Too late now...
If you're out there thinking you might hedge yourself against a fall in the dollar, I am here to say it is too late. The story has hit the front page of the Wall Street Journal, so it seems to me the cat is out of the bag. Any move made now would only be following a herd of lemmings running into the sea.
Brad DeLong points to this article pointing out the debagging of the cat.
From the article:
A natural recovery would have brought with it job and income growth which would have spurned demand. Part of the problem, I'm sure, is that our purchases, and the jobs created weren't in the U.S., The jobs being created are outsourced jobs in Asia and the products we're buying are from China. This only serves to exacerbate the problems of trade and budget deficits.
This certainly explains the jobs/retail numbers. My understanding is that most of the job creation is in the retail/service sector. Wealthy individuals, and middle class people in lots of debt continue to buy ( high-end retail is up ) and workers dislocated from the manufacturing sector ( or their wives, I don't see many 45 yo men working at the mall). Who apparently spend all their money paying down debt ( note the flurry of good numbers from banks yesterday) or paying for health insurance (a sector also experiencing record growth). So, the people doing the outsourcing are doing OK, the outsourced or about to be outsourced are in trouble.
Anyway, here's the issue. If indeed there is a housing bubble as the article suggests, then some untold number of families (millions?) are going to find themselves in houses they can't sell (overvalued). It has been suggested previously that politicians may choose to deflate the dollar (it may not have a choice). The danger with currency devaluation is inflation. Normally, inflation would help all those people upside down in their houses. The assumption is their income will adjust with the rate of inflation. I can't speak for anyone else, but even in this low inflationary period, my wages do not keep up with inflation, I don't think that wages will change just because prices go up. Instead, I think this will lead to even more outsourcing, more demand for low cost items from China, etc. So, while the common sense notion may be that deflating the dollar will prevent massive defaults, it seems more likely that it will precipitate forclosures.
Of course, rising interest rates to prevent a decline in the dollar might very well cause the same scenario. In this instance, wages remain steady while disposable income gets dumped in to interest paid on variable rate mortgage. This will also contract consumer spending which may cause higher unemployment. It certainly won't do anything to curb outsourcing.
My major disapointment in the reporting of this phenomenon is the focus on the markets. I'd like to hear some advice on how to insulate myself from the possible "hard-landing". I'm ready to commit to a course of action, but what action is there to take? Economic theory tells us that the price takes into account all information available. With that in mind, it is too late to try to hedge against a decline in the dollar and get any real benefit from the move.
..anyway, to summarize: hard landing ahead, please return your seatbacks and traytables to the upright position, grab a beer and some cable TV, sit back and enjoy the show.
Brad DeLong points to this article pointing out the debagging of the cat.
From the article:
"...massive Fed easing (6.5% to 1%), massive and reckless fiscal easing (from 2.5% of GDP surplus to 4% deficit) and sharp dollar fall (15% trade weighted so far and still going) gave us the best recovery that money can buy; but it also gave us the most drugged and artificial recovery that money can but leaving the US imbalalances worse than before: twin deficit, short-term financing of these deficits with increasing rollover risk, sloshing liquidity, housing and risky assets bubbles, low savings and high leverage in households and among highly-leveraged agents, carry-trades and chasing for yield."Claiming the recovery was/is artificial is a good point, one that hit home for those of us in the rustbelt where the recovery has been anything but. Unemployment in Michigan is still hovering around 7%. One might also point to the automotive industry where massive incentive offers should have cleared the lots of excess inventory. Instead, the lots sit full and evidence is mounting that incentives are no longer working.
A natural recovery would have brought with it job and income growth which would have spurned demand. Part of the problem, I'm sure, is that our purchases, and the jobs created weren't in the U.S., The jobs being created are outsourced jobs in Asia and the products we're buying are from China. This only serves to exacerbate the problems of trade and budget deficits.
This certainly explains the jobs/retail numbers. My understanding is that most of the job creation is in the retail/service sector. Wealthy individuals, and middle class people in lots of debt continue to buy ( high-end retail is up ) and workers dislocated from the manufacturing sector ( or their wives, I don't see many 45 yo men working at the mall). Who apparently spend all their money paying down debt ( note the flurry of good numbers from banks yesterday) or paying for health insurance (a sector also experiencing record growth). So, the people doing the outsourcing are doing OK, the outsourced or about to be outsourced are in trouble.
Anyway, here's the issue. If indeed there is a housing bubble as the article suggests, then some untold number of families (millions?) are going to find themselves in houses they can't sell (overvalued). It has been suggested previously that politicians may choose to deflate the dollar (it may not have a choice). The danger with currency devaluation is inflation. Normally, inflation would help all those people upside down in their houses. The assumption is their income will adjust with the rate of inflation. I can't speak for anyone else, but even in this low inflationary period, my wages do not keep up with inflation, I don't think that wages will change just because prices go up. Instead, I think this will lead to even more outsourcing, more demand for low cost items from China, etc. So, while the common sense notion may be that deflating the dollar will prevent massive defaults, it seems more likely that it will precipitate forclosures.
Of course, rising interest rates to prevent a decline in the dollar might very well cause the same scenario. In this instance, wages remain steady while disposable income gets dumped in to interest paid on variable rate mortgage. This will also contract consumer spending which may cause higher unemployment. It certainly won't do anything to curb outsourcing.
My major disapointment in the reporting of this phenomenon is the focus on the markets. I'd like to hear some advice on how to insulate myself from the possible "hard-landing". I'm ready to commit to a course of action, but what action is there to take? Economic theory tells us that the price takes into account all information available. With that in mind, it is too late to try to hedge against a decline in the dollar and get any real benefit from the move.
..anyway, to summarize: hard landing ahead, please return your seatbacks and traytables to the upright position, grab a beer and some cable TV, sit back and enjoy the show.
posted by Oberon at 3:29 AM
3 Comments:
"Economic theory tells us that the price takes into account all information available."
Sure, but over what timeline? If we look at this moment in time, or 1-2 quarters down the road, we still see the same situation - big "twin deficits" that continue to be propped-up by foreign investors that are too deeply committed to the plight of the dollar to bail themselves out at this point, and as such the prices shouldn't change much. I mean, heck, even a 50% run-up in energy prices and the slightly-lower raw material costs haven't hurt the markets in any significant fashion.
I guess the big question is: Had we known what we know now 4 years ago, what kind of investments could we have made to hedge against this? I really don't have a good answer to that, which means I really don't know what steps I'd take at this exact moment in time to hedge against further losses. Assuming that banks would be forced to honor loan promises, the smart theoretical thing to do is to take on as much debt as possible with the hopes that the dollar crashes and wipes out your debt, but I think you're the one who predicted that banks would call in their loans immediately after a currency devaluation, and I think you're right.
The point I'm trying to make here is that all the media pieces may cause a sudden run on the dollar which will precipitate a collapse and hard-landing over the next year, if not the next quarter. Lucky for all of us, Brad and Jennifer have taken up a bigger spot on the news. The "down-and-out" dollar did manage to become a SNL skit last week...though they missed the point a bit.
Anyway, as far as decisions I would have made 4 years ago...I haven't had a great deal of flexibility until now to make real "investment decisions". It's alawys been, pay down debts, save for house. It may have been worthwhile to use savings to buy some Euro's last summer, but I'm decently hedged right now given my options in terms of retirement savings.
Where I'm not hedged, my job and my house. A sudden downturn in domestic auto sales may mean no job and it will also likely deflate housing values in the short term. Which would make it difficult to move in search of a new job.
As far as loans getting called in, this is where the "small business" phalacy will come home to roost. Small business loans will be the first to be called in leaving thousands in bankruptcy.
So, the end result is a run on the dollar may cause a cascade of bankruptcies, high interest rates, forclosures, job loss, low market returns....I'm scared of the possible political ramifications..the boomers are going to be mad..
Is it OK to be mad when something you expect to happen happens anyway?
Ah, I see what you're saying - the sudden deluge of media attention on this issue (at least compared to the attention it was, or wasn't, getting a year or two ago) may very well trigger the events that are being predicted.
I think you proved my point about hedging against such a collapse - there really isn't one to be had, other than minimizing debt and expanding one's skillsets (both of which run contrary to popular trends).
Good observation about the banks calling-in small business loans. That's something I hadn't even considered. It seems to me than in many cases, small businesses might not be immediately affected by a devaluation, assuming of course they don't import significant amounts of material or use a lot of energy (both attributes, I feel, are primarily limited to larger businesses). But, yea, if the banks decide to go after the little guy first and call in the loans, I think most small businesses would be screwed since so many of the depend on credit. The ones that wouldn't immediately go under would just get crushed by a spike in interest rates. As I opined during the dicussion on the Library, borrowing to start a small business sounds like a bad idea (which simply means that I'll probably do exactly that at some point in the future).
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