Just wrote this... Welcome the ET community to comment. Please distribute ... http://scriabinop23.blogspot.com/2008/03/on-usd-grand-polarization-ron-pauls.html Today is a day to talk about paradigm shifts. One theme of our times is the US dollar 'collapse' all facilitated by political mismanagement of our system, unsustainable trade deficits, bloated budget deficits, horrible energy policy, and most recently, a credit crisis causing a loss of faith in US assets. You don't need to go far to find areas of the blogosphere and youtube where goldbugs congregrate and call to an end of time, soliciting everyone to buy their duct tape and prepare to deal with our transition to becoming the next Zimbabwe. So amidst all of this, plenty of emotion is gathered. Who can deny that any threat to the sanctity of the dollar is upsetting and definitely a threat to national pride? Its easy to understand how disappointing this situation can be for us Americans, who for the better part of our lives have lived under the notion of a nationalistic and even moral superiority. What a dilemma that puts us in this past few years, having to gather some humility having 'failed' on multiple levels? So now everything is finally catching up with us. We are paying the price for fiscal mismanagement, years of bloating money supply without fear of repercussion, and as Ron Paul would say (I'll paraphrase his concept) a "flawed and unnecessary central bank driven system based on broken fractional reserve banking policy backed by no credibility (gold)." That is at least what everyone you talk to would believe. The public notion is one of trend following. At the peak of any bubble, the public has resounding confidence in whatever the bubble is. During the tech bubble, Dow was going to 40k. During the housing bubble, you better buy now, or you'll be unable to afford anything ever again. The commodities bubble? The Long any currency but US dollar bubble? Well we're still dealing with that. But the gold and silver bubble of the early 80's has a familiar ending. Ron Paul's folks are merely blind trend followers who do not realize innovation that defines America is by the large part fueled by a deflation-avoidance driven policy that serves to provide incentive to invest. The gold standard was a resounding failure as the US was trapped in a deflationary mire for decades on end, holding back economic and technological innovation unnecessarily. The herd is never good at realizing the risk rises (at least in the long term) as we get further and further from the mean, <em>because they assume every trend reflects a <strong>permanent</strong> paradigm shift</em>. The reality is contrary - paradigm shifts are the exception; cycles are the commonality. The resounding truth and best opportunity is always somewhere everyone is not looking. And that is this: The US Dollar is still a fundamentally sound currency, despite like any developed nations we face very real challenges in our entitlement systems(Medicare sustainability), energy policy, and war spending policy. But all of those problems are fixable. One needn't look far to realize that speculative flows to the euro are not quite justifiable on news reel of <a href="http://www.spiegel.de/international/business/0,1518,536635,00.html">German bank stability</a>. It also doesn't take a rocket scientist to realize Japanese dependence on the American economy, nor its dependence on a weak Yen to buoy strength, thus justification for higher interest rates and more favorable currency fundamentals. Our debt to GDP ratios are still amongst best in the developed world, and a few mere changes of government policy with respect to entitlement sustainability, tax policy, energy and food subsidization, and redirection of war spending to local infrastructure improvement can easily usher an era of US broad economic leadership. As far as money supply: we are in a deflationary time, not inflationary, as the goldbugs would have you believe. Money supply is coming down as the financial world is reassessing its risk models. Less money is moving around; credit is reigned in. In a market where fiscally sound municipal debt is chaotically unwound, you realize we are having a market dynamic driven detachment from risk related to the actual holdings determine new values of assets. The FOMC is merely swapping paper not able to be properly valued with treasuries to prevent a cascading liquidation effect. This is a stabilizer, not a monetary flood! Aggregrate demand is falling. That is the short term trend until bottom is found. And yet, commodities have generally reigned (Did you know crude oil is the new 30 year bond?). While world equity markets have mostly become sharply negative bears, somewhat predicting global recession, the commodity bulls argue a contrary and nonsensical notion, of stagflation, where commodity demand is miraculously maintained. Baltic shipping indexes sharply disagree; rates on the movement of goods are coming down. While there are genuine issues in supply, especially concerning <a href="http://scriabinop23.blogspot.com/2008/02/open-letter-to-barack-obama-and-all.html">misguided food/energy policy</a>, they are all repairable in a very real and attainable way. As I've previously detailed, our structural price problems could largely be remedied by investment instead of consumption spending. By investing, and merely going to all electric/battery vehicles, we could stop oil importation. Just imagine the cascading benefits on the broad economy of a lesser 'energy tax' (higher productivity), lesser dollar exportation to petro producers, and a disappearing need to use food for fuel. The whole equation changes. Suddenly oil is no longer worth its weight in gold, the dollar is, and hundreds of billions of dollars are no longer necessary to be 'invested' in stabilizing the mid-east. So my point? The world will (likely already) obviously experience a global cyclical recession of some extent and decoupling will prove to be a fantastical myth, thus undermining commodity bulls' claim as their sole justification for continued high prices. Financial memories are short, and never let the equity markets get far ahead of themselves following the 2000 bubble pop. With that said, the beef of substantial risk (as an investor, not a short term trader) is entirely in holding long commodities and USD short positions. Deflation is the name of the game, and reversion to the mean based on fundamentals, not momentum, is where the value lies. The years of 2008-2009 will likely mark a multi-decade bottom in dollar weakness, as a new political and financial landscape with a fundamentally sound direction will take hold. The fundamentals in so many trade partners have detached from their currency valuations, and this provides opportunity. New financial memory will prevent further debacles of excess, and hopefully crude will stay high long enough to stimulate a new era of energy efficiency, leading to the next great bull. Call me the optimist, even a contrarian, but selling the US short is a foolish thing to do after the proverbial toilet has already been flushed.
This whole system has no other alternative than cheap money. If you cant figure it out then you havent thought long enough about how this entire thing works.
So, let me get this straight. You think that the almost $10 TRILLION of debt on the books, borrowed, wasted, and now owed by the US government, and the $500 billion or so more needed EVERY YEAR in addition to it, are NOT a problem? Do you realize that it would take 100 YEARS of $100 billion per year surpluses to pay it off? What happens when the rest of the world decides it doesn't want to invest 75% of its TOTAL savings in MORE US government bonds? Tell me why we aren't ALREADY doing anything about any of this mess? For 7 years the supposedly fiscal conservative republicans have been in power, yet look at the size of the disaster they have created. Sadly, I don't see the democrats doing any better at all.
First of all, minus the social security and medicare debt (which are offset by our cash reserves), its about $5 Trillion. Our GDP is $13T or so. Check that ratio compared to other modern countries. Its not great to have debt, but its manageable. Look at how GDP has changed over the years. You'll quickly realize a $20T GDP in 2020 is not undoable. If we merely keep our debt under control and reign in entitlements, that is easily handleable and even reduceable in our system. Other points: 1) We spend $650B on military in '08. Imagine if we cut that down to $200B. Then redirect a few hundred billion annually to moving to electric vehicles ... etc.. 2) Imagine if we lowered entitlement benefits -- less medicare and social security, to a balanced level. No system drain. It will happen - it just may take a few years for it to go into mainstream politics. 3) Fiscal conservative republicans??? Give me evidence of that. They've been fiscally disastrous. 4) One of the present consequences of our trade imbalances is this exporting dollars for taking in crude oil; well it just happens to play out that most of those dollars are finding their way back to the US. Thats a normal consequence of trade. Both sides tend to balance out. Not sustainable if the Bush way of life continues, but its clear that way of life will be over soon. Energy policy is really the crux of it all. We need to stop the war spending and redirect it to getting off crude. When that happens, the whole game changes.
I remember in '79 or '80 there was the VW Rabbit diesel, 50 MPG. In 28 years we haven't been able to improve on that basic technology? And why the push for ethanol? Why not biodiesel instead? Just take out the glycerin and wallah, diesel.
Its sad to see such a well written article with very little substance. You clearly don't understand Ron Paul's positions. When reading your article and trying to understand your counter points to "Ron Paul" positions all I heard was "Goldbug". If you want to make counter points with any value of reading, may a suggest doing more than ounce of research next time?
I'll take that at least as a compliment on my writing skills. Thanks. Now as far as the substance... Ron Paul wants to see an abolishment of the federal reserve; a return to gold standard and even possibly removal of fractional reserve banking. Am I wrong? These issues are what I'm targeting here. Without flexibility in money supply, investment possibility really dies. My point is simply that. The fall of the dollar has as much if not more to do with our fiscal waste and mismanagement than mere money supply pumping. Our currency is only as good as our politics.
We're only dependent for half our oil from foreign sources. Canada is far and away the largest exporter to the States. Only 15% of our oil comes from the Mideast. Many other developed nations, like Japan, import virtually 100% of their energy. Our agricultural exports make up much of the "net" commodity imbalance. It makes little difference if we swap our oil imports for imports of another stripe. IOW's it's possible that fuel burning cars cause less of a trade imbalance than battery powered engines-if those batteries wind up being built in Asia. I find it odd when lefties harp about "dependence on foreign oil." Why is oil such a concern? Why not foreign cars? Or foreign wines? Or foreign electronics? Seems like your opposition to consumption of foreign oil is rooted in the belief that since oil is to a degree the province of the Islamic bogeyman it then must be stopped. Thus the left's protest of oil imports is predicated upon religious intolerance. Am I missing something in your position?
Hahah.. thats creative. The issue is trade imbalance, and when we buy oil, that is clearly money down the drain that doesn't really function as an investment. At least a foreign auto gives us use perpetually. Crude oil is instantly burned away. I have no issue of religious application here - maybe you do. But its pretty clear that our war policy (which costs us $650B+/yr) wouldn't be as it is if there was not a desire for stability in the region due to an alterior motive (I don't see us in Sudan). And like I said before, dollars we export end up back here anyway (in direct investment). Look at Saudi Arabia buying $15B/month of treasuries for evidence of this. It makes no difference who we receive our direct oil imports from (yes, I know Mexico, Canada, and Venezeula are are major direct trade partners), since the total market supply/demand balance (and thus price) is absolutely dictated by our net consumption #. If you increase double consumption efficiency on energy by 2, you reduce demand to 40 mb/d of crude, off a supply base of 85+ mb/d. That fixes the 'tax' on economic activity, freeing funds for investment in more 'productive ways'. Essentially increasing productivity functions the same as increasing aggregrate supply, which I'm all about.