Prague Twin

Wednesday, November 07, 2007

Bad Day All Around

Pick your poison today. Dow down 360 points. Oil close to $100. Gold up well above $800. But if you ask me, the real problem is the dollar.

The dollar has now reached its record low against all major currencies on the news that China wants to diversify its assets away from the greenback. Have a look at this chart....

So Bernanke's double dip on rate cuts is starting to have its effect, although I'm not sure this is the one he intended. Meanwhile Treasury Secretary Paulson continues to talk about America's strong dollar policy. His credibility is just about shot at this point.

Meanwhile, the largest insurance company in the world, AIG, lost over 7% of its value today which seems to confirm that the subprime mortgage crisis is not "well contained." Citibank wrote down about $38 billion in assets that were overvalued (read subprime) and this indicates that other write-downs are on the horizon. Moody's also downgraded major SIVs further pressuring the credit markets. Furthermore, Mario Cuomo, the NY DA has filed subpoenas on Freddie Mac and Fanny Mae regarding possible collusion with Washington Mutual in overvaluing asset backed securities.

I think we are still at the beginning. This is going to get worse.

The drastic drop in the dollar (which most analysts say are will continue) is going to make it even less likely that the TICS data is going to bounce back. Translation: as the dollar continues to drop, more and more people will refuse to put their money into dollar denominated assets. Hell, even a typical model knows better than that.

The upside? Christmas shopping in the US with foreign currency. Whoo Hoo!

Postscript: Did I say Citibank wrote down $38 billion? Sorry, that was a few days ago. Today it was GM.

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  • How about Christmas shopping in Europe with American dollars! That is a scary thought.

    By Blogger Publia, at 1:24 AM  

  • Waiting for the lemmings to start to open the windows and step out on the ledge.

    By Blogger Frederick, at 1:25 PM  

  • But if we could stop overspending and don't need to borrow money worldwide, then who cares that the dollar is down? It just means our goods and services are that much more attractive, or am I missing something here?

    By Blogger Roger Fraley, at 6:09 PM  

  • Publia,

    Enjoy Germany..... again. You will just appreciate it that much more.


    Shouldn't be long now. When the real skeletons come out in the financial sector, I think we will.


    That argument only goes so far. The sinking dollar will eventually create inflation (as imports become more expensive) and a rapidly sinking dollar threatens to destabilize the entire world's economy. In an interconnected world, a rapidly sinking dollar hurts everyone and eventually hurts you too.

    So yeah, you are missing a lot. Even if we could stop overspending (not likely) you still have to finance the current $9 Trillion in debt, and the $60 billion per month current account deficit.

    By Blogger Praguetwin, at 11:36 PM  

  • So what is the world doing to prop up the dollar or at least slow its descent?

    By Blogger Roger Fraley, at 3:24 AM  

  • There isn't much the world can do. It is up to America to real in it's spending, and if the Fed would quit cutting rates, that would help too.

    By Blogger Praguetwin, at 5:55 PM  

  • I agree with you on both points. Kind of out of my hands though. My party's official position is less government spending, but they don't practice what they preach. I guess the party is split on the prime rate; the rich wish it was higher, the upper middle class is largely clueless (and split both ways) and the lower middle class wants it lower so that loans are easier to get. Or so I suspect.

    By Blogger Roger Fraley, at 7:36 PM  

  • It is not so simple. Sure, the middle to lower classes want lower rates so they can borrow easier. I mean we all want lower rates, but not at the price of inflation.

    Inflation affects everyone, but the working class the most. Lower rates makes it easier to buy a house, but it also drives up housing prices. So the industrious who have a 50% down payment actually should favor higher rates to give them an advantage over the guy who has to borrow 100%.

    The big business guys all want lower rates. The rich always have their money working so there are very few that like to just sit on fixed income and count their gold. I suppose they want higher rates, but they are a very rare breed these days.

    By Blogger Praguetwin, at 8:16 PM  

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