Except that prior to it even being a question of Keynesian economics and fixing a recession we were driving down the dollar to make US exports more "competitve" with the rest of the world.
Bitcoin seems about ready to take over...
In relation to lionhearted's comment and the article, the author of the OP loses me at the paragraph where they discuss alternatives.
The Euro is barely stitched together and various conflicts between the participating countries are really going to prevent it from being recognized as a stable, worldwide reserve currency.
There have been some decent articles the past few years about the potential for the yuan to be devalued if the Chinese government were to allow it to float against the dollar. In this case, the yuan may not be quite ready either, although it's probably a better
And a last note which always gets lost in these discussions is that the U.S. dollar is supported by the U.S. government and military. If necessary, the government has quite a few options (all mostly worst-case scenarios) where it can exert force (economic or military) to ensure no other currency reaches the international reserve status the dollar still holds.
If I get comments from people asking me to elaborate on any of these points, I can in six hours after I get off work :)