The Euro recently hit a two-year low. Meanwhile, Russia is tipping at the brink of a deep recession. Japan just received a credit downgrade by Moody’s.
These days, I don’t envy speculators in the currency markets.
Trading currencies is like judging a beauty contest in a small town, when none of the girls are particularly attractive. There aren’t that many good choices. Sometimes you just have to do the best you can.
Bitcoin is like the mysterious new girl in town, but unfortunately one of her old boyfriends has an unsavory reputation – a bit of a scandal, really. Bitcoin prices are off 70% this year, yet nobody is talking. It’s been shunned.
So, the winner (for now) is everyone’s sweetheart, the U.S. dollar. In a deflationary environment, when prices for oil and gold are falling, the dollar is able to buy more than it did last year. Furthermore, a strong dollar has also shored up investment in our own stock market.
But there are some very fundamental flaws in this high school romance. Last week, our federal debt surpassed $18 trillion dollars. The last trillion dollars of debt was accumulated in just over 13 months. What can a trillion dollars buy these days? Well, how about the combined annual operating budgets of the Departments of Defense ($615 billion), Homeland Security ($44b), Transportation ($17b), Education ($71b), Justice ($16b), Treasury ($13b), Health and Human Services ($78b), Labor ($12b)? For government budgeting purposes, these are all considered “discretionary” expenditures. 90% of our federal tax receipts currently go towards entitlement programs such as Medicare and Social Security.
How long can this go on? A while – possibly a few years, maybe a few decades.
U.S. policy makers have been watching Japan for a long time now, because they are a few years ahead of us in terms of both demographics and debt. In fact, the low interest regime that we are experiencing was taken directly out of the Japanese debt playbook. Low interest rates are what keep the debt in check, because without them, things would rapidly spiral out of control.
So, this brings us back to the question of “what comes after the dollar?” I’d wager that the dollar will be around for a long while, at least on a local level. There may come a time, however, when the sovereign debt bubble will pop and we’ll need a bail-out of our own. The problem will likely be kicked upstairs. During the next global liquidity crises, the only clean balance sheet may come from supra-governmental organizations such as the IMF. And increasingly, their reserve currency of choice is not a single currency but a “basket” of currencies known as SDRs (special drawing rights). This would solve the problem of illiquidity by process of obscurity.
And at that point, oil and gold may not be cheap any more.