Friday, January 11, 2008

The dollar: crumble or crash?

The U.S. Dollar took a pounding against a lot of different currencies last year. One currency trading option is called USD, which is an index that allows you to trade the dollar against a mixture of foreign money, weighted strongly on the Euro, but also including the yen, the British pound, the Canadian dollar and the Swedish krona (go figure).

It's no secret that 2007 wasn't a good year for the dollar. Heck, even McDonald's lets people know this in their commercials. 2006 wasn't exactly the days of wine and roses either, though 2005 showed an increase. Here are the positions of the USD index at the beginning of each year.

Jan 2006: around 91
Jan 2007: around 84 (8% drop in value)
Jan 2008: around 76 (9.5% drop in value)

The steady cuts in interest rates, both here and in the U.K., make these two currencies look bad compared to other world money. It's like the Fed saying our economy needs training wheels. But the U.S. dollar is still being propped up by two separate unusual situations.

1. Asian central banks, most notably the Chinese and the Japanese, are still buying American debt.

2. Every barrel of oil, sold anywhere in the world, must be paid for in U.S. dollars.

With these two forces in play, it becomes unlikely the dollar will go into a crash, but other weaknesses could continue the current two year crumble. But what if one or both of these forces goes away? What then?

1. The odd behavior of the inscrutable Orientals. According to Kevin Phillips and others, the Asian philanthropy towards the American economy isn't done out of pure Christian charity, or even pure Shinto and Commie charity. Both Japan and China thrive because Americans spend like drunken sailors. If the economy becomes such a cold wind that we actually realize we can't afford all this shit we buy, the Chinese and the Japanese get hurt as well in a very big way.

2. Psst! Buddy! You want to buy some oil? You got... Euros? No problem. Another thing that could happen is that one of the many oil producing nations in this world that don't think much of Americans could start selling the commodity priced in Euros or yen or some other currency. The Iranians are the most likely ones to try, but the Russians are also sitting on a lot of oil reserves. Why wouldn't they?

Right now, the question actually goes the other way around. Oil sales are like a game of dollar tag. Whoever ends up having lots of dollars is "it". If your currency is the Euro, you spend your strong currency to buy our weak currency, then turn right around and buy the oil with the dollars, so the dollars end up in the hands the oil producers. They're "it". Nyaah nya nya!

If you are an American, crude oil went up 72.8% last year. If your currency is the Euro, it showed a 13.1% increase in comparison to the dollar. This is one of those percent of a percent problems folks were asking me to talk about. What we get is 1.728/1.131 = 1.528, which is to say that the increase for the Europeans was 52.8%, because of the "convert to greenbacks" bonus they get right now with the weak dollar. The Europeans aren't that interested in getting the dollar out of the equation. The Iranians would be very happy, because now they have dollars and the American government is fucking with their right to spend those dollars in the U.S. But they need two to play that game, and right now, they are having troubles finding a dance partner.

I'm more on the 'splainin' side that the predictin' side, but if I was predictin', I'd say the system is set up more for the dollar to continue to slide instead of having a sudden monstrous crash.

Whoa, that's lotsa 'splainin'. Glad I'm not working Fridays right now.

And since it's a Friday, let's have a Random 10.

Nagasaki Django Reinhardt
You Just Haven’t Earned It Yet Baby Kirsty MacColl
Shock The Monkey Peter Gabriel
Please Send Me Someone To Love Sade
Beat On The Brat The Ramones
Better Off Without A Wife Tom Waits
I Was Made To Love Her Stevie Wonder
When I Was Cruel No. 2 Elvis Costello
One Love/People Get Ready Bob Marley & The Wailers
What’s So Funny ‘Bout Peace, Love and Understanding? Elvis Costello & The Attractions

After starting off with a tune from the great jazz guitarist of early last century, it's pretty much all stuff from the rock era. One Tom Waits and two from the One True Living Elvis, no surprises there. Lots of good tunes to highlight, but I chose one from the late lamented Kirsty MacColl, You Just Haven't Earned It Yet Baby, which seemed apropos of this post.

Yay, Ecuador! Yay, Flags of many Lands™!

All I need in South America is Paraguay and the countries that were known as The Guianas when I was a sprout.

Now playing: Kirsty MacColl - You Just Haven't Earned It Yet Baby
via FoxyTunes


Karla said...

Did you see Giselle Bunnychen's denial of the rumor that she accepts only Euros?

I wonder if some 'Murcans made her do it!

Matty Boy said...

Actually, since Giselle is Brazilian, maybe somebody wised her up. Much better right now to be paid in Brazilian Reals.

Also, Giselle is dating Tom Brady, who is very close to just as rich and just as pretty as she is. How do couples like this make each other happy? Buying extravagant prezzies? They can already get any extravagant prezzie they want with their own gigantic piles of cash.

I like to think they spend hours engaged in mutually satisfying wild monkey sex, but that's just the romantic in me.

no_slappz said...

you wrote:

"If you are an American, crude oil went up 72.8% last year. If your currency is the Euro, it showed a 13.1% increase in comparison to the dollar."

Your preceding statement might include some factual elements, but it is misleading.

As an American, I have never purchased Crude Oil. However, I've bought gasoline. Gasoline, despite the fact that its pump price includes the impact of rising crude costs, as well as various federal, state and local taxes, did not rise 72.8% last year. The increase was much less.

Additionally, because Europeans buy their processed crude oil with vastly more taxes piled on the final purchase price compared with Americans, the change in their pump price is even more skewed by non-market forces than ours.

In any case, the Iranians can exchange their dollars for any currency they'd like as soon as the dollars arrive. Thus, they are not exposed to currency risk for long periods that might result in a loss of value.

Frankly, the Iranians should get as cozy as possible with China if dollar-risk is their big worry.

dguzman said...

Oh gees, Slappy's back.

But I digress.... I luvz me some Sade, but that song just rubs me the wrong way; she's so smooth and silky-jazzy that, at least to my ears, her attempt to sing the blues just rings false. But that's just me.

Distributorcap said...


i have a wheelbarrel to send you

Matty Boy said...

Thanks for the kind thoughts, D-cap, but it's probably easier for me to buy one here at a garage sale real soon, before I need it to carry my walking around money.

Anonymous said...

Oh no . . Did I see Slappy? Is that a new name for a blog or what? God I hope he starts it so we can go over and heckle him there.

no_slappz said...

zoey & me,

Yeah, I've got a blog.