The Dollar: Back to Monopoly Money Status?

[KRonn]

There were a few threads about how the dollar was going down in flames a year or so ago, so I thought we should have one now that the dollar has been doing fairly well. So what do you think, no where to go but down from here? I'm getting rid of my dollars at the moment; I have a feeling we'll be doing a worse by year end.

The US is supposed to bounce back from the recession faster than some other regions in the world. If that actually happens I don't see why the dollar shouldn't stay relatively strong.

According to some views I've seen in the news, the government is printing such large amounts of money (perhaps most ever?), and that could cause the dollar to lose value since there's not enough to back it up, adding greatly to inflation. Also if the government goes too deep into debt, as the Bush admin started but which seemed to get not nearly enough notice, and that spending continues at an even much faster pace. That could, not saying will, add to further govt financial/debt problems as the US tries to come out of recession. I assume that cycle will hit later on, a year or so or over the next years for the budgetary issues. Just my take on what I've seen reported. I'll let the Languish resident financial folks answer this with more insight than I have. I'm hoping that much of it is hyperbole, over blowing the problems, as seems so often happens.

[The Minsky Moment]

the Fed supposedly has a plan in place to rapidly mop up liquidity once the economy appears safe.  I leave it to you to determine how credible that promise is.

As for the federal debt, the question is can the government find enough people willing to buy bonds.  The last auction did not go well and the interest rate has been gliding upwards.  If unchecked that will have a restrictive monetary effect on its own, but the Fed may choose to counteract in the short run by buying in the treasury market (in effect quantitative easing).  If they do that on a significant scale, it will be hard to damp down inflation over the medium run.

[DontSayBanana]

the Fed supposedly has a plan in place to rapidly mop up liquidity once the economy appears safe.  I leave it to you to determine how credible that promise is.

The word "rapidly" in your phrasing gives me a general feeling of . Their promises of rapid action thus far have turned out to be anything but in effect.

[alfred russel]

the Fed supposedly has a plan in place to rapidly mop up liquidity once the economy appears safe.  I leave it to you to determine how credible that promise is.

As for the federal debt, the question is can the government find enough people willing to buy bonds.  The last auction did not go well and the interest rate has been gliding upwards.  If unchecked that will have a restrictive monetary effect on its own, but the Fed may choose to counteract in the short run by buying in the treasury market (in effect quantitative easing).  If they do that on a significant scale, it will be hard to damp down inflation over the medium run.

My point of view is that if we just look at three currencies, the British Pound, the Can. Dollar, and the Euro, the had somewhat stable values before the world fell apart last August/September. For each of those, you could get about $2, $1, and $1.50, respectively (how stable those values are is debatable). People flocked to the dollar for safety, and now the values are around $1.50, $0.85, and $1.35 respectively. Now that the world is getting back onto a bit more of an even keel, and the US is not in much better shape than the areas of the currencies mentioned, I have a tough time seeing the US$ in a stronger position at year end.

To be fair, no one is doing especially well right now, but still our comparative fiscal situation doesn't seem strong (I'd argue it is comparatively weak), our monetary position is very loose with a commitment from the Fed to keep it that way (probably not different from other countries though), and our economy is not comparatively strong.

[KRonn]

Well, here's some additional scary news that came out this week, again. Old news though, and stuff we've all known about. But as usual our Congress and political leadership haven't fixed these programs, addressed the issues. Just as they've been failing on so many other things, including partly enabling the financial disaster we've found ourselves in.


http://www.msnbc.msn.com/id/30698248/

Social Security and Medicare finances worsen
Recession hurts latest forecast for two biggest benefit programs

WASHINGTON - Social Security and Medicare are fading even faster under the weight of the recession, heading for insolvency years sooner than previously expected, the government warned Tuesday.

Social Security will start paying out more in benefits than it collects in taxes in 2016, a year sooner than projected last year, and the giant trust fund will be depleted by 2037, four years sooner, trustees reported.

Medicare is in even worse shape. The trustees said the program for hospital expenses will pay out more in benefits than it collects this year, just as it did for the first time in 2008. The trustees project that the Medicare fund will be depleted by 2017, two years earlier than the date projected in last year's report.

[The Minsky Moment]

My point of view is that if we just look at three currencies, the British Pound, the Can. Dollar, and the Euro, the had somewhat stable values before the world fell apart last August/September. For each of those, you could get about $2, $1, and $1.50, respectively (how stable those values are is debatable).

Debatable is one way to put it.  I still remember the days not that long ago when my 85 cents bought a shiny euro coin.

[Zanza]

and the US is not in much better shape than the areas of the currencies mentioned

No idea about Canada, but the Eurozone and the UK are probably doing worse than the US right now and may do for the next few quarters too. And as Minsky said, the dollar - euro value fluctuated a lot over the last few years. And for the US, the value dollar versus the Yen and the Yuan is also quite important.

[Richard Hakluyt]

I'm not sure how much one can treat the euro as a safe haven. On the one hand it is essentially the Dm writ large, OTOH it's member countries are experiencing very different situations which may change matters at any time.

[saskganesh]

Canada: imports and exports continue to decline, but imports are falling faster. hence our trade surplus is doublethink increasing. there seems to be an increased balance of trade, with more business in Europe. the USA tho remains the most important importer.

there continues to be speculation in commodities, helped by a weaker $, so you see short term rallies, but then they fall to earth. the stupid and slow get caught.

banks seem to be healthy. apparently they are undervalued.

overall we are doing better. but we haven't seen the destruction of retailers yet, which should be coming, because people are buying a lot less stuff over an extended period of time.

I am assuming the gvt will let the dollar fall in efforts to stimulate more trade.

[Jos Theelen]

This situation could reverse. For every Zim-dollar you need thousands of US-dollars.

I bet the ones who set up that picture took the 10 dollar bill and the Zim dollars with them again after the pictures had been taken.

No, I think they took the 10 dollar bill and gave him the Zimdollars, to use as toiletpaper.

[alfred russel]

and the US is not in much better shape than the areas of the currencies mentioned

No idea about Canada, but the Eurozone and the UK are probably doing worse than the US right now and may do for the next few quarters too. And as Minsky said, the dollar - euro value fluctuated a lot over the last few years. And for the US, the value dollar versus the Yen and the Yuan is also quite important.

If you go by the OECD projections, this will be 2009 and 2010 GDP growth, by country:

US: -4.0, 0.0
Euro area: -4.1, -0.3
UK: -3.7, -0.2
Canada: -3.0, 0.3

http://www.oecd.org/document/59/0,3343,en_2649_34109_42234619_1_1_1_37443,00.html

So I don't know if the US is really in a position of strength.

I agree those other currencies matter, but the yuan is a managed currency and the yen is one of the few that have gotten stronger against the dollar, so I left them out.

[KRonn]

So, if Social Security and Medicare reform come up for reform, that may mean additional funding, taxes, govt spending, and some kind of over haul for the two systems. I posted a couple links above, and have been hearing some concerning news on the state of the two programs. I have to wonder how this will hit, and what affect on the economic recovery depending on timing of it, further govt spending, money supply or the dollar value if govt prints or borrows more money for these items as well.

[alfred russel]

So, if Social Security and Medicare reform come up for reform, that may mean additional funding, taxes, govt spending, and some kind of over haul for the two systems. I posted a couple links above, and have been hearing some concerning news on the state of the two programs. I have to wonder how this will hit, and what affect on the economic recovery depending on timing of it, further govt spending, money supply or the dollar value if govt prints or borrows more money for these items as well.

If we are still talking about the value of the dollar, maybe you could argue that this is a good thing for our currency, because while we have retirement program problems, other countries are in worse shape.

Here is a Financial Times Opinion piece that ran today:

America's triple A rating is at risk

By David Walker

Published: May 12 2009 20:06 | Last updated: May 12 2009 20:06

Long before the current financial crisis, nearly two years ago, a little-noticed cloud darkened the horizon for the US government. It was ignored. But now that shadow, in the form of a warning from a top credit rating agency that the nation risked losing its triple A rating if it did not start putting its finances in order, is coming back to haunt us.

That warning from Moody's focused on the exploding healthcare and Social Security costs that threaten to engulf the federal government in debt over coming decades. The facts show we're in even worse shape now, and there are signs that confidence in America's ability to control its finances is eroding.

Prices have risen on credit default insurance on US government bonds, meaning it costs investors more to protect their investment in Treasury bonds against default than before the crisis hit. It even, briefly, cost more to buy protection on US government debt than on debt issued by McDonald's. Another warning sign has come from across the Pacific, where the Chinese premier and the head of the People's Bank of China have expressed concern about America's longer-term credit worthiness and the value of the dollar.

The US, despite the downturn, has the resources, expertise and resilience to restore its economy and meet its obligations. Moreover, many of the trillions of dollars recently funnelled into the financial system will hopefully rescue it and stimulate our economy.

The US government has had a triple A credit rating since 1917, but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.

First, while comprehensive healthcare reform is needed, it must not further harm our nation's financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country's future.

Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.

For too long, the US has delayed making the tough but necessary choices needed to reverse its deteriorating financial condition. One could even argue that our government does not deserve a triple A credit rating based on our current financial condition, structural fiscal imbalances and political stalemate. The credit rating agencies have been wildly wrong before, not least with mortgage-backed securities.

How can one justify bestowing a triple A rating on an entity with an accumulated negative net worth of more than $11,000bn (€8,000bn, £7,000bn) and additional off-balance sheet obligations of $45,000bn? An entity that is set to run a $1,800bn-plus deficit for the current year and trillion dollar-plus deficits for years to come?

I have fought on the front lines of the war for fiscal responsibility for almost six years. We should have been more wary of tax cuts in 2001 without matching spending cuts that would have prevented the budget going deeply into deficit. That mistake was compounded in 2003, when President George W. Bush proposed expanding Medicare to include a prescription drug benefit. We must learn from past mistakes.

Fiscal irresponsibility comes in two primary forms – acts of commission and of omission. Both are in danger of undermining our future.

First, Washington is about to embark on another major healthcare reform debate, this time over the need for comprehensive healthcare reform. The debate is driven, in large part, by the recognition that healthcare costs are the single largest contributor to our nation's fiscal imbalance. It also recognises that the US is the only large industrialised nation without some level of guaranteed health coverage.

There is no question that this nation needs to pursue comprehensive healthcare reform that should address the important dimensions of coverage, cost, quality and personal responsibility. But while comprehensive reform is called for and some basic level of universal coverage is appropriate, it is critically important that we not shoot ourselves again. Comprehensive healthcare reform should significantly reduce the huge unfunded healthcare promises we already have (over $36,000bn for Medicare alone as of last September), as well as the large and growing structural deficits that threaten our future.

One way out of these problems is for the president and Congress to create a "fiscal future commission" where everything is on the table, including budget controls, entitlement programme reforms and tax increases. This commission should venture beyond Washington's Beltway to engage the American people, using digital technologies in an unparalleled manner. If it can achieve a predetermined super-majority vote on a package of recommendations, they should be guaranteed a vote in Congress.

Recent research conducted for the Peterson Foundation shows that 90 per cent of Americans want the federal government to put its own financial house in order. It also shows that the public supports the creation of a fiscal commission by a two-to-one margin. Yet Washington still sleeps, and it is clear that we cannot count on politicians to make tough transformational changes on multiple fronts using the regular legislative process. We have to act before we face a much larger economic crisis. Let's not wait until a credit rating downgrade. The time for Washington to wake up is now.

David Walker is chief executive of the Peter G. Peterson Foundation and former comptroller general of the US

[DontSayBanana]

Two points. I'm curious how the author got the $45 trillion in off-balance-sheet obligations; by dint of being off the balance sheets, it seems that could be pretty subjective and manipulated to prove a point.

Also, it falls apart on the author's proposed solution. He cites original research and I can't shake this feeling that he's implicitly campaigning for a role within this "fiscal future commission" that he's advocating. In addition, if the research is already showing a clear supermajority and that time is so short, then why is he not simply calling on Congress to act on that? Why wrap it up in even more (expensive) red tape that would threaten the immediacy he's trying to convey?

[alfred russel]

Two points. I'm curious how the author got the $45 trillion in off-balance-sheet obligations; by dint of being off the balance sheets, it seems that could be pretty subjective and manipulated to prove a point.

There are different sets of accounting rules for private companies and the government. Private companies must include discount pension benefit obligation, net of any funding, on the balance sheet. The government doesn't have to do that, but has to include disclosures. You inspired me to dig through the financial statement disclosures for the government and I found that over the next 75 years,  "From the Governmentwide perspective, the present value of the total resources needed for the Social Security and Medicare Programs equals $40,848 billion, in addition to payroll taxes, benefit taxes, and premium payments
from the public." There is a table showing we expect the total costs to be $93.2 trillion, offset by $52.3 trillion in expected revenues.

http://www.gao.gov/financial/fy2007/07frusg.pdf