The Dollar will continue to fall until the central bankers and politicians get together and hammer out a new deal on how and when to stop it. It will take a lot of pain to make that happen.
The Europeans are concerned that the Dollar fall will hit their economies. This week French President Sarkozy called for a strong dollar. When chancellor Merkel is in Washington these next days she will have the issue on her agenda too. Jean-Claude Trichet, the head of the European Central Bank, also made some noise:
The ECB almost certainly believes that more overt currency market intervention requires agreement with other central banks. But in spite of concerns that the weaker dollar will increase the risk of inflation, the Fed has shown no interest in currency intervention.
Obviously the U.S. has decided to let the Dollar fall further. F… the Europeans. This will rapidly increase the prices the U.S. consumers have to pay for energy and other imports. A lower Dollar may help Boeing to sell a few more airplanes, but the little folks will get screwed by high prices and a tanking economy.
If the Fed would be independent and smart, it would increase interest rates by several points. That would squeeze out inflation and lead to a healthy fast deflation of the popping credit bubble. But the Feds concern is Wall Street and plenty of cheap money, it hopes, will keep the banks and the stock markets up.
There is still resistance by the banks to acknowledge the real amount of junk papers they have in their books. When the first Mortgage Backed Securities were downgraded people spoke of possible losses of $50 billion. Now some talk of $500 billion. My estimate is a trillion and then some.
This not only from mortgage papers and related debt obligations and derivatives thereof, but also from various debt obligations that aggregate consumer credit cards and car loans. People losing their home will not balance their credit cards or honor their car loans. The papers backed by these loans are thereby also junk. The trillion in bank losses come on top of the trillions in book losses home owners have with the values of their houses declining. The size of this devaluation is unprecedented.
The Fed tries to keep the markets up but it is obvious that something systemic went wrong and the huge mess in the credit markets will over time be reflected in stock values too. When Google stocks are back down at $100 the crisis may be over. But we are still far away from that.
Little noticed, another bubble burst this week. After eleven years of rising art prices Sotheby, the British auction house, yesterday failed to sell a load of impressionist artwork for the suggested prices.
Analysts were particularly struck by the fact that Vincent van Gogh’s landscape, Wheat Fields, possibly his last finished work, painted in 1890 two weeks before he committed suicide, was left unsold; Sotheby’s had valued it at up to $35m (£17.5m).
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Overall, Sotheby’s brought in $270m from Wednesday night’s sale, failing to meet even its low estimate of $401m including commissions.
Sotheby’s had given guarantees to the art owners and failed to sell above these. As it had to eat the losses, Sotheby stocks lost 40% of their value.
This is certainly a sign that even people with lots of money are holding back. The next bubble to burst is the British housing market. The Chinese stock market, while still in an upswing, doesn’t look healthy either. Besides commodities, everything is poised to go down.
But back to the Dollar. It has to fall further but should fall more against the Yen and the Yuan than against the Euro. There are political reasons why this is not happening.
China is not pleased with the U.S. behavior in the world, especially in Iran, Pakistan and Sudan where it has interests. It certainly has no sympathies that would allow for a solid deal on exchange rates.
Japan has bad experience with the last big Dollar fall. In 1985 it got screwed in a similar situation. The Dollar was overvalued and in the Plaza Accord big money nations agreed and pressed the Japanese to let it fall. The Yen doubled in value over a short time which led to an asset price bubble in Japan. When that bubble burst, fifteen years of relative economic misery followed.
For now the Euro, CanDo, Pound and other ‘western’ currencies and their economies will have to take the burden of the falling Dollar. At a certain point, like when €1 will cost $1.50, the ECB may try to intervene alone but not in a serious way. This could lead to a short term counter rally in the Dollar markets but can only be sustained for a few weeks.
Through its behavior, the U.S. has lost credit in the world. This also in a very monetary sense. The Dollar will therefor fall further and its time as primary reserve currency may be over. The pains of the popping bubbles get socialized to the consumers in the U.S. and elsewhere.