everyone panics and decides to sell their USD, jump in to the Euro if they think some US banking collapse is coming. The logic being that they know that the only solutions available to the US are ones that will further decrease the value of the USD. So, either there is a banking collapse and foreigners lose their USD or there is a massive bailout and foreigners lose the value of their USD. Anything but the USD is a no brainier. No amount of CB currency intervention will be enough. There is a tipping point in all major paradigm shifts, are we getting close to this one and what are the implications? Interestingly despite the sell off this past week the USD gave up ground. One might have expected to see a firming of the USD as international money did the traditional flight to safety trade in to US treasuries but instead that has not happened. Is this a sign that the tipping point has been reached? The Fed seems to be doing everything in its power to cause a migration away from the long end to the short end of the yield curve. This gives them more control and they have been doing this for a while now (recall Greeenie telling everyone to get in ARMS) but it creates significant and destabilizing volatility. Without the dampening effects of money at the long end of the yield curve the swings generated by the economic cycle become more violent and pronounced. The good times are more extreme, record profits, liquidity, leverage, and the bad times will be equally extreme. This is very destabilizing and threatens to wreck the economic cycle. Could this be the catalyst that causes the USD to lose its reserve currency status?
Well, it can certainly fall more from here. It is not an exact comparison, but look at what happened with the British Pound after 1980. It fell in value over 50% until it bottomed out in 1985. Still other currencies have fared much worse in history than that (look at the Zimbabwe Dollar :eek: ). So, there is plenty of downward room left to go. However, if you look at the USD since 1985 you can notice it does much worse under Republican Presidents than it did when Clinton was in office. This is not a political commentary just a statement of fact. I think if the market perceives a Democrat in the White House in 2009 and change in policy coming, the dollar could experience a rally, at least short term. If McCain is elected and looks like GWB the sequel... look out below.
Clinton's admin luckily coincided with the dotcom boom which brought in record receipts and allowed interest rates to remain stable to high vis a vis foreign FX historically speaking. this is why the dollar was strong under Clinton. Had nothing to do with his policies. I don't know about the other Dem administrations, but that is the case with the last one. On the other hand, I would blame Bush, the FED, and congress for the weakness as of the last few years. Combo of no fiscal responsibility and artificially low rates.
Well, you see almost an identical sharp drop in the dollar during the Reagan and first Bush years as well. It has more to do with the level of debt and deficit accumulation than the dot com bubble. I am no fan of Bill Clinton but he was more of a fiscal conservative than either Bush ever was... Even Alan Greenspan will tell you that.
The tech boom was what created the fiscal euphoria (surpluses). I'm not arguing a bit about the over spending of the other admins BTW. They all spend too damn much.
More panic. Don't panic. Sterling, that is the British £, was in effect the world's Reserve Currency in the 19th century and until WW2. This all slid away after WW2 and nobody in Britain gives a shit that Sterling is no longer a Reserve Currency. In fact it is mostly regarded in economic history as freeing Britain from what had become an adverse harness on British economic & monetary policies.
Long term, the US WILL lose its status as a reserve currency. But not in the next year, two or even three. There is a lot of talk, and its growing everyday that the Central Banks around the world are going to step in and intervene with a falling USD. In a global slowdown, they can't let the USD fall much further. Just beware. There is a chance in the short-run that the USD has bottomed out (but long-term, it's headed to junk status).
If you look at defense spending the chart will look identical. The republicians trying to keep the military strong have to enter a deal with the Dems. They get more domestic spending and the military gets more help. Same with Bush...you don't think the Dems (and some republicians) horsetrade votes to fund the war. A good way to sum it up: *Republicans borrow and spend *Demacrats tax and spend