dollar on the tightrope

[solarbird]

Good morning. A very brief note this rainy Wednesday; I have things to do and don't want to get into the whole vacuuming-the-cat thing, so I'll cut to the chase:

Everyone is wondering whether the US dollar is reaching an inflection point down. It's been on Drudge, it's floating around right blogistan as a political noise, and so on. Here are the numbers.

The US dollar index (DIX) is not, I repeat not, in record low territory today, but it is floating around 75.6, the lowest number since the spiral down to 70 back in spring/summer 2008. And you're starting to see actual news like this, wherein it's pointed out that the US dollar share of new global currency reserve acquisition has fallen dramatically, with the rate of decline accelerating in the third quarter. Go read that article.

Predictably, oil, et al, are up, with oil just shy of $75/barrel in New York trading. Elliott Wave International is one of the few bulls - they think we're at or near the end of Wave 5 of 5 down and should look for a rally almost immediately. It's also not in the interest of anyone - much - to see the USD collapse. A controlled decline is in the interests of many; a spike down, not really much of anyone.

I don't know who is right. But if we spike down here, any floor is quite far off. The USD really is on a tightrope today.

Oh, and I need to point out this blog post by Karl Denninger pointing to this Bloomberg article on banks pushing the Obama administration to allow interest-only loan reconfigurations, and talking about how this has never ended anything bit disastrously. I've spent time talking about the non-intuitive nature of exponential functions in growth, particularly as regards to oil consumption; Karl gives this same problem his go here, regarding interest on debt. People really do need to understand this, and it's not intuitive because you don't have any evolutionary pressures pushing brain development to handle it, so people think things like "2% interest" and go "that's tiny and will remain so forever." It's not, and it won't.

Comments

[llachglin.livejournal.com]

I think there's a bias toward a strong dollar that causes people (particularly on the right) to predict doom where it does not exist. The same goes for alarmist claims about government debt.

While you're right that a collapse in the dollar wouldn't be good a consistent decline in the dollar is a good thing given our economic situation.

The following links to recent blog posts by Krugman and Brad DeLong are good examples (if brief) of the argument that the monetary and deficit hawks are wrong:

http://krugman.blogs.nytimes.com/2009/10/09/modified-goldbugism-at-the-wsj/
http://krugman.blogs.nytimes.com/2009/10/09/beware-the-dollar-hawks/
http://krugman.blogs.nytimes.com/2009/10/10/the-madness-of-the-monetary-hawks-wonkish/
http://krugman.blogs.nytimes.com/2009/10/13/leading-indicators-and-the-shape-of-the-recovery/
http://delong.typepad.com/sdj/2009/10/yes-we-can--afford-more-short-run-deficit-spending-that-is.html

DeLong's post in particular goes into detail about why there's no better time than now to be increasing government debt. But Krugman's chart of how seeking strong currencies during the Depression in the form of retaining the gold standard was correlated with slower recovery across several key countries is illustrative of the risks of the focus on a strong dollar now.

That's not to say that speculators driven by the ideology of a strong dollar won't lead us into a dollar collapse, but there's nothing in the fundamentals of the present situation leading to that result. The real risk to the economy is that we will try to rein in debt and protect our currency when there's still no recovery in employment, sparking another drop in production. The best remedy remains massive government spending until there are real signs of inflation, crowding out of private investment, or a collapse in confidence in the ability of the US government to pay back its debt (leading to high interest rates). None of this is on the horizon, and when any of these indicators do appear we can stop the spending then.

It actually appears we're more likely to make the opposite mistake of not spending enough. The stimulus bill was too small by half, states and local governments are cutting budgets to the bone, there's no federal help on deck, and employment and real estate (particularly commercial) have yet to hit bottom.

[peristaltor.livejournal.com]

You mentioned the "non-intuitive nature of exponential functions in growth." I fully recognize that you know more about this stuff than I.

That said, have you seen -- and can you verify -- the evidence and conclusions reached by Chris Martenson in his Crash Course (http://www.chrismartenson.com/crashcourse) series?

[solarbird]

I haven't seen this, so can't really talk about anything in it, just from ignorance of the lecture series. It looks like it would take quite a while to go through, as well, so I'm afraid I won't be delving into it now.

[peristaltor.livejournal.com]

Yep, it's long. That's the problem. Anyone with knowledge enough to evaluate its relevance is too busy to watch the whole thing; anyone who finds it interesting but is too ignorant of the particulars has no idea of its relevance.

You're the third professional in finance/economics to mention they don't have time to evaluate it. No slam on you, not at all; but I'm inclined to note how easy it would be to slip a factually weak argument amongst the masses and have it adopted without challenge. There's just too much going on to interest the attention -- let alone the critical evaluation -- of professionals.

Come to think of it, I'll bet this was how Creationism spread so quickly. The paleontologists just couldn't be bothered to refute the lies.

[solarbird]

You're the third professional in finance/economics
Aw. Luv, I'm a musician. I'm also an investor and I have various investment and currency interests, but economics is just a hobby. I have neither an economics nor business degrees. I'm just into self-study. (And specifically, to be legal about it: I am not an investment advisor and none of this is investment advice. I think I should run that disclaimer again.)

[peristaltor.livejournal.com]

Well, congrats! You talk the talk.

It's amazing what an internet connection and desire to learn something can do.