November 13, 2007
Remember my email on the supermodel last week? Well, well, well ... read at the end. Anyway, the $ has been declared dead before, and somehow it's still here!!!
THE DEATH OF THE DOLLAR
Fellow Investor,
Little wonder that "The Death of the Dollar" was the headline story as I sat in the studios of the Fox Business Network yesterday. In the past few weeks, the greenback has hit parity against the Canadian dollar, and a record low against the U.K. pound, as well as the Australian and New Zealand dollars. The U.S. dollar index, which tracks its value against a basket of six leading currencies, has fallen to never-before-seen levels. For Americans, London has become as overpriced as Tokyo was in the late 1980s. And much like the Japanese then, Europeans traveling to the United States now fancy themselves as the planet's über-rich.
"Death of the Dollar": Doomsday for the United States?
The dollar's relentless descent has been greeted by barely concealed glee among the foreign press as a symbol of the decline of the United States. Readers' comments on the London-based Financial Times Web site regularly call the United States "the next Argentina" -- the poster child of how one of the world's wealthiest nations has devolved into poverty and chaos. As one commentator put it: "yawn, America's so yesterday, baby." (sic).
The argument is familiar. Fears that U.S. subprime woes might push the U.S. economy into a recession are spooking investors holding U.S. dollar-denominated assets. The U.S. economy has become dangerously dependent on foreign capital. Foreign investors have (finally) tired of financing the profligate ways of the United States and are driving the dollar -- the proxy of the economic health of the nation -- even lower. After running current account and trade deficits since the early 1980s, the U.S. current account deficit ballooned to 7% of GNP. Foreign central banks -- fearing the United States may not be able to repay its huge debts in outstanding Treasury bonds -- are rushing to unload their greenback reserves. This will tip the Titanic that is the U.S. economy into the cold waters of economic depression.
The crowds are rooting for the United States' collapse on both sides of the pond. Harvard economist Ken Rogoff argues that the subprime mess has irretrievably tarnished the U.S. image as a global financial center. A few weeks ago, I attended a seminar on "Why the World Hates America" at London's annual "Battle of Ideas." There, everyone with a North American accent was quick to point out that they were Canadian lest they had to endure the shame of being American. Political scientist Andrei Markovits argues that anti-Americanism is the new anti-Semitism. Except anti-Americanism is not a sign of prejudice: it's now a sign of sophistication.
"Death of the Dollar": Wishful Thinking...
But like the presidential candidacy of my Harvard classmate Barack Obama, the talk about the demise of the United States is more about wishful thinking than what is really there. Yes, the dollar has declined. But it's hardly fallen off a cliff. It may have hit record lows against the euro, but the euro is a young currency. It's only if you look at the short term, say, since January 2002, that the dollar's fall against the euro seems out of whack. Turns out, the value of the dollar in euro, (assuming the German mark transformed into the euro on January 1, 1999), is about the same as it was in the mid-1990s. According to research by Brown Brothers Harriman, the now-defunct German mark hit a record high in 1995 that would be the equivalent of a euro level of $1.4575. Yesterday, it closed at $1.4576.
Nor is a weak dollar all bad news. A weaker currency provides a boost to the U.S. economy, making U.S. exports more attractive at a time when consumer spending is slowing down and the housing market is a drag on growth. Thanks to a weaker dollar, growth in U.S. exports is already shrinking America's external deficit. During the past three quarters the deficit has been cut by $119 billion, falling from about 6% of gross domestic product to 5%. The adjustment appears to be continuing as the U.S. trade deficit narrowed by a stronger-than-expected $56.4 billion in September. The federal budget deficit has also come down sharply to 1.2% of GDP, well below its historical average.
Meanwhile, U.S. economic growth numbers were revised upward from 3.1% to 3.9% in the third quarter of 2007. U.S. worker productivity in the third quarter rose to 4.9%, the strongest pace in four years. The United States also was rated the #1 most competitive economy in the world by the World Economic Forum. None of that sounds like "the next Argentina" to me.
"Death of the Dollar": ... And A Great Exaggeration
So what accounts best for the dollar's recent rout? The Fed's recent interest rate cuts mean that global funds are flowing away from U.S.-denominated assets. At the same time, based on purchasing power parity -- the long-term value toward which currencies should converge -- the euro and the New Zealand dollar are now 25% to 30% overvalued, while the Japanese yen is 30% undervalued against the U.S. dollar.
And while the op-ed pages of European business publications celebrate the current bout of dollar weakness as a metaphor for the decline of the U.S. Empire, they should be careful what they wish for. French President Nicolas Sarkozy -- in a remarkably engaging speech to the U.S. Congress that is well worth watching -- already has lamented the negative effects of the high euro exchange rate. European triumphalism notwithstanding, if the dollar gets much weaker, European economies could go into a tailspin.
Calling the direction of currencies is notoriously difficult. The U.S. dollar -- and the United States itself -- is as hated as it has ever been in recent memory. Yet all is not as it seems. In what was the most widely read story on the financial Web sites last week, it was reported that supermodel Giselle stopped taking payments for her work in U.S. dollars. Turns out the whole story was a figment of a Brazilian blogger's imagination. In that way, it sounds much like the arguments made for the "death of the dollar."
Sincerely,
Nicholas A. Vardy
Editor, The Global Guru
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