Dollar Decline in Action: The 2004 Christmas Crash

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Dollar billDon’t call it a prediction, that’s one thing I want to say right away. If anything, a prediction is guess, speculation on what could happen based on anything from historical analysis to religious prophecy. I don’t traffic in any of those, instead I’m about to tell you what is already happening. If the recent bad news continues at the current pace, by Christmas we should start seeing numerous countries fleeing the dollar and OPEC reversing it’s decision and selling oil in euros, which will lead to a complete collapse and skyrocketting inflation.

The dollar is currently getting slam-dunked internationally, and the US economy is now visibly cracking at the foundation. The cause of this is very simple: the national debt and our government’s inability to curb printing and spending of new money in the face of record-breaking debt. I touched on this in an earlier entry — Hoping for a Government Collapse — but my hope at the time was that we’d see a gradual collapse of the dollar which would head off depression-style inflation. Not to be a chicken little here, but now, the outlook is pretty grim.

I’ve been watching the news wires recently for specifics on how quickly this could take place, and from all corners I am seeing reports that the world is tired of bailing water for the US while our government keeps racking up new debts. Below is a compendium of quotes from articles on the subject:

“So far, the dollar’s slide to nine-year lows doesn’t reflect panic. But some analysts say a run on the dollar is possible.”
Worldwide effects of sinking dollar – Nov 22, 2004 – Christian Science Monitor

[Morgan Stanley chief economist Stephen Roach] sees a 30 percent chance of a slump soon and a 60 percent chance that “we’ll muddle through for a while and delay the eventual [economic] armageddon.”

The chance we’ll get through OK: one in 10. Maybe.
Economic `Armageddon’ predicted – Nov 23, 2004 – Boston Herald

“The dollar is friendless and in danger of freefall,” said Neil Mackinnon, chief economist at ECU Group.
Dollar plumbs new lows on talk of central bank selling – Nov 24, 2004 – AFP

“The cause is clear,” [German Chancellor Gerhard Schr??der] added. “It can be found in the double deficit in the U.S. — the deficit in the federal budget and the current account.”
Why The Dollar Is Giving Way – Dec 6, 2004 Ed. – BusinessWeek

“There is an emerging consensus that banks around the world are moving to expand their reserves of euros at the expense of dollars,” said Ashraf Laidi, chief currency analyst at MG Financial Group in New York.
Dollar slides to a record low – Nov 27, 2004 – San Francisco Chronicle

“What we’re seeing now is far more than just speculation. These are real fundamental shifts in portfolio allocations from official and private entities, and that could continue and see the dollar selling accelerate,” said Derek Halpenny, a currency strategist at Bank of Tokyo-Mitsubishi Ltd. in London.
Bond Yields Rise, Dollar Dips on News of Selling in China – Nov 27, 2004 – Los Angeles Times

“The real risk is that the sharper and the quicker the dollar falls, that these investors pull out pretty quickly from U.S. markets,” said Mitul Kotecha, global head of currency research in London at Calyon, the investment banking unit of Credit Agricole SA.
Dollar Declines for Seventh Week Against Euro, Sets Record Low – Nov 27, 2004 – Bloomberg

The things to watch this week are gold prices and foreign banks selling dollars. We’ve already hit 16-year gold highs at $445/oz, and it’s steaming forward with little to hold it back. If you look at the index compared to other currencies though, there’s little change, so the economic meaning of this is that gold is remaining stable while the dollar falls against all other currencies.

A lot of economic reports are going to be released this week, and they’re going to mean diddly squat. The real fear here is that at the current rate of foreign banks dumping US debt and dollars, we’re heading towards an economic meltdown right at the peak of the holiday season. The immediate response from the Federal Reserve will be to drastically increase interest rates, which will send shockwaves through the real estate sector as mortgage rates go up. Anyone not already with a fixed-interest mortgage better go ahead and refinance while they have the chance.

As for inflation, you can expect that to be more gradual for domestic goods and pronounced in early 2005 as imports begin to get more expensive. You may hear good news in saying that exports will now go up, but don’t believe that shit either. Exports are expected to be lackluster since there’s a new sanction on US exports thanks to the stupidity of Senator Robert Byrd in passing a law that imposed duties on imports and giving a cut to US manufacturers led the WTO to impose export sanctions on our goods.

Overall, this is looking to be a very bad holiday season, though I doubt there will be the same frenzy here as in other nations to dump the dollar. Gold speculation could shoot through the roof and go upwards of $600/oz and higher if the whole thing continues to unravel as fast as it currently is, but remember: the price of gold is stable with other currencies. A rule of thumb for investors has always been to have 10% in precious metals (not futures trading, but physical currency).

I’m not giving anyone advice here, but the writing is on the wall. We’re in for a depression, whether we like it or not. I’m just curious to see how things unravel, this is not going to be pretty.

UPDATE: Just to clarify, I’m not entirely bullish on gold and there’s good reason to have reservations about it. It has been a horrible long term investment as we are just now hitting 16-year levels and is only useful to shield against inflation (duh, that’s why all the managers only suggest a small percentage). Other options are buying foreign currencies and bonds, making a profit by becoming part of the “problem”. Of course that means you blame the problem on investors who are trying to protect their wealth, not Congress, who can’t get a grip on it’s spending. I’m betting on foreign bonds doing quite well as savvy investors flee the sinking ship while they still have a chance. Of course, I’m not a financial advisor, so don’t do anything without consulting one to determine your level of risk.

Stephen VanDyke

I've published HoT along with about 300+ friends since 2002. We're all Americans who are snarky and love our country. I'm a libertarian that registered Republican because I like to win elections. That's pretty much it.

  1. Sorry, I just don’t see it. There really hasn’t been a significant shift from dollars to euros by major institutions and investors, and while the decline in the dollar is a fact of life, it doesn’t seem to be sliding rapidly or even much further, and other economic indicators are so strong that a small and gradual increase in interest rates – which are too low anyway – combined with ongoing economic growth ought to bring the dollar back up the 10 points or so that are needed right now to keep things stable.

    That said, Byrd’s recent bill is indeed totally ridiculous. He needs to be retired to the home for crazy old politicians. As for the UN sanctions, it seem unlikely that they will be observed widely by the players who really count. The US remains THE consumer marketplace and even if the government is being retarded people need to sell their goods. As usual the people of the US will pay the price for tariffs in the form of higher prices for consumer goods.