Is There An Impending Collapse of the US Dollar?

[jackson64]

I am an optimist by nature but I can no longer ignore the rumblings of a coming recession. I'd be interested in some input from those with a higher level of education than mine concerning economics. ( my field is bio-chemistry)

 

With the housing market problems, the inevitable skyrocketing of oil as winter approaches, and the US dollar loosing its value worldwide ( the euro and pound are now almost X3 and even the Canadian $ is worth more now) I am becoming seriously concerned. Some reassurances from others would be nice.

 

If all you have is cold hard reality to tell me ....then maybe some ideas for safeguarding my investments and not liquidating my coin collection little by little to fill the gas tank... ..............anyhow, what are some feelings on this, I'm not jumping on the bandwagon with those who are stockpiling non-perishable food but I'm also not sticking my head in the sand and hoping it will all get better either.....

[carson city]

Don't Worry(it's only money) be Happy !-----Bobby McFerrin

[bsshog40]

I think the stock market is actually higher than it was last year, it's just dropping numbers for this year. Gas is gonna skyrocket as long as the supply and demand stays as is. The dollar has been slowly diminishing for a long time now to due wgaes not keeping up with inflation and the economy. I'm no expert, but that's what I think.

[physics-fan3.14]

Well, my major is rocket science, but one of my hobbies is economics and the markets. With out getting too deep into it, yes, the economy is slowing. No, there is not going to be a recession. A recession is classically defined as any two consecutive quarters with negative GDP growth. This is completely different from a few quarters with slower than average GDP growth. It is just going to seem bad because we are used to higher than average GDP growth, especially in the 90s and over the past couple of years. The slower growth is forecasted to last until next spring, and then it should be business as usual. There are a number of factors contributing to this, but the higher cost of energy and the recent housing bubble bursting are some of the more important ones. Anytime credit starts to contract, it signals a slowing down of the economy. We have been undergoing a serious shakeup in the credit markets lately, and that has shaken the confidence of investors just about everywhere.

 

Keep in mind that the American economy is the largest in the world, and that historically the stock market has returned on average about 11%. However, the very nature of capitalism and a free market is to have boom and bust cycles. They cannot be avoided. Don't panic, and you can profit greatly.

 

As for where you should put your money now, for the short to medium term, there are several options. Not knowing your situation, I can't make any specific recommendations (and it should be emphasized that you should NOT take the recommendations of some stranger on a chat board without first SERIOUSLY thinking about them and evaluating them, and discussing plans with other trusted advisors. While I mean the best for you, you do not know that.)

 

The first, and easiest way to do the best is just to leave your investments where they are now. This might seem crazy, but unless you need the money sometime in the next year or two, do not sell anything. Paper losses don't become real losses until you sell. By this point, if you are still in the market, you have lost a good deal and should not sell. This downturn is only temporary, and the economy will recover and do very well in the long term, as it always has. Instead, take the example of Buffet and others - when everyone else panics - BUY! You should be contributing to your retirement plans regularly, but take this opportunity to invest even more. You will be happy you did so later. Don't try to time things, just dollar cost average. People who do this wind up earning a significantly higher return than those who try to time the markets.

 

The second option is less recommended, but if you have already taken your money out of the markets and want to earn more than the quarter percent your checking account is probably earning, I would suggest government bonds. Look at treasuries, or something like that ( a mutual fund will probably be your best bet here, I recommend Vanguard). Government bonds have a fixed interest rate, and unless the government declares bankruptcy your money is guaranteed. Over the long term, government debt is useful for diversifying but will earn you pretty much the lowest rate around. They are extremely low risk, and the return reflects that.

 

The third option is probably the riskiest, but you could stand a chance of doing rather well - go international. As you point out, international currencies have been doing better against the dollar. The Euro is at $1.50, the Pound at $2.09, and the Loonie at $0.91. Foreign exchange (trading currencies) is a new hobby of mine. Investing in foreign stocks will reduce the American exposure in your portfolio, and the idea is that foreign stocks, if properly selected, will outperform American in the near term. This is risky, and a very complicated subject, and you should research thoroughly before pursuing this option. Again, with this option a mutual fund is almost certainly your best bet. Keep in mind, however, that with the new gloabl economy everything is intertwined. If America, the largest economy in the world, is faltering, you can be almost certain that there is some weakness all over the world. This phenomenon is extremely interesting, but is for another thread.

 

Your fourth option is precious metals. While I would not recommend more than a small fraction of your portfolio go into metals, it is the classic flight to safety. Metals have been going straight up the past year or so, and there is every indication that while the economy is slowing, they will continue to do so. Buying a gold or silver ETF is the easiest way to get into metals, unless you prefer to hold it. But if you are buying a sizeable quantity, storage can get cumbersome and expensive.

 

The key is to always diversify. If you had your portfolio properly allocated before the market downturn, your risk was minimized to begin with. If not, there is no time like the present. I would not suggest changing your allocation too much, and the best policy is to invest new money in the weaker sections of your portfolio to bring the balance back to where it should be. Like I said, the first option is probably your best bet in the long term (although a properly diversified portfolio will contain different percentages of each of the above).

 

That was probably a lot more than you wanted to know, but I tried to be somewhat thorough. Good luck.

[jtryka]

Well, my major is rocket science, but one of my hobbies is economics and the markets. With out getting too deep into it, yes, the economy is slowing. No, there is not going to be a recession. A recession is classically defined as any two consecutive quarters with negative GDP growth. This is completely different from a few quarters with slower than average GDP growth. It is just going to seem bad because we are used to higher than average GDP growth, especially in the 90s and over the past couple of years. The slower growth is forecasted to last until next spring, and then it should be business as usual. There are a number of factors contributing to this, but the higher cost of energy and the recent housing bubble bursting are some of the more important ones. Anytime credit starts to contract, it signals a slowing down of the economy. We have been undergoing a serious shakeup in the credit markets lately, and that has shaken the confidence of investors just about everywhere.

 

 

Most of what you said I agree with, and I think it is good advice. I would only correct you in that the loonie is at $1.07 after hitting $1.09 earlier today, the US$ is only worth $0.91 Canadian, but I will assume this is a simple typo. My major disagreement is with the paragraph above. We are experiencing slow growth based on the reported numbers, however I don't have much confidence in the reported numbers. The 3Q GDP was reported at 3.9% annual growth in real terms, however the GDP deflator used to come up with that real rate was 0.8%! If you believe that despite near $100 oil, rising commodity prices, and gold over $800 that inflation is actually as low as it was in Eisenhower's first term, then we have slow growth. If you look at the simple CPI when calculated using the same methodology as before the change in methodology begun in 1994, then real inflation is running somewhere north of 6%, Deduct that 6% from the 4.7% nominal GDP growth in 3Q, and you have at least a 1.3% contraction in the economy in the quarter (and likely sub-0 growth in the prior 2 quarters since the housing collapse began, which means we are likely already in recession. This would fit well with the continuing weakness in manufacturing data, and lower consumer confidence (consumers may be a bunch of ignoramuses when it comes to economic theory, but they know when things don't seem to be going well). My personal belief is that we are going through a time eerily similar to the 1970s, the only question to be answered is whether we are closer to 1974 or 1979.

[James_OldeTowne]

The stock market has gone up too far too fast. I think it was way overvalued during the dot-com craze, and frankly, it never did shed as much as I thought it should even back then. I just don't think Dow Jones should be over 10,000 even today. This plays into the strength of the dollar.

 

I don't expect a calamitous collapse of the likes of the Depression, but I think we are long overdue for a major correction.

[MarkFeld]

Paper losses don't become real losses until you sell.

I have heard many people say that but I strongly disagree with it. If you have a loss on paper you have suffered a (real) loss, whether you take that loss/officially recognize it at the time or not. Sure, you might make it back (or lose even more) later, but in the interim, you have a loss. If you don't believe me, try selling at your cost when/if you supposedly only have a loss on paper.

 

Edited to add: The above notwithstanding, I think your post was quite informative. (thumbs u

[physics-fan3.14]

jtryka, relativity is your friend

 

USD/CAD = $0.91

CAD/USD = $1.09

[World Colonial]

I am an optimist by nature but I can no longer ignore the rumblings of a coming recession. I'd be interested in some input from those with a higher level of education than mine concerning economics. ( my field is bio-chemistry)

 

With the housing market problems, the inevitable skyrocketing of oil as winter approaches, and the US dollar loosing its value worldwide ( the euro and pound are now almost X3 and even the Canadian $ is worth more now) I am becoming seriously concerned. Some reassurances from others would be nice.

 

If all you have is cold hard reality to tell me ....then maybe some ideas for safeguarding my investments and not liquidating my coin collection little by little to fill the gas tank... ..............anyhow, what are some feelings on this, I'm not jumping on the bandwagon with those who are stockpiling non-perishable food but I'm also not sticking my head in the sand and hoping it will all get better either.....

 

The economy is in trouble now and yes, there is going to be a recession in the US probably next year and globally in 2009. (You would think from listening to conventional economists that this would be the end of the world. Periodically, it is normal.) The housing mania is over and the average American consumer with a NEGATIVE savings rate and a weak balance sheet cannot continue to spend above their means indefinitely as they have been.

 

The only way this irrational spending was even possible was because of the housing bubble and the lowest credit standards in the history of ANY economy EVER. With the huge losses which have been recognized in the mortgage security markets and other toxic waste, it is inevitable that some tightening in credit standards has happened.

 

It is correct that a recession is defined as two consecutive quarters of negative GDP. But waiting for this to occur and be widely recognized is a waste of time if you are planning any strategy around it. In the last two recessions which were mild using aggregate statistics, they were not even officially recognized until they were already over. Also, do not waste your time paying attention to conventional thinking economists. Many of them are cheerleaders (just like the NAR is for housing) and have been wrong as usual in calling for a premature end to the current credit problems.

 

Though I believe there will be a recession next year, I have no idea how bad it will be or how long it will last. Given the weak balance sheets in the United States, logic would indicate that it will be a deep one. But that is what I thought before but reckless montary policy by the Fed and lending by banks, government deficit spending and foreign financing of our trade deficits have allowed the US to continue to consume above our means.

 

As for the US Dollar, I have owned it for most of my assets by default but not because I wanted to. (I own Euro with about 20% of my money.) At this point, though I have been wrong, I continue to believe that at least a temporary recovery in the US Dollar is warranted because sentiment is overwhelmingly negative and in the financial markets, the majority is usually wrong. However, I do believe that the long term outlook for the US Dollar is overwhelmingly bearish.

[EZ_E]

The stock market has not had a major correction since 2002 and it is way over due.

 

Just the fact that the Canadian dollar is now stronger than the US dollar tells you that our economy is majorly out of whack! Inflation is caused by an increase in the money supply...period! I don't care what kind of convoluted economical BS that one may state, the dollar is loosing value because more of it is being printed to fund pork barrel projects. Politicians are killing our country.

[DC Dawg]

The stock market has not had a major correction since 2002 and it is way over due.

 

Just the fact that the Canadian dollar is now stronger than the US dollar tells you that our economy is majorly out of whack! Inflation is caused by an increase in the money supply...period! I don't care what kind of convoluted economical BS that one may state, the dollar is loosing value because more of it is being printed to fund pork barrel projects. Politicians are killing our country.

This is what I have been saying since the Fed added more money to the system to "cool" the credit crunch.

 

Hopefully, those who have common sense who remember the crash of 1987 and the "correction" currently going on will remember this and realize why George H.W. Bush called supply-side economics "Voodoo Economics." It goes by the theory "if you build it, they will come." The problem with building it is that it relies too much on credit. At some point, margins are called and something unbalances the equation. Go back through history and you will find the same thing... a credit crisis causes a crash and an economic downturn. Some day, people will learn!

 

Scott

[just-john]

The Canadian dollar should be rising with the price of oil gold and silver that what they have

and with only 35 to 36 million people makes since to me .The plus to all this is all the illegal aliens will be heading North to greener pastures. Canada's population would then double.Interesting times to say the least

[Tradedollarnut]

The stock market has gone through a stunning correction the past few years - in most any currency other than the dollar. Just compare the Dow in euros from a few years ago to now - it's dropped nearly in half!

 

If foreign investors aren't buying US stocks when they're half as expensive as they were just a few years ago, that's not a good sign.

[cladking]

The dollar will find good, albeit temporary, support in the 74 area. The central banks will see to it even if it didn't happen by itself.

[chinook]

When supermodels begin to be concerned about the dollar, me thinks the the horse has already left the barn.

 

When everyone stands on one side of the ship it is bound to capsize.

 

The majority of this decline has already occured. The largest and most violent moves usually occur at tops and bottom. A dramatic selloff would be welcomed and offer much opportunity,

[RI AL]

MY financial planner (and trust me...we're not anything but middle class) one told me that if there were a collapse...nothing would matter anyway. He also told me that gold is nice...as is silver (if it is in your hot little hand) but in the case of a real legit financial or world crisis, the most valuable commodity you could have is a stash of canned food set aside.He said, "you can't eat gold". I've always remembered that and am careful to rotate stock in the basement on occasion. Have about a week's worth.

 

On the other hand...with oil hovering (did it cross today) at the $100 mark, you can't heat your home with canned food...but it's hard as heck to store oil!

 

We're starting the generator hunt for emergencies..a whole house one...where are the best buys??

 

RI AL

[physics-fan3.14]

RI AL, it's not hard to store oil at all. All you need is an empty salt mine or a hollow salt dome and fill her up (Seriously, that's what they do.)

[DC Dawg]

RI AL, it's not hard to store oil at all. All you need is an empty salt mine or a hollow salt dome and fill her up (Seriously, that's what they do.)

It's phun to have a physics geek around!!!

 

Scott

[BankNote1]

Yes!

[RI AL]

Oh heck. I just sold my old salt mine on E-Bay!! Just goes to show ya'...ya' never need it until it's gone.

 

RI AL

[jackson64]

I have an extra laying around somewhere...I'll sell it to you cheap when I find it...

 

On the serious side, I appreciate all of the input. I discussed this with my wife and although we keep seperate accounts, she agreed with my decision to buy 10 generic $20 gold liberties to add to our holdings. With gold going up and the purchasing power of the dollar dropping, it seems better to have more of my "savings" in gold value than sitting in my account with a US dollar value.... and I think it's only wise to use a bit more of the free firewood in my backyard and save some money on heating costs. Maybe a few months worth of canned goods also is a practical idea too.......things could get squirrly very fast or not at all, but either way I must be responsible for the welfare of my wife and kids....

[just-john]

That's for crude oil unrefined don't go putting you car gas or home heating oil in your salt mine.

[CHABSENTIA]

The dollar is down against other currecies including the Indian Rupee because there was a deliberate and suucessful attempt to drive it down.I have mentioned this before but if people remember the Savings and Loan Crisis then they remember that the Credit crisis was prevented from going Global because the FED immediately jumoed in and lowered the Federal Funds rate and pumped as much Money into the EConomy as was needed right away.This time even though the problems were evident they said they would wait until next month.Foreclosures were up this month 100% as comapared to last quarter. Anytime in History that the Federal Funds rate has been raised 6 times in succession there has been a recession.Bernake raised it 17 consecutive times.

 

 

A lower dollar in relation to other currencies means our goods are cheaper to them and their goods are more expensive to us.People will not go abroad as much and be encouraged to stay home and spend their Money here.People from abroad will be encouraged to come here and soend their money here.People abroad will be encouraged to buy more American goods etc.

 

For some there will be a flight to precious metals such as gold and Silver. Oil is a different situation.We import over 65% of our Oil abroad. The Middle East etc has increases the price of Oil to compensate for the fall in the Dollar. Oil Companies are buying less Oil as out Stockpiles are down because of the increase on price.The Speculators on the Futures Market that buy contracts 3 months out are driving up the Price of the contracts to snap up the available Oil to ensure supply.

 

The Government takes care to avoid it in conversations but the national government tax average on a gallon of gas is $.48. In New York City the total of Local, State, and Federal taxes is $,60 a gallon.This means that if a gallon of gas costs $3.00 at the pump that it is actually $2.40 before government taxes. This represents a 25% increase.

 

People must love the Politicians because in the last National Election only 39% of Registered Voters went to the Polls and every election 90% of the Incumbents are returned to Office. People that don't go to the Polls and people that go to the Polls and vote the same Losers back into Office are responsible.If 39% of the Registered Voters go to the polls then about 19.5% are needed to do it. This means that 80% of the Registered Voters can look in the mirror and say they are responsible for the Politicians in office.

 

The dollar has been down relative to many years ago for some time.As long as people accept it at whatever value for an exchange of other goods then there will be no problem as long as they stay in the U.S.

 

Oil will most likely be over $100.00.Gold will probably be at $1200.00 and Silver at $25.00 if this is the case Gold and Silver Bullion have storage problems as well as a slow increase in value in Hard Economic times. Gold and Silver in the form of Coins increase in value over time for many reasons and are a joy to collect at the same time.

 

Bernake has a PHD in Economics.Paulson used to be the head of Goldman Sachs.Does anybody really believe that they did not know what they were doing when Paulson freely admits that he was on the telephone to Bernake every day?

[World Colonial]

You make some good points but the situation is, I believe, a little more complicated than that.

 

You are correct that with the collapse of American's purchasing power due to the decline in the exchange value of the US Dollar that Americans will find it more difficult or impossible to both travel or expatriate abroad. But that does not mean that there will be no or only limited fallout.

 

For those who are interested in protecting their wealth and are in a position to do so, a more or less permanent move out of the US Dollar will become a necessity unless you do not mind your wealth evaporating. The United States does not really produce that much in the way of the goods that we buy anymore or at least a lot less than it used to and this is likely to continue.

 

So far, foreign trading partners have been willing to sterilize US Dollar inflation as a trade-off to maintaining employment in their economies and we should be glad that we have received all the goods we have bought from them for our depreciating currency. Eventually, that is going to end. When I do not know but probably as their reliance on our markets decreases over time. This is likely to coincide with the end of the US Dollar as the reserve currency and when it does, many of those Dollars we sent abroad are going to return here and the price inflation we have not seen (and thought had been avoided) will apear and interest rates will also increase, perhaps substantially.

 

Another thing that is likely is that the US Government will impose foreign exchange controls because that is a typical thing that governments have done to mitigate the effects of their economic mismanagement. It always fails but they keep on doing it anyway.

 

On balance, a depreciating currency is a major negative for any economy which imports more than it exports. Longer term, any holder of US Dollars needs to expatriate the majority of their money out of the US system if they want to protect their wealth and this is even more important for anyone who is a US citizen or US resident.