The Dollar Trap Is Sprung
As 2011 has come to a close, millions of Americans are resting with a false sense of security. Little do they know that a trap has already been sprung and steel teeth are about to slam shut.
If you pay attention to the big media outlets, you might think the economy is finally improving. Christmas sales blew away past records. The unemployment rate has fallen to 8.6 percent. Fewer homes were repossessed this year. And the dollar is strengthening.
Yet all is not as it seems. Be careful of headlines: They can be deceiving.
It was a record year for retailers this Christmas. People beat the previous record by 3 percent—no small feat. But what were they buying, and where did the money come from?
People bought mostly the deeply discounted door-buster items and little else, reports cbs. So it wasn’t actually a very good season for many retailers. The announcement from Sears that it was closing 120 stores confirms it.
Some retailers, however, are prospering. The Telegraph reports it was a record Christmas for gun sales. One and a half million background checks were requested in December—500,000 in the last six days before Christmas alone. It was the highest number ever for a single month. The previous record was November.
And where did all that money come from? You guessed it: more debt. While Christmas sales rose by 3 percent, credit card spending rose by 7 percent in November and looks to be up at least 6 percent in December too.
Was all the extra spending a reflection of a recovering job market? The official unemployment rate fell from 9 percent to 8.6 percent in November. But it wasn’t because of the 120,000 jobs created: That is barely enough to keep up with population growth. The only reason the unemployment rate fell is because discouraged workers left the job market. America’s labor market—the total number of people working—is actually shrinking.
America’s housing market is still shrinking too, despite what you might have read. This month, the National Association of Realtors said it had overestimated home sales by more than 7 percent since the housing bubble burst in 2007. Last year, it accidentally overstated house sales by a whopping 14.6 percent. Analysts now say 2011 was the worst year for house sales since records were first collected in 1963.
On Tuesday, the Case-Shiller house price index showed a housing market virtual free fall. House prices fell in every single major market except Washington, d.c. On average, house prices fell 3.4 percent from a year ago. Some major markets, such as Atlanta, are down more than 11 percent. And with the massive backlog of foreclosures in the pipeline, house prices are almost sure to keep falling in 2012.
Yet perhaps the most deceitful and potentially dangerous news is the fact that the U.S. dollar is rising in value.
Normally, the value of a nation’s currency is a good measure of the health of an economy. Over the past six months, the dollar has risen 8 percent on the dollar index. It is up more than 13 percent since the economic crisis in 2008.
Don’t be confused. This rise is not due to the soundness of the U.S. economy.
First: The dollar is rising because Europe is a mess. The U.S. dollar market is the only market large enough to absorb all the “safe haven” money trying to flee Europe. Second: Many people are trying to pay down debt. This causes the money supply to shrink, which also boosts the dollar’s purchasing power.
Note: Both of these conditions are temporary. Europe is already laying the groundwork for a pared-down, dynamic union, with Germany at the helm. And as far as the shrinking money supply goes, the U.S. government and Federal Reserve have virtually promised to do everything they can (including dropping money from helicopters) to prevent deflation.
There is a third reason the dollar is rising. When people get scared, they sell investments. Like gold, the dollar has long been seen as a safe haven.
Yet this strategy may end up being a gigantic trap. The dollar is no longer the safe haven it once was (or at least it may not be for long).
Consider this article written in the Atlantic (December 27). It is emblematic of today’s conventional wisdom. The author asks: If America’s debt is so dangerous, how come so many people are purchasing U.S. treasuries? He notes that interest rates are at all-time lows. That people want to lend America money—even offering it to us at zero percent. And that we should take advantage and borrow as much as we can to stimulate the economy.
President Obama and most of the Republican Congress seem to agree. The president is now asking for the debt ceiling to be raised by another $1.2 trillion. That will take the total federal debt to around $16.4 trillion—more than 100 percent of gross domestic product. That is a lot higher than Spain’s debt-to-gdp ratio and about the same as Portugal’s, two countries in serious financial trouble. When you include household debt and corporate debt, America’s debt-to-gdp ratio is over 250 percent—which is essentially the same as Greece’s. America is only marginally better than Italy.
When you account for unfunded liabilities, America’s debt shoots to over 500 percent of gdp—which is way beyond Italy, Ireland, Portugal or Spain’s unfunded liabilities. Of the piigs group, only Greece is worse off than America. Hardly comforting.
Yet here is why the dollar is a deadly trap.
Italy, Greece, Spain, Portugal and Ireland never had any trouble borrowing money—until they did. Investors happily lent these countries money blindly, assuming they would get it back. Then abruptly—almost overnight—investor sentiment changed. Confidence was broken. Then these countries couldn’t borrow a dime at affordable rates, and their economies plummeted into economic crisis.
But the euro is still far stronger than the dollar, you might argue. True: But that is because of Germany. Germany has a strong economy and lower debts. Germany is also not allowing these countries to print money to inflate away their debts (at least so far).
America is in a different situation. It is prospering mostly due to the fact that it isn’t Europe. In America, the Federal Reserve has no such qualms about printing money. In fact, the Federal Reserve is already creating money to finance the federal deficit. Since the crisis began at the end of 2008, it has created $1.7 trillion out of thin air to give to the government to spend. These kinds of policies may help cover debts, but they also erode currency confidence.
One day, America will wake up to find out that it has suddenly become Greece. Only there is no Germany to bail it out. America’s lenders, the ones the Atlantic says are practically throwing money at us today, will disappear. Interest rates will soar. Federal Reserve money printing presses will go into overdrive to pay debts. The dollar will crash in value—and anyone holding dollars as a “safe haven” will find they have nothing but worthless bank accounts.
That’s the dollar trap. America’s economy is broken. Politicians cannot get control of spending. Debt is soaring. The value of the dollar is being artificially held up, mostly by virtue of it not being the euro.
But one day soon, Europe will take real action to get its act together. When it does—watch out! The dollar trap is already set. The steel teeth are slamming shut.