Why the death of the dollar is greatly exaggerated.

Discussion in 'Economics' started by xenix, Aug 19, 2009.

  1. xenix


    This is just my opinion and is based solely on spending 3-4 hrs a day watching Bloomberg, reading the financial press and having just enough understanding of economics to be dangerous.

    This is how I see things playing out.

    Everyone is going to be caught flatfooted by the amount of growth engendered by a fairly small amount of stimulus.

    Right now velocity of money is still hovering around 1 and there are probably several trillion dollars of excess liquidity in the system. A lot of people are saying that this liquidity amounts to an effective monetizing of the new debt being created. Taken on it's own, that would probably be true.

    BUT, the economy is much leaner and hungrier animal that it was a year ago. Cost cutting has been merciless. Payrolls and inventories have been slashed as have advertising and cap-ex. Putting a dollar into this economy is going to be a different experience than putting a dollar into the economy of 12-18 months ago. It will utilized much more efficiently and therefore will produce proportionally more growth.

    Doing economics by analogy is always dangerous and usually sophistic, but to give the argument some color, it's like the difference between putting a gallon of gas in a land yacht and a crotch rocket. One will take you about 15 miles and the other will take you about 60 miles and at twice the speed.

    Efficiency is the key to growth - finding new ways to do same things better and faster or finding ways to do new things that eclipse older things - because the new things are better and/or faster.

    An increase in economic activity implies a greater need for money to suppport more and bigger transactions. Normally you would have to rely on the Fed to, in it's holy beneficence, increase the money supply to goose or support an economic expansion. But right now we already have probably some ridiculous multiple of the amount of liquidity that would be required in a normal expansion.

    So, as soon as the money from things like 'cash for clunkers' starts to work through the system, that money will produce more real economic value than in any previous economy. That will increase the demand for money which will immediately flow from excess reserves into productive lending.

    This will result in a fairly sudden increase in the velocity of money. Lather, rinse, repeat.

    And because you have a ready supply of liquidity, this will happen in record time. Sort of like having nitrous injection on your crotch rocket.
  2. Wrong. 2/3rs sof the economy is the consumer. The consumer is in debt up to his eye balls. Likely has little equity to tap into and now has his credit lines also being cut.

    The economy needs growth and it can only come from the consumer, unfortunately little of the stimulus is making it the consumer, cash-for clunkers excepted.
  3. http://www.elitetrader.com/vb/showthread.php?s=&threadid=170616&highlight=dizard

    Got zero reaction, but the info in there is still good. The fact no one is paying attention to that info means, of course, that everyone is going to be surprised.
  4. xenix


    Great article. I love the author's style.

    There was also a recent thread where the role of the consumer was discussed - http://www.elitetrader.com/vb/showthread.php?s=&threadid=172661. I tried to show that while the consumer is certainly important, a big chunk of "discretionary" spending isn't as discretionary as that word might connote. Further, even a higher savings rate will contribute to GDP since investment is one of the components.

    I think it's also worth noting that while the over all savings rate might be increasing, the very definition of pent up demand is someone who has been living on unemployment insurance for several months and who finally gets a decent job. For example GM is calling back a couple thousand (1400?) UAW members due in large part to increased demand from the clunkers program.
  5. ?.......You're bullish?:confused:
  6. xenix


    Oh, so you expect me to follow my own advice? How stupid do you think I am?

    That was a rhetorical question. :D

    I guess I'm cautiously optimistic. Like I said, I'm just an arm chair economist, but I think it's too easy to lose perspective when you've been as close to edge as we have. Was it Nietzsche who said 'if you stare into the abyss long enough, it will stare back.'? It's like an accident where you total your car but walk away without a scratch. You keep wondering if it's for real.
  7. That only happens to the drunkest person involved in the accident. :cool:
  8. I would agree that the "death of the dollar" is currently exaggerated. Not so much that it's wrong, but that the timing is not what many believe it will be.

    The dollar will remain strong for a while longer not because of economic recovery or strength, but because of continued deflation and deleveraging over the next couple of years. The next waves of resets in Option ARM/Alt-A, commercial and prime RE will be greatest next year. Add to that unprecedented levels of credit card defaults, and true unemployment that is already in the double digits, and you have a recipe for disaster. As similar results unfold in Europe and elsewhere, the Dollar will once again be seen as a "safe haven", as twisted as it may be at this point.

    That said, I fully expect that we'll see what "appears" to be a rebound in the coming months, and even possibly fears of inflation. But it will simply be a counter trend in the bigger picture.

    But ultimately long term the Dollar is in big trouble. I expect by 2012 or so to see the deflation run its course and massive inflation follow, possibly even hyper inflation.

    One thing is for certain, the next several years will be historic.
  9. Strange how it works out that way a lot of times. Must be anesthetized from the shock of impact.
  10. Small amount of stimulus?

    It's in the trillions. Do you even realize that money supply has gone parabolic?
    #10     Aug 19, 2009