Dollar Rebound in 2008: A Fairy Tale?
Several analysts expect the U.S. dollar to rebound in the second half of the year. A slowing U.S. economy always affects the rest of the world with a delay, they say, and most of the bad news may already be priced into the greenback. "For Euroland, historically, the delay has been one or two quarters," notes Stephen Roach at Morgan Stanley. Analysts like Mr. Roach argue that central banks that proactively cut rates to bolster growth (like the Fed) will now see their currencies rally, and central banks that don't cut rates will see their currencies weaken. The implication here is that investors will move money away from yield and turn their focus to areas of growth. Going by this logic, the U.S. dollar should benefit from the Fed's amplified focus on growth.
But what happens when the Fed's monetary policy fails to work? "Since the start of the global financial crisis last August, monetary policy has been remarkably ineffective," writes Wolfgang Münchau at the Financial Times. "We may even be in a situation where low interest rates give us the worst of all worlds: no stimulus in the short run, and a rise in inflationary expectations in the long run." He adds: "Among the various channels through which monetary policy affects the real economy, the credit channel is one of the most important. If real-world interest rates are determined independent of a central bank's monetary policy, the effect of monetary policy on economic growth is correspondingly reduced."
The key question that needs to be raised by those expecting a dollar rebound later this year: Are traditional assumptions about the connection between growth and proactive interest rate cuts still valid if monetary policy fails?
More commentary from Mr. Münchau: "This credit crisis is first and foremost a financial solvency crisis. When you are insolvent, the rate of interest is irrelevant because no one will lend you money in any case. And if someone did, the interest rate would still be irrelevant, since you are not going to pay them back. If you face only a liquidity problem, the rate of interest matters a great deal, since it determines the price you pay to regain liquidity. This has not been a liquidity crisis, but a hugely contagious solvency crisis, affecting sector after sector, starting off with sub-prime mortgages, spilling over to the rest of the mortgage market, into municipal debt, corporate debt and many obscure sectors of the financial market."
Another big question to ask, and the point I am trying to make here: What happens if the solvency crisis dissipates over the next few months? In that event, interest rate cuts from other central banks will have a bigger impact on growth than the present day "proactive" (read: impotent) Fed rate cuts. There is also a real risk that the Fed will have run out of ammunition by the time the solvency crisis has run its course. Interest rates can't go below zero, and if the federal funds are lowered beyond a certain point, the ability of the Fed to stimulate the economy comes to an end.
Will investors buy currencies associated with monetary policy that has the desired growth effects? In that case, the growth story might still dominate the currency markets, but the greenback won't be the winner.
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Dollar Rebound ?
Well the Bear Stearns bailout just killed any chance of that, at the next Fed meeting we will see just how depraved Our Central Bankers can get , will the discount rate cut be 3/4pct or 1pct ...
The privately owned and operated is now bailing out the very institutions that created the mess in the first place by subjecting the American people to ever more inflation ...
It is time to Fire the Federal Reserve and establish a public central bank that would act with a fiduciary duty to the country and to the people.
Whether teh dollar wil rebound is one question. but the euro bubble will burst with a massive pop that is a certainty. There is already pretty much fiscal civil war in the Eu over rates. the BoE is timidly cutting while it's housing market makes the US subprime mess look measured and rational. Germany is fighting double digit inflation and massive manufacturing contraction. And Spain and Italy both basically have one foot in the economic grave.
The real question is what will happen to other currencies. The appreciating yen is already hurting companies like Toyota (who lose $350 million for every 1 point drop of the dollar against the (Yen). The Yuan is in trouble if it doesn't de-peg because the depreciation of the dollar is causing isane inflation in China.
And countries like Kuwait and Saudi Arabia are starting to wilt under teh inflation teh weak dollar is causing their currencies. The only countries to benefit from a weak dollar are Iran, Venezuela and Algeria, and, in Iran's case that is mor epolitical that practical while in Venezuela and Algeria's case it's simply because tehy have to have oil trade at above $65 per barrel just to break even on their cost of production.
There is too much shared disincentive for the dollar to stay as low as it is for too long. The longer the dollar stays down, the more devastating the Euro crash will be to the EU, and the more pressure China and Japan will feel. The Euro really only has at most another 5-10 cents to go before it passes the point of crisis for Germany 's manufacturing base.
It's been a pretty safe bet that if an Administration-shill economist says something, you can pretty much bet on the opposite.
Remember: Up until recently, we were being told that we were in a very strong economy and it was just certain pessimists talking it down. There was no recession .... if anything, it was Boom Times.
And now? "The recession will be short and mild."
Do any of them have a memroy span greater than 30 minutes?!? Do they think we'll forget what they said just last week, or even the day before? Lying bastiches ... !
And you can't forget this doozy: "The housing market is great, this is just a boom, not a bubble!"
How about "American home ownership is at an all-time high?"
By June 2008 more than 1.9 million more Investor held homeloans will go into default maybe more.
Currently only 900,000 Investor owned home loans have caused this much damage wait to see what hapeend when the F H A starts giving local Government the money to buy those foreclosed properties.
Dollar rebound ?
Record budget deficit.
Trade deficit spiking.
Economy tanking.
Consumers broke or discouraged.
mm, headline on Yahoo, "Experts:Years before dollar regains value, prestige", I just hope these are not the same "experts" who predicted no recession just months ago, or that a dropping dollar is good for us.
These same failed economists and experts will all be rewriting their own prognostications and pose once again as economists and experts ... as long as they toe the mantra of the corporatocracy ...
And the ones who claimed that there was no housing "Bubble" it was just a constant Boom, and would always continue!
lets see.
lower interest rates or cut taxes.
kind of like watching a football game with only two plays--run up the middle or hail mary.
to "mix it up" lets do both simultaneously--that'll work!
d
Are the people predicting a rebound the same people who scoffed at the idea we "might" b e heading towards a recession?
And the ones who claimed that there was no housing "Bubble" it was just a constant Boom, and would always continue!
The market is depending on public perception instead of sound economic policies. Financial institutions act as if there's some secret stash of money that imaginary people are just itching to invest. Somebody throw these bozos a lifeline. The only people with any real money are buying gold and waiting for the whole thing to collapse. The non financial news media reports: the price of oil reached new highs today; the price of gold reached record numbers. The real news is that the dollar has reached new lows. Inflation is going to cause skyrocketing prices and retailers are going to be imploding malls for open air grocery stands. Wall Street clings to this little sleight of hand in the hopes of keeping investors from pulling out before they themselves have a chance to transfer their all of their assets into gold and other commodities. The greatest default in history is in the works, or so it seems. Good screw the federal reserve bankers. Either way the American worker is in trouble.
Question:
1) who benefits by this crisis ?
2) who ends up owning the homes in default?
3) how can you stimulate the economy with high unemployment and low paying jobs?
Henry Ford raised his employees' salary so the could afford to buy the cars HIS employees made.
How can Americans afford to buy cars that foreign employees make?
Stimulating the economy can best be accomplished not by government hand outs like rebates, but by government projects to rebuild the infrastructure by hiring Americans who are living in America to do the jobs it's a win/win game. And all the FED's hocus-pocus confuses the economy into stagflation, inflation, deflation and FED's confiscation of public properties, which obviously the FED has been doing successfully since its inception in 1913. And without investing one ounze of their on gold. Incredible !
THANK YOU!!! I've been saying it for years that we need a sensible gov't policy regarding stimulus! You can't simply cut taxes and hand people a check once and *poof* everything's better.
I don't expect American business to recover until middle class American workers gets their disposable incomes back. And that will not be in the immediate future.
My reason? There is no corporate growth with out top-line growth (sales). Cutting costs to improve the bottom line (then giving a large chunk of the difference to upper management as a performance bonus) means cutting middle class wages and decreases the disposable income, which means the worker has to cut back on buying useless junk. The only reason the US has not felt this earlier is because of the increase of consumer debt, which substituted for real disposable income. Clearly, this was not sustainable.
Thank you, Eben, for bringing these views so clearly to the business page readers.
I am sure that many would argue with Wolfgang's principal point, stated as:
"This credit crisis is first and foremost a financial solvency crisis."
A Financial Solvency Crisis.
Nah, can't be that.
We would n't want all those biz-net hacks trying to carry the story of our burgeoning "financial solvency crisis" onto the newtwork stage.
Jeeeezum!
People might begin to ask some serious questions.
Like, what is financial insolvency?
Like, how did we get in this crisis?
And, like, if financial insolvency is the diagnosis of the day, then what is the proper monetary medicine needed to restore solvency, and how does that relate to the medicine required to restore traditional economic growth?
Did someone say "financial insolvency crisis"?
Biz-page readers are fortunate to have this analysis.
A somewhat unspoken, yet genuine, consensus exists in the financial world today.
We are clearly in an unprecedented global financial, well, conflagration, sort of. There's not a lot of history to this here particular predicament.
A different set of circumstances.
Countervailing forces.
Confused seas.
In the face of a possible financial insolvency, the proposed political solution of the Economic Stimulus package, with another $400 billion to be repaid by some futue Americans, sounds to me like throwing fuel on the insolvency fire.
So, the question comes down to this: Who is paying any attention to this question of whether or not the country has, or should have, the monetary and fiscal policy combination that is called for in these times?
Proper management of the money supply is the most important government policy that can be used in the struggle to restore the economic well-being of the great American public. An improperly managed money supply can lead to the wrong kind of growth happening in all the negative directions, as Wolfgang described it, "the worst of all worlds."
Monetary policy.
The creation, use and control of the nation's money supply.
By whom?
For whom?
It's long been know that liquidity can substitute for capital, but capital cannot substitute for liquidity. (remember the "china syndrome" of the savings and loans crisis?)
There is a "liquidity" problem. For example: Lets say that a servicer of the real estate loans that are funneled into a securitization that is sold to a European bank. That security is rated and has legal obligations for monthly payments of principal/interest (depending on the contract terms of the security). When the underlying assets, the notes (which are secured by homes) stop making their monthly payments due to default, then (depending on specific contractural terms) the Servicer must "advance" funds for payment to security holders. The monthly advances (where do these come from???) are made by the Servicer of the underlying home loans and they (the advances) become an account receivable that will be recouped by the eventual foreclosure of the home(s), acquisition as reo (real estate owned), and then sale to a brand new purchaser. This then will pay-back the Servicer (for monthly payments made by Servicer to Security holder in Eurpoe) and the net proceeds (if the home loan were $800000 and the home sole at reo sale for $500000 the net loss $300000) go to the security holder after the "advances" by servicer and holding/foreclosing costs taxes etc are netted.
Well then... step your way through a couple of million of these transactions over the next two years and you can vizualize a tremendous liquidity problem. And of course, these millions of homes that are going to "come" onto the market will be looking for a new home and the new purchaser will pay more the lower interest rates are.
We already know that Merrill got $12 billion preferred capital at 13.25% interest. This is not a "solvency" issue obviously it is a Basel Capital Requirements issue for the size of loans they can be making and the size of their assets (bs as in balance sheet) and CountryWide has been purchased by Bank of America. The head of the FDIC states there are only approx 60 banks on the problem list and that these are small. Solvency obviously has a harbor in bankruptcy or share value. I mean, is WaMu insolvent?
Lets say, for example that the institution you worked for had $100 million of these mbs on its books and the Board of Directors ordered you to sell, all. Which of the 20 big institutions helped out by the Fed has ample liquidity to purchase? There is a tremendous liquidity problem out there. It's screaming.
Yeah. Is this just an academic discussion of a "solvency crisis"? Is it that we don't yet know what a solvency crisis really looks like? When was the last time we had one?
The point that we are experienced with liquidity crises but not with solvency crises may be true. I need some more information, and until then I am willing to postpone worrying about solvency crises. How many of them can dance on the head of a pin?
Insolvency: a financial condition experienced by a person or business entity when their assets no longer exceed their liabilities, commonly referred to as 'balance-sheet' insolvency.
In 1989 when George HW Bush was prez, there was this savings and loans crisis. The govt deposit insurance agency, the FSLIC had roughly $16 bil in insurance reserves (indeed by law parked into U.S. Tres obligations). Examination reports showed something like a $100 bil hole in the savings and loans, insolvent savings and loans. These savings and loans would have to be "liquidated" and depositors reimbursed up to their respective deposit amounts or the limit $100K. So... the FSLIC sits with $16 billion in assets with an obligation to pay depositors some $100 billion. This was 1989 and led to the Bush recession etc etc. The fathers of that debacle are witnessing their sons' spectacular current "fuck-up" that far surpasses the here-to-fore unimaginable levels of incompetence!!! (Merrill up to their eye-balls in each debacle)
There is a solution, a bold solution along the lines of the RTC. And that is the governemt (shades of FDR) set up the Subprime Repurchase Corp that will purchase at "par" all securitiztions of subprime in the "A" tranche secruities. This would be only the paper that represents the principal balance of the loans. The derivative-type peripheries, e.g. the tranche that is the securitization of the stripped "prepayment penalties" associated with other tranches are left to vaporize with their respective owners the victim.
Once all this paper is corralled, specialists(assuming there is such a thing) would negotiate a binding deal with each and every separate home owner to resolve the issue. The benefit is this: It liquifies the market and lets them get on with business. It is the government underwriting a market failure, but what was good enough for George Bush I, must be good enough for a repeat by Jr, eh? There are all kinds of foreigners who own this paper. This paper makes America look the fools we are. It is time to "take the bull by the horns" on this issue, instead of the drip drip drip throughout the balance of this year and possible into the next.
Think of this for one second: Had George I let the FSLIC declare bankruptcy in 1989, what sort of "run" do you think there would have been on the 100s if not 1000s of savings and loans in this country???(remember the great depression). We've been here before, we'll be here again.
So we're heading for stagflation? YAY!
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