Two years ago I said the American deficit would cause the dollar to tumble in value, it was trading at 91cents to the euro at the time. Now if you want a buy a euro you’d have to give $1.34 for it. That’s a fall of 43 cents in the value of the dollar in two years. I never expected it to tank so far. Last time this happened the markets ignored the dollar’s fall for two years then they panicked and the crash of 1987 happened.
The US has to import $1.8 billion everyday to make ends meet on its trading deficits and its current account deficit, which is currently running at $680 billion a year. But lending money to the US government has become a painful experience. Why lend money at 4% interest when the value of the dollar has lost forty percent. Imagine, when not long ago, the euro and the dollar were at par, one-to-one. If you cashed a million euros into dollars and you lent them to the American government in return for a million dollars’ worth of Treasury notes, your investment would still be worth one million dollars. But if you sold the notes and cashed the dollars back into euros, you would only get about Euro 748,000 at today’s rate, plus whatever bit of interest you received-a big loss on your investment.
Every month the US Treasury holds an auction to sell its various promissory notes to buyers; many are overseas banks. In October, for the first time ever, there were no bidders at the auction. That spooked people out. The Treasury auction failure didn’t make the evening news but it was reported on financial sites on the Internet. In November, the Treasury auctions returned to normal but the October failure is a foretaste of things to come. The American debt bubble is so astronomical it can never be cured. The plunging dollar will drive investors and lenders away. What politician will dare to reduce America’s spending, or take away America’s addiction to cheap credit? And who will tackle the pork barrel legislation or the billions that are paid to special interests, like the American farmers?
Stocks are vulnerable because foreign buyers have to guess how much the dollar will fall compared to how much they hope a stock may go up. If the foreign investors panic and they pull out of Wall Street that would be very serious. It is not really a matter of ‘if they pull out’ but ‘when will they pull out’? I am not a financial advisor but I have been warning my friends of the extreme dangers they face. Some of them have seen the light and they have sold stocks and gone to cash. A few haven’t, which distresses me enormously. I am sure I’ll wind up with having to look after them for the rest of their natural lives. I love them all very dearly but I wish they’d sell and cut me some slack. When this thing pancakes it will be horrendous, a wipeout like never before. Pensions invested in stocks will vaporize over night. Ten million lies will be heading for the door with their pants down, all at the same time.
© Stuart Wilde 2004 - www.stuartwilde.com