Weaker Dollar = Weaker US

Weaker Dollar = Weaker US? Are the consequences of a weakening currency all negative? Nope, click here for the glass half full version posted earlier this week. Now we get to be depressed (Joe Prozac) and discuss the negative aspects of a weakening currency. Okay great, is everybody nice and depressed and ready to read on?

Joe was depressed after trying unsuccessfully to convince JoAnn to accept a diamond ring before prices shot up. Things are looking better for Joe since the last post however, unlike the US Dollar. The dollar continues to inflate (Joe home-made hot air balloon) with out much of anything to bring it back down. (Joe wasn't inside)

Disadvantages of a Weak Dollar

Inflation - Everybody knows a weakening currency leads to inflation, which subsequently decreases your purchasing power. This was one of the main causes of our current recession. Inflation starts with investors bidding up commodities as a form of hedging against possible inflation - which ironically further aggravates inflation. Commodities such as oil are building blocks for manufacturing; and commodities such as corn, soybean, and wheat (Joe farmers market) are building blocks of food production. Prices of end products are affected as the increased prices of commodities filter up through the economy. Also, inflation is simply a tax on savers because the value of money decreases.

Treasury Auctions - Think the Chinese will be upset if the rate of inflation surpasses the interest on their treasury purchases? Inflation damages investments of fixed interest debt such as US Treasury notes and bonds. The Chinese and various oil-exporting countries are in a pinch right now. If they stop purchasing our US Treasury notes and bonds the interest rates on current auctions will have to increase to attract buyers. This will in turn drive up interest rates - further damaging our housing market and delay the recovery. If they keep purchasing our worthless debt, they increase their exposure to debt that may not be able to be repaid in full with dollars that are worth anything. If we default these notes, the Chinese will seek restitution Jackie Chan style. At what point do we have to start asking permission from our international creditors whether to sign stimulus legislation? We're slowly being bought by some very dangerous creditors. (Joe, check-N-go)

International Positioning - It's no secret that the US is starting to slip a little bit on the international scene. Once the world economic and military superpower, now we're essentially owned by a handful of third-world nations. What was once inconceivable (Joe, hiding in the attic for five hours) is now starting to be realized because of poor fiscal decisions and a financial collapse which lead to a global recession. What we need to do now, however is protect the dollar. We've already ticked off our creditor nations once because of our crashing economy. It might be wise to avoid doing it again by protecting our dollar.

Joe and JoAnn Take a Romantic Walk on the Beach while Analyzing Gov Spending

Right now the US Congress is spending money like a lottery winner in Vegas. (Joe High Roller) Congress is spending 185% of what it takes in (1), and there's currently no relief in sight. (Joe Sahara) This spending spree is leading us down the path of one or two inevitable consequences, neither of which is appealing:

• High Interest Rates: The current spending habits in Congress are simply not possible to sustain. Right now we have plenty of buyers of debt in the form of treasury auctions. However, as the national deficit increases, so does the risk of default, which will cause buyers to flee from the treasury auctions. (Joe bug from Joe Orkin man) Since the US is so heavily in debt already, we depend on the issuance of new debt to cover the principal and interest on the outstanding notes. If the buyers' appetite for our bonds cools off, the government will need to raise bond yields to attract more buyers. Since bond yields go hand in hand with interest rates, (Joe and JoAnn, hand in hand for a romantic walk on the beach....in Joe's head) higher bond yields will consequently raise interest rates of all kinds, including business loans, car loans, and mortgages, and could be a repeat of the 1970's and 80's when interest rates soared to double digits.



• Hyper-Inflation: The government can tap the Fed to just print more money to pay the national debt right? The consequences of simply printing money would be rising prises of goods and services as the national money supply grows. (Joe and JoAnn, romantic walk on the beach....but unable to buy hyper inflated drinks from vendors along the way) Inflation slows the flow of economic growth like a rollover accident during rush hour; and increasing the national monetary supply and inflation are extremely tightly correlated. (Anorexic Joe and diet coke).

How long will the "Risk Free" Rate be risk-free?

The US T-Bond has traditionally been the most trusted investment in the world. It's used as a benchmark for many return-on-investment (ROI) opportunities when companies and individuals compare various investment options. (Joe MBA) Although traditionally a lower yield offering than other methods of investing, (stocks, bonds, commodities, etc) the US T-bonds offer a guaranteed yield, hence the name "risk free", and the investor knows that without exception the interest and principle will be paid with perfect regularity. The problem, as mentioned above, is that we're financing old debt with new debt. Currently, China, India, Japan, Germany, and other countries regularly pitch in to feed our congress' appetite for spending by buying these treasuries. However, if we continue on our current course of spending, the US could face a problem of insolvency as wary investors back off, creating a problem of re-paying the debt that we already owe. If this happens, the "risk-free" rate may not be as the name suggests, and the possibility of default could emerge.

What is to be done? Americans need to voice their concerns about the current federal budget, and the sooner the better. Last week the White House raised its ten year budget deficit estimate to 9 trillion. That's nearly doubling the already astronomically high deficit. At an average of 25-40% taxation rate, Americans are doing our part to pay down the national deficit; but we desperately need Congress and Prez Obama to stop spending money we don't have. (Taxpayer Joe fighting the current) If the government doesn't stop the recklessness, talk of an endangered "risk-free" rate could emerge as more of a realistic problem than anyone wants to admit. All one needs to do is to look at California's insolvency crisis as proof (Joe Shareholder in LA, purchasing drinks for the walk on the beach with Joann....still in his head.....but only from vendors accepting state issued IOU's)

Super Ben Saves the World from Collapse

While speaking to a group of economists and policy makers on Friday, Federal Reserve (Fed) Chairman Ben Bernanke proudly announced that the aggressive monetary policies implemented by the Fed and the Treasury department “saved the world” from a financial meltdown. (Joe Superman) While markets have indeed responded positively since early March ‘09, it’s not clear whether the rally has been based simply on Fed intervention or on strengthening fundamentals. While some economic indicators have shown signs of bottoming, we have yet to see real sustained growth. (Joe Rogaine) Super Benny has, however, managed several accomplishments which we’d like to discuss below.

He screwed small banks
Late last year, when many large banks were insolvent and broken, Super Benny wielded his power and influence over congress (Joe pull down the wool) and served up a large dish of TARP salad (Joe next Food Network Star), with side dishes of PPIP and TALF from the Treasury (Joe “Bam! Kick it up a notch!”). The central banksters and clueless bureaucrats in Washington not only approved immediate TARP funds and monetary injection into large financial institutions, but also pledged to continue to infuse money should the need arise in the future. Even though the Fed and large banksters helped shape this economic crisis due to lax policies and excessive risk taking in the first place, they have been granted the safety net of taxpayer funds while the smaller institutions continue to struggle on their own. (Joe upside down roly-poly) Additionally, nervous depositors at small banks are pulling funds and fleeing to the safety of the too-big-to-fail empire. (Joe Titanic)

He screwed China
Each week the US Treasury auctions off new debt in the form of Treasury bonds and notes. As demand on the bonds increases, the yield, or interest rate decreases. (Joe Econ 101) Therefore, buyers want as little competition as possible to get the best rate. The Fed announced a plan in March to buy 300 billion of US treasuries in an effort to keep US interest rates low. (The housing mortgage rates closely follow the 10 year bond, for more on this China situation click here) This Fed purchase plan undoubtedly angered China, who is the largest foreign purchaser of US debt. In other words, with each dollar of debt the Federal Reserve purchases, the interest rates on Chinese investments drop. This situation of the Fed buying from the Treasury is similar to when Joe Shareholder asked his Mexican investor friend Jose to help bid up the price on the diamond ring he placed on eBay after JoAnn shot him down. (Joe false start)

He screwed the US Dollar….and Taxpayer…..and Saver
Ben’s plan to avoid another depression is to induce inflation to combat the dreaded economic forces of deflation, which he claims caused the Great Depression. (For reasons why click here) The best way to induce inflation is to crank up the printing press and dump it onto the economy - hence the nickname Helicopter Ben. (For his own words on the topic, click here). Since Ben took the reigns in 2006, the US dollar has slipped roughly 16% and 20% to the Japanese Yen and Euro respectively, with both trading near all-time lows. Inflation on the dollar is essentially a tax on anyone saving money. In Ben’s defense, however, he’s had plenty of dollar destruction help from politicians loading debt on the back of the fragile/exhausted US dollar. The Congressional Budget Office announced on Tuesday that the budget deficit earlier estimated at 7.1 trillion by 2019 has been raised to 9 trillion. Can the US dollar sustain such levels of debt or will it begin a free fall? (Joe Petty, brother of Tom) Will countries continue buying our debt even while it’s climbing to new highs daily? If there comes a time when debt investors decide it’s just too risky to hold US debt, there could be a massive sell off which could get quite scary. (Joe, “stay behind the yellow tape kids, nothing to see here. ”)

So the Fed and Super Benny have stabilized the large financial institutions…..but at what cost? Only time will tell (Joe crystal ball) whether the negative impact on these periphery entities will come back to haunt him (Joe October 31st…..2010, 2011, 2012???). Speaking of Halloween, Joe Shareholder likes this time of year because he offers JoAnn his protection from anything scary that might be lurking out there. JoAnn insists that nothing bad ever happens in Joetown, Ohio. This year, however, Joe can remind her that as long as Super Benny is in charge, plenty of scary things could happen.