Dollar Decline: More Ruminations on the Christmas Crash

George Bush with a dollarI know it seems like I’m flogging a mule here, but the number of respected economists just keeps growing. I’ll limit to just one source of bad news and give some valid reasons for specifying Christmas (this month) for when the who ball of wax will unceremoniously melt.

The Economist joined the fray with it’s article — The disappearing dollar:

The dollar is not what it used to be. Over the past three years it has fallen by 35% against the euro and by 24% against the yen. But its latest slide is merely a symptom of a worse malaise: the global financial system is under great strain. America has habits that are inappropriate, to say the least, for the guardian of the world’s main reserve currency: rampant government borrowing, furious consumer spending and a current-account deficit big enough to have bankrupted any other country some time ago. This makes a dollar devaluation inevitable, not least because it becomes a seemingly attractive option for the leaders of a heavily indebted America. Policymakers now seem to be talking the dollar down. Yet this is a dangerous game. Why would anybody want to invest in a currency that will almost certainly depreciate?

[…]
A fall in the dollar sufficient to close the current-account deficit might destroy its safe-haven status. If the dollar falls by another 30%, as some predict, it would amount to the biggest default in history: not a conventional default on debt service, but default by stealth, wiping trillions off the value of foreigners’ dollar assets.

Now, that doesn’t paint a very good picture. But what leads me to believe anything like that could remotely happen in such a short time period? Well, simple: year-end stock sell-offs and tax-bunching. The week before Christmas is when most brokers will sell-off poor or stagnating stocks so that their customers can get the tax benefits that come with a capital loss. These are supposed to lessen the hit on the taxes they’ll owe on capital gains – stocks sold for a profit.

Normally, this money then goes into money-market accounts for individuals (fund managers will normally reinvest since they are not concerned with tax ramifications, causing what’s known as the “Santa Claus Rally” the week after Christmas), but with interest rates so low, and domestic bonds underperforming, the obvious choice for brokers is foreign bonds this year. Thus, the brokers unwittingly add to the dollar’s fall by raising foreign currency values. Multiply that by a few hundred billion dollars and you have a cascading system where panic could set in right as they are about to go on their holiday vacations. It doesn’t take a genius to figure this stuff out.

1 Comment

Comments are closed