So just how far down do you wanna go?
Well we could talk it out over a cup a joe.
And you could look deep into my eyes like I was a super-model.
- from the song Banditos by The Refreshments
By now everyone should be well aware of the fact that the U.S. Dollar has been falling even faster than George Bush’s approval rating for a long time. A recent story about Gisele Bundchen and her rejection of the dollar immediately brought the lyric above to my mind. Uh huh.
Starting some months back, Gisele has insisted on being paid in almost any currency except the U.S. Dollar. You have to give the lady credit. It appears that her fashion sense may be exceeded by her financial sense. Surely a woman who sits atop the super model heap doesn’t want to be seen with a loser currency like ours. It’s so last century, you know. If a girl must be seen with a dollar it should be a virile Canadian or Aussie. They’re much more resource rich; not to mention up and coming.
Seriously though, it’s not just super-models who reject the dollar - as a look at this chart shows. Almost since the day that Duh-bya first took the oath of office the world has increasingly rejected our currency. The truth is the only thing keeping it from disintegrating altogether is the fact that our Asian and Arab trading partners have kept their currencies pegged to the dollar to maintain American demand for their goods. Think PCs, big screens, Toyotas and oil.
Those countries are getting increasingly uncomfortable doing so, as it has become obvious that the Fed has shifted into hyperinflation mode. As other markets increase the demand for their goods it will lessen their dependence on the U.S. consumer, and eventually they will either loosen or jettison their currency pegs altogether. Kuwait has already done so in the face of the imported inflation inherent in the peg; and other gulf states are seriously considering doing the same.
That leaves the Asians who are sitting on a mountain of trade surplus dollars who don’t want to see the value of those dollar reserves drop along with the dollar itself. By now they’ve probably figured out that they’ve been left stomping on the flaming bag and they don’t like the smell one bit. Their dilemma is in how to divest themselves of their dollar hoards before they are inflated into relative worthlessness. I think that ultimately they will have to move a lot of it into the world’s foremost falling dollar-based asset - namely, U.S. real estate.
Not just yet though, as mortgage resets, delinquencies and foreclosures are just beginning to hit their stride. Surely the Asians are betting that those assets will fall faster than the dollar for the next year or two. In the meantime, the U.S. stock market is looking like it might join the race to the bottom as investors realize that there really should be something more substantial supporting equity prices than a rapidly inflating currency. If stocks do fall in a big way, I think we’ll see the Asians and Arabs dropping in for the fire sale on Wall Street as well.
Only then will we see the culmination of our decades-long credit binge. We’ve bought all the cheap gasoline, cars and electronics we can on credit and we’re increasingly unable to pay the bills when they come due. So now our foreign creditors will come to repossess our corporations, our few remaining factories, and our office buildings. Yeah, and that seems fair!
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