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How Irish Tourists Saved The U.S. Economy

“There’s someone I want you to meet this weekend,” my girlfriend told me in June. Her relatives were coming in from Ireland for a family reunion in Chicago. “He’s travelling with his wife and her sisters. Maybe you guys could hang out and talk some football [soccer].” I met Connor that Friday night at the Water Tower Place in Chicago (from what I could understand, he wasn’t married, yet he did travel with a young lady and her sisters). While the conversation revolved mostly around the “beautiful game” and my plans for the “Great Escape” the next day to watch some of Euro 2008, he happened to mention that since he’d been in United States, he and the “Walsh girls,” as they came to be known by reunion participants, had shopped, shopped, and shopped some more. It seemed that every time I asked about Connor’s whereabouts, “he and the Walsh girls went shopping” was the response I got. On Sunday, the reunion shifted to Arlington Park Racetrack for thoroughbred racing. I saw the Irishman at the start of the day after he had just won a race, but didn’t see him later on. More shopping, perhaps? In the days that followed, my girlfriend joked to her sister that the Walsh girls single-handedly saved the U.S. economy. She also mentioned that she felt bad for Connor, as did I, as he was forced to endure the seemingly-endless spending sprees at the Chicagoland malls. However, this remorse was short-lived when her sister informed her that Connor bought just as much stuff as the Walsh girls did.

Robin Sparkles, “Let’s Go To The Mall”
YouTube Video Link

Anyway, I read a blog post by CNN’s Jack Cafferty earlier today that reminded me of our “economic rescue” by these visiting tourists from the Emerald Isle. Cafferty provides commentary and insight for CNN’s political program “The Situation Room.” He wrote:

The U.S. dollar just isn’t what it used to be. In fact, the dollar has been declining in value for 6 years now against other major currencies.

And, if you look around, it’s hard not to see the signs: hordes of vacationing Europeans are picking up bargains in the U.S., while Americans traveling overseas are hit hard with sticker shock. Canadians now flock here for shopping bargains, instead of the opposite. A Belgian company is attempting a hostile takeover of Anheuser-Busch, the largest brewer in the U.S. If the takeover goes through, it might be the first of many foreign takeovers of American companies.

While everything made in the U.S. is so much cheaper to foreigners, Americans are paying more for imported goods, while most are also grappling with rising food and energy costs. Since oil is bought and sold in dollars, the devalued dollar makes gasoline that much more expensive for Americans.

Some even suggest the continued decline of the dollar could one day lead to it being replaced by the Euro as the so-called “primary reserve” currency. There are stores right here in New York that now accept euros as payment.

Meanwhile, the message from Washington doesn’t seem to change much. President Bush has often talked about his support for a “strong dollar”, just last week saying “We’re strong-dollar people in this administration.” Really, Mr. President? You have presided over the most precipitous drop in the value of our currency in our nation’s history.

Source:

“Concern about sharp decline of dollar?”
Jack Cafferty
CNNPolitics.com, July 2, 2008

Gold, Greenbacks, And Government Intervention

I remember reading a rather significant article by MarketWatch’s Peter Brimelow last fall. As someone who follows precious metals religiously, I had already been aware of the claims made by groups such as the Gold Anti-Trust Action Committee, or GATA, that the price of gold is being manipulated. However, on October 18, 2007, Brimelow let “the cat out of the bag,” so to speak, for the readers of that particular Dow Jones website. Brimelow wrote:

Nevertheless, for the longer term, the gold bug faction lead by Bill Murphy’s LeMetropole Cafe Website is cockahoop. It has long argued that the metal’s price has been repressed by what it calls “The Gold Cartel” an alliance between the official sector (central banks, the U.S. Treasury) and chosen instruments (key investment banks and co-opted bullion dealers and others) to create a financial assets boom.

Reason for rejoicing: The discovery by James Turk of the Freemarket Gold & Money Report that, as Turk puts it: “the U.S. Treasury quietly made a subtle change to its weekly reports of the U.S. International Reserve Position, which includes the U.S. Gold Reserve. This change was first made May 14… It says the U.S. Gold Reserve is 261.499 million ounces and importantly, that the gold is now reported ‘INCLUDING GOLD DEPOSITS AND, IF APPROPRIATE, GOLD SWAPPED’ (emphasis added).

This description provides clear evidence that the U.S. Gold Reserve is in play. Gold has been removed from U.S. Treasury vaults and placed on deposit, presumably in the couple of bullion banks the Treasury has selected to assist with its gold price-capping efforts. Gold placed on deposit gets loaned out by these bullion banks, and then sold into the spot market to try capping the gold price.”

Intervention, pure and simple as that. No, manipulation. Which, by the way, isn’t as conspiratorial as it sounds. Brimelow pointed out:

It may seem like an arcane point. But I remember when the idea that central banks were systematically selling gold at all was dismissed as crankishness. Yet it’s now universally acknowledged.

And why would Uncle Sam want to cap the gold price? The MarketWatch columnist wrote:

Turk’s conclusion: “This new evidence provided in the U.S. Treasury report as well as the rising gold price itself suggest to me that we are now witnessing the last scramble by the gold cartel to cap the gold price. It is a vain attempt by them, acting under the instructions of the U.S. Treasury, to make the world think the dollar is worthy of being the world’s reserve currency when in fact everyone knows that it is not. In short, the wheel has fallen off the truck. The dollar is heading for a train wreck. Use whatever metaphor you want, but the message is clear - the dollar is in serious trouble…

Fast forward to the present day. According to MarketWatch’s Laura Mandaro tonight, currency traders now suspect that American and European finance officials engaged in some “arm-twisting” at last month’s G7 meeting in an attempt to provide support to the U.S. dollar. Mandaro wrote:

Gains of 2% to 5% in the U.S. dollar from a key low point last month, combined with recent press statements from anonymous senior finance officials, have fostered suspicions that the group of industrialized nations backed up their public statements with some backdoor negotiations.

Madaro referred to an analysis of euro and dollar trades by Greg Anderson, head of foreign exchange strategy at ABN AMRO, which suggested “the U.S. and Europe may have pressured central banks from the BRIC countries– Brazil, Russia, India and China– and sovereign-wealth funds to temporarily stop converting 20% to 40% of their newly accumulated U.S. dollar-holdings to the euro.”

This pressure, along with signs that the European economy is struggling, could help explain why the greenback has stabilized. Mandaro suggested that analysts now suspect finance officials, especially from the United States, changed tactics around the time of the G7 meetings. The MarketWatch reporter wrote:

The Treasury Department, while officially supporting a strong dollar policy, had been content to see the dollar slide since it helps U.S. exports, analysts said. That laissez-faire approach seems to have changed in the last two months, as the U.S. government has seen the weak dollar help push up oil, agricultural and other commodity prices to record highs.

Disturbingly, some are making claims of direct government intervention in the market. However, Mandaro noted:

But many currency analysts say such a direct intervention is unlikely.

For one, the United States’ foreign exchange reserves are relatively small at about $75 billion, making dollar buy-backs little more than symbolic.

And the G7 statement, at least at the time, didn’t suggest a direct intervention was round the corner. The last time the U.S. dollar experienced a coordinated currency intervention, when European monetary authorities in September 2000 convinced other G7 members to support the then-depressed euro, the policy statement specifically mentioned the euro. This most recent time, the statement just mentioned exchange rates in general.

The United States doesn’t usually intervene: From August 1995 through December 2006, the United States only intervened twice in the foreign exchange markets.

“Last time.” “Doesn’t usually.” And what’s to say government intervention isn’t occurring this time around?

So much for the notion of “free markets.”

Sources:

“Gold bugs: ‘We told you so…’”
Peter Brimelow
MarketWatch, October 18, 2007

“Dollar rally, leaks put fresh focus on G7 meetings”
Laura Mandaro
MarketWatch, May 15, 2008

The Dollar: No Longer The Universal Tourist Currency?

Last week I heard that some stores in New York City were starting to accept payment in euros, and in some cases, the British pound. While some news outlets insinuated this was yet more proof of the dollar’s decline, I saw it more as a ploy by the stores to draw foreign shoppers by helping them avoid the hassle of converting their currency. On the website Lost Weekend: Brit Blokes On Tour, editor Rory Boland wrote the following post on February 7:

Now, stores in the Big Apple have started accepting the Euro, and in some cases the British pound, in an attempt to tempt in European bargain hunters.

The dollar, once the world’s currency, currently seems more like Monopoly money, and European shoppers have been rampaging through the city’s stores, malls and boutiques cashing in on the greenbacks tanking value.

Still, who would have thought New Yorkers would again be accepting coins and notes with the Queen beaming back at them. What would George Washington say?

Oi! Not funny!

Anyway, it’s what I read earlier this evening that really grabbed my attention and provided further evidence of the dollar’s fall from grace. Michelle Higgins of the New York Times News Service wrote “As the currency slides, U.S. dollar is no longer a ticket to anywhere,” which appeared yesterday on the Kansas City Star website. Higgins said:

The U.S. dollar used to be the universal tourist currency, accepted almost anywhere, from the streets of Hanoi, Vietnam, to the plains of Africa. But the continued slide of the dollar against other currencies has led the greenback to be shunned in unexpected places, creating new problems for American travelers and pushing prices higher.

The Taj Mahal has stopped accepting dollars for the entrance fee under a new edict from the Indian Ministry of Culture. As a result, for entrance to the Taj Mahal, Americans must now pay 750 rupees, about $19, at the rate of 39.49 rupees to the dollar, compared with $15 previously.

Some tour operators say they have encountered newfound resistance to dollars in parts of Vietnam and Peru, especially in villages that are off the beaten path.

“It used to be a $100 bill was universal everywhere, from Moscow to Mozambique,” said Peter Rudy, the North America director for KE Adventure Travel, a Denver-based outfit that books adventure trips throughout the world. “It’s not now.”

So much for going overseas in the near future. That Massachusetts Getaway Guide I received this weekend is looking pretty good right now. Anyone ever been to Rockport?

Too Much Egg Nog For The Dollar Bulls?

Earlier today, the U.S. dollar advanced the most against the euro since June 2004 after it was revealed U.S. consumer prices increased 0.8% last month after a 0.3% gain in October, and producer prices rose the fastest in 34 years in November. The rise in prices prompted traders to pare expectations for interest rate reductions, sending the greenback higher. The U.S. currency rose 1.5% versus the euro over the past five days, which was the biggest weekly increase since August. The dollar was also helped this week by a coordinated plan led by the Federal Reserve to tackle the credit crunch, and the third interest rate cut this year with the goal of avoiding a U.S. recession. The ongoing rally this week meant the dollar pared some of its losses against the euro this year, down 8.5% against the European currency to date.

An increasing number of analysts are painting a bullish picture for the U.S. dollar. Michael Malpede, a senior currency analyst in Chicago at MF Global Ltd., the world’s largest broker of exchange-traded futures and options contacts, told Bloomberg today:

The fundamental picture started to move in the dollar’s favor. Inflation is picking up, making it difficult for the Fed to aggressively cut interest rates.

Malpede predicts the U.S. currency will strengthen to $1.43 per euro by the end of the month. Against the euro, the dollar rose 1.5% to $1.4415 at 2:19 p.m. in New York, from $1.4633 yesterday, according to Bloomberg.

Toshi Honda, a London-based currency strategist at Mizuho Corporate Bank Ltd., said:

The move approaching $1.50 was too rapid, irrational. It was driven by fear of a U.S. economic meltdown, but I don’t think the fear is going to be materialized. The overall sentiment is positive for the dollar.

Honda thinks that the dollar will end the year below $1.40 against the euro. Sentiment does seem to favor a stronger greenback. According to the median forecast of 44 economists in a recent Bloomberg survey, the American currency will be at $1.45 per euro by the end of March and $1.40 by the end of next year.

There are even some who expect the dollar to put on a strong performance should the feared recession materialize. According to participants at this week’s Reuters Investment Outlook 2008 Summit in New York, a U.S. recession, coupled with evidence of global stress, could lead to flight-to-quality flows into the dollar. Robert Kowit, an international bond fund manager with Federated Investors, told Reuters:

If the U.S. goes into recession and it looks like it’s going to have a knock-on in other major economies, the dollar may actually outperform in a recessionary environment.

PIMCO’s Bill Gross added, “I think the dollar has had its run to the downside against the euro and the pound.”

What a change from a few weeks ago, when the actions of rappers and supermodels seemed to indicate the dollar was toast. Yet, some still believe the greenback is on a road to nowhere. Enter Paul Rodriguez, Senior Technical Analyst from the Economic Research Team over at London-based Lloyds TSB (formed in 1995 by the merger of Lloyds Bank and the Trustee Savings Bank). In a December 10 report, Rodriguez said:

As the year draws to a close, the interesting feature for the US dollar remains the short term strength set against potential for longer term weakness in 2008. This broad brush view of the dollar’s outlook is the inverse of the general market’s expectations which satisfies the contrary element of my strategy. It has been clear for some weeks now that the broad US dollar sell off was no longer the one way street it was claimed to be and as prospects for interest rate cuts have been fully absorbed by the market, the rebound should continue.

Yet, Rodriguez warns the dollar’s downward trend remains intact:

However, this does not mean the trend next year will be dollar positive and as sterling recovers from its oversold status, a move back towards 2.11 should see a broader appetite to sell the US currency. Whilst the yen and swiss franc lose ground against the dollar on the back of a rebound in equities, it should be noted that the dollar has fallen a long way and any interim recovery is fully consistent with a continued bear phase…

The dollar index has rebounded and whilst the broader market is broadly dollar bullish, I continue to view the recovery in the context of a long term downward trend.

In a Forbes interview yesterday, legendary investor Jim Rogers warned about the type of dollar rally we saw today:

I’m terribly pessimistic about the state of the U.S. dollar. But there are so many pessimists out there right now that we’re bound to have a rally. I doubt you can find anybody except (U.S. Treasury Secretary Hank) Paulson who is bullish on the U.S. dollars. If that rally comes, I would use that rally to sell the rest of my dollars. I’ve never seen so much pessimism in my life. So I’m a dollar bear looking for a big rally. So I can sell.

And Rogers’ latest prognosis for the greenback?

The U.S. dollar is not an asset I want to hold over the next 10, 15, 20 years. We have an idiot running the central bank right now who knows nothing about currency, history or the markets.

World’s Highest Paid Advisor: ‘Financial Tsunami Is Upon Us’

Have you ever heard of Harry Schultz? I sure have, and to this day I am still in absolute awe of the money this man earns. Mr. Schultz, publisher of the International Harry Schultz Letter, is the highest paid investment consultant in the world at $3,500 an hour (or $4,900 an hour if you require his services during the weekend). I talked about him in my November 21 post where I discussed gold as a hedge and investment. Back then, Schultz said that gold will advance past the thousand dollar mark in 2008. Earlier today in his MarketWatch commentary, Peter Brimelow said that Schultz’s latest newsletter issue is “absolutely apocalyptical.” Schultz warned, “A financial tsunami is upon us,” which he attributes to lax credit and complications from the derivatives craze. MarketWatch’s Brimelow says:

Among other interesting ideas raised by Schultz in his intense, somewhat terrifying introduction: recession, possibly depression; bank failures; exchange controls; housing prices down by 50%; credit card company failures; money market fund dangers; tripling of U.S. jobless numbers; federal bail-outs for Fannie Mae.

 Bank run from “It’s A Wonderful Life”

Sound terrifying? According to Brimelow, Schultz’s advice for protecting one’s self from the coming financial storm and vulnerable U.S. banking system included, most urgently, closing out time deposits and buying non-U.S. government bonds. Regarding the future of the U.S. dollar, Schultz warned:

…the second biggest danger is owning U.S. dollars in any form, (it) has crashed and going much lower … use dollar rallies to exit dollars or sell short … This is not a time to seek profits, but to protect what U have … Portfolio diversification is essential in troubled times.

Brimelow noted Schultz’s favored currencies are, “In order of preference: Swiss Franc, Australian dollar, Euro, and Canadian dollar.”

On the topic of gold, Schultz recommended that:

Exposure to gold shares and bullion should be a minimum of 35-45% of your total portfolio, with at least 10% in physical gold bullion and coins, and/or very rare coins…

The public is still not in the gold market. They will be in 2008 as the derivatives and credit crises bring down more financial institutions (amid recession) and eyes will be opened, via pain. While Rome burns, gold will smash through its old unadjusted-for-inflation $850 high on the way to $1,600, & who knows how far beyond …

Wow. Apocalyptical indeed. By the way, Brimelow noted that Harry Schultz is up 21.42% over the past year according to the Hulbert Financial Digest, versus 7.51% for the dividend-reinvested Dow Jones Wilshire 5000. Looking back over five years, Schultz is up 34.38% annualized versus 12.85% for the Dow Jones Wilshire 5000.

U.S. Budget Deficit Could Suffer ‘Noticeable Deterioration’

Today, Congressional Budget Office Director Peter Orszag told the House Budget Committee that subprime mortgage woes and other factors have combined to create an “elevated risk of a recession,” according to MarketWatch. However, Orszag emphasized that the most likely scenario was “low economic growth,” pointing to the general consensus of analysts.

His testimony was notable in that he pointed out that a recession or extended stretch of sluggish growth could cause a “noticeable deterioration” in the U.S. budget deficit. A budget deficit occurs when the U.S. government spends more money than it takes in. Orszag pointed out that the U.S. deficit has increased by around 1% to 3% of gross domestic product during recessions since 1968, or $140 billion to $420 billion in today’s economy. For fiscal year 2007 (which ended September 30), the deficit stood at $162.8 billion, according to U.S. Treasury data.

Source: White House

On December 3, Bloomberg said a growing number of strategists are saying the stage is being set for a U.S. dollar rally in 2008. They have been pinning their hopes on the simultaneous narrowing of the U.S. budget and trade deficits for the first time since 1995. Stephen Jen, the London-based head of currency research at Morgan Stanley, told Bloomberg, “I am confident that the dollar will have a significant rally next year, especially against the euro and the pound… The deficits are shrinking fast.”

For how much longer?

Russia’s Gazprom May Say No To Dollars

When I see what’s happened to the U.S. dollar, I think of Rodney Dangerfield and him always joking “I don’t get no respect.” And according to Bloomberg this afternoon, the greenback took another one on the chin as Gazprom, the world’s largest natural gas exporter, announced it may start selling its crude and gas production in rubles rather than dollars and euros.

Alexander Medvedev, Gazprom’s deputy chief executive officer, told reporters in New York today that, “We are seriously thinking about selling our resources in rubles.” The gas giant’s chief financial officer, Andrei Kruglov, told the same members of the press that the switch would happen “sooner, rather than later.”

According to New York Times reference material on Gazprom:

What former General Motors president Charles E. Wilson said of his company – “what was good for our country was good for General Motors and vice versa” - could well apply to Russia’s Gazprom, the nation’s largest company. The line between state-owned Gazprom and the Russian state is often blurry. The monopoly’s primary activity is selling natural gas in Europe at market rates to subsidize energy prices domestically. Several board members wear two hats and also work in government; for example, Dmitri A. Medvedev, a first deputy prime minister, is chairman of Gazprom. Still, the company controls more hydrocarbon reserves than the country of Iraq. So when it opened to foreign investors earlier this year, the capitalization spiked over $200 billion. Gazprom produced 545 billion cubic meters of natural gas in 2004.

Bloomberg noted that the dollar has fallen 11% against the euro so far this year, which has reduced the value of exports by oil-rich nations and contributed to a 49% increase in crude oil prices. This announcement comes on the heels of the secretary general of the Gulf Cooperation Council saying last week that six Gulf Arab states will discuss a proposal next month to revalue their currencies against the U.S. dollar.

Gold: Barbarous Relic Or Investment Superstar? Part 2

In part one of a three-part series on gold, I noted that the price of the metal has risen significantly in the past year, despite all the arguments leveled against gold by its detractors. Meanwhile, the metal looks to be headed for its seventh straight annual gain. Gold bulls point to the following as having a significant impact on its price in 2007:

U.S. Dollar Weakness- The U.S. currency is down four out of the last five years, and has dropped almost 11% so far this year based on the Federal Reserve’s U.S. Trade-Weighted Major Currency Index. This autumn it’s been at its weakest against the euro since the European currency started trading in 1999, the lowest against the Canadian dollar since it was floated in 1950, and at a 26-year low versus the British pound. The end of the U.S. housing boom, the subprime mortgage crisis, and a credit crunch, in conjunction with forecasts for a slowing U.S. economy, have weighed down the U.S. currency. The increased threats from dollar diversification by countries holding large numbers of greenbacks in their foreign currency reserves, sovereign wealth funds looking to exchange their dollars for other assets, and more nations looking to decouple their currencies from the U.S. dollar have only made matters worse for the world’s reserve currency. Assuming the existence of a strategic inverse relationship between gold and the greenback, investors have poured money into the precious metal and related investment vehicles. Validating such actions have been forecasts by legendary investors such as Warren Buffett, Jim Rogers, and George Soros, who all predict that the U.S. dollar is going lower. Back on October 25, Buffett was quoted by CNBC as saying, “We are still negative on the dollar. We bought stocks in companies that are earning their money in other currencies.” On November 15, Rogers told Bloomberg that, “If you have dollars, I urge you to get out. That’s not a currency to own.” Finally, on June 2, AME Info reported that Soros said, “A slowdown in the United States will be transmitted to the rest of the world via a weaker dollar.”

Geopolitical Risk- The continuing stalemate between the West and Iran over its nuclear program, political instability in Pakistan, and Turkey’s spat with Iraq are just some of the more recent geopolitical risks that have driven the price of gold higher. The ever-present danger from Al-Qaeda should not be forgotten either. Consider the following warning from Michael Scheuer, a 22-year veteran of the Central Intelligence Agency (CIA), where for 6 years he was in charge of the search for Al-Qaeda leader Osama bin Laden. When asked by Radio Free Europe/Radio Liberty earlier this year if he expected more attacks on the United States or in the West on the scale of September 11, 2001, Scheuer’s response was:

Oh, I think greater than 9/11. I don’t think it will happen in Europe, but I do think it will happen in the United States. Bin Laden has been very clear that each of Al-Qaeda’s attacks on America will be greater than the last, and I think the only reason we haven’t seen an attack so far is that he doesn’t have that attack prepared. But when he does, he will use it. And try to get us out of the way, which of course is his main goal.

Stephen Walker, director of global mining research at RBC Capital Markets, said last week that increasing geopolitical risk, combined with combined with rising economic uncertainty, “should continue to provide incentives for investors to increase their exposure to gold as a safe haven.”

Supply and Demand- Last Friday, the Telegraph (UK) announced:

The era of ‘peak gold’ has arrived. Try as they might, miners cannot find enough ore at viable costs to replace their fast-depleting reserves, even if they dig miles into the centre of the earth.

The global mine supply of gold peaked in 2002, and has fallen every year since. Last year alone, the mine supply of gold fell 15%. Also in 2006, South Africa, the world’s single-largest gold producer, produced its lowest amount of gold since 1922 with overall output down 72% since its 1970 peak. It should be noted that no major new mine production is expected in the near-term either.

On the demand side, RBC Capital Markets noted last Wednesday that demand is rising as consumption increases in China, India, and the Middle East. On Thursday, a study by precious metals consultant GFMS Ltd. showed that global gold demand in the third quarter rose 19% year-on-year on the back of robust inflows into bullion investment funds and improved jewelry consumption. The report revealed that the increase in investment demand replaced jewelry buying as the major source of growth for the third quarter. Demand grew sharply in India, China, Turkey, and the Middle East, while it slowed in the United States.

Outside of U.S. dollar weakness, geopolitical risk, and supply/demand factors, gold bulls say that some of the drawbacks which Bloomberg’s Michael Sesit spelled out in part one are actually advantages to owning the precious metal. Critics of gold like to point out that it “doesn’t earn a return.” Michael J. Kosares, President and Founder of Centennial Precious Metals, Inc., argued in his book The ABCs of Gold Investing, that:

Those who criticize gold because it fails to offer a return do not really understand gold’s position as the fixed North Star of asset value around which all other assets rotate. Gold is a stand-alone asset. It relies on no individual or institution for value. Gold investors prefer it this way. In the ultimate sense, this is what money is and what money should be.

Another criticism directed at gold, said Sesit, is “the world’s biggest holders of gold, major central banks, aren’t overly eager to keep owning it.” If so, gold bulls ask why central banks hesitate to unload the metal. In 2006, net central bank sales amounted to just 319 tons, less than half of the 659 tons recorded in the previous year.

Love it or hate it, bulls and bears, gold is here to stay. In the final part of this series, I will talk about where this precious metal may go from here.

(Part 3 will be posted on Wednesday)

Doubting The Dollar

It’s being reported today that the central bank governor of the United Arab Emirates, Sultan Bin Nasser al-Suwaidi, said that the continuing weakness of the U.S. dollar could lead to a review of the dirham’s peg to the dollar. The U.S. currency has fallen 10% against the euro this year, making imports for Gulf Arab states more expensive and helping push inflation in the U.A.E. to the second-highest level in the region. Kathy Lien, currency strategist at Forex Capital Markets, told MarketWatch:

The dollar stands to suffer from reserve diversification. The central bank governor of the U.A.E said today that they may drop their dollar peg in favor of a currency basket including the euro to contain inflation… Even though the reserves held by the U.A.E. are relatively small, if the move becomes official, it would be symbolically important because it suggests that other Gulf nations could follow suit.

Other analysts are more certain about the intentions of the U.A.E. Caroline Grad, an economist with Deutsche Bank AG in London, told Bloomberg today:

Today’s comments reinforce our view the dirham is the currency most likely to move away from its dollar peg following Kuwait’s move earlier this year. Although the U.A.E. has said it doesn’t intend to unilaterally abandon the dollar peg, we don’t rule out a move without the rest of the Gulf Cooperation Council.

In May, Kuwait abandoned the dinar’s peg to the U.S. dollar in favor of a basket of international currencies. Today’s statement by the U.A.E. official fuels speculation that the Gulf Cooperation Council states, which include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, may follow Kuwait and drop the peg between their currencies and the greenback.

“I wouldn’t bet against the U.S. as the world’s reserve currency,” former U.S. Treasury Secretary John Snow, now chairman of Cerberus Capital Management in New York, told Bloomberg yesterday. “The dollar markets are so deep and so liquid and the American economy is so fundamentally advanced,” he adds.

Yet, even Bloomberg recognized today that:

Concern is growing that the dollar’s weakness may augur the end of the U.S. currency’s 62-year reign as the world’s main international currency for trade, financial transactions and central-bank reserves.

South Korea’s central bank urged shipbuilders this week to issue invoices in won, the South Korean currency, and increase hedging policies against the weakened dollar. Last weekend, Qatar’s prime minister, Sheikh Hamad bin Jasim bin Jaber al-Thani, complained that the declining value of the U.S. currency is significantly curtailing the country’s oil and gas income, leaving less to invest abroad. The central bank in Iraq last month said it, too, wants to diversify its reserves away from mostly U.S. dollars (no typo here- that’s Iraq, which the U.S. has occupied since 2003). It was even reported by the Telegraph (UK) back on September 21 that the United States’ closest ally in the region, Saudi Arabia, refused to cut interest rates in conjunction with the Federal Reserve for the first time, “signaling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.”

Despite the bleak outlook, the dollar rose against most of its major foreign-exchange counterparts Thursday.

Sunday Edition: November 11, 2007

The United States Of Debt
On November 6, the Denver Post talked about U.S. Comptroller General David M. Walker as he participates in the “Fiscal Wakeup Tour.” In an earlier post I spoke of tour, which is sponsored by the Concord Coalition and attempts to explain in plain terms why budget analysts of diverse perspectives are increasingly alarmed by the nation’s long-term fiscal outlook. Walker, who is the chief auditor of all federal programs and activities, is a political independent who is pleading with American voters to elect only presidential candidates who make budget reform a top priority. Why is he so concerned? According to the Post:

The federal budget is crumbling, he says. The nation continues to borrow at an alarming rate and to saddle today’s toddlers with exorbitant debt they may not ever be able to repay. The country can’t afford the Medicare and Social Security benefits it has promised. And politicians seemingly refuse to level with Americans about how much financial trouble the country faces if it sticks with the status quo much longer.

According to the nation’s auditor:

Let me tell it to you straight. The. Math. Politicians. Sell. Does. Not. Work. And if we don’t start dealing with the truth soon, this country could face dire consequences.

He adds:

Do not vote for anyone who is unwilling to make fiscal responsibility and intergenerational equity one of their top three priorities.

In response to those who insist that the United States can grow its economy enough to head off its impending trillion-dollar debt, Walker says his calculations show our annual economic growth must be at least 10% for the next 75 consecutive years for this to work (by the way, in the nineties the economy grew at an annual average of only 3.2%). Walker concludes, “We can’t grow our way out of this. Some very tough decisions must be made.”

Click here to watch the Denver Post’s presentation of “The United States Of Debt.” According to the Post, “This colorful video primer featuring Walker and some of the information he highlights when meeting with civic groups across the country will bring you up to speed in a hurry on one of the nation’s most pressing issues.”

Dissing The Dollar
I usually don’t pay attention to the antics of the in-crowd, but the following two are worth mentioning. On November 5, Bloomberg reported that Brazilian supermodel Gisele Bundchen wants to remain the world’s richest model and is insisting that she be paid in almost any currency but the U.S. dollar. Patricia Bundchen, the model’s twin sister and manager in Brazil, said in a telephone interview back in September that, “Contracts starting now are more attractive in euros because we don’t know what will happen to the dollar.”

Peter Schiff of Euro Pacific Capital had this to say about the greenback’s slide in the latest issue of his free newsletter The Global Investor:

The dollar’s fall is now so pervasive that the world is walking away from it en masse. The story has even been given some sizzle with the announcement from Brazilian supermodel Gisele Bundchen that she will no longer accept modeling contracts in dollars. Never seeing a cloud attached to any silver lining, knee-jerk bulls such as Larry Kudlow have suggested that Bundchen’s decision is a contrary indicator that the dollar has bottomed. In truth, the only notable bottom here belongs to Gisele herself.

On Friday, the Wall Street Journal reported that in the video for his new single “Blue Magic,” American rap artist Jay-Z is shown spending euros rather than dollars, “thus annointing the European currency as the rap world’s new bling,” according to the Boston Herald. Jim Cramer, host of CNBC’s “Mad Money, remarked, “But when things have gotten to the point that even people like Gisele and Jay-Z realize the dollar is too weak, things have gotten out of control.”

Parting Shot
Time magazine reported in its November 12 issue that some parents are skipping a mortgage payment so that they can get their hands on a ticket ($1,000 and up in some cases) for their child to attend a Hannah Montana concert. In case you didn’t know, Disney’s Hannah Montana is the number one show for kids and tweens on basic cable. The 54-city accompanying concert has sold out within minutes in every town.

On a side note, St. Louis-based radio station Y98 offered dads the chance to be their daughter’s hero- by putting on high heels and racing 50 yards to win 4 concert tickets.

According to Reuters, Mark Edwards, director of programming at Y98, said, “We got a couple of hundred phone calls from people asking questions about where to get high heeled shoes big enough for husbands and about 150 men turned up in high heels.”

By the way, the winner of the race didn’t give the tickets to his kids. He was competing on behalf of his boss who has a young daughter…

It’s good to be the king.

Have a wonderful week,

Christopher E. Hill
Editor
editor@boom2bust.com