Foreign banks dumping the dollar?

posted at 9:30 am on October 13, 2009 by Ed Morrissey

Economists have long predicted the dollar’s demise as the global currency of choice.  Some, such as Paul Krugman, hailed it as a means of correcting the American trade imbalance.  Love it or hate it, the weakening of the American dollar has begun as central banks have started to buy euros and yen while dumping the dollar (via Instapundit):

Central banks flush with record reserves are increasingly snubbing dollars in favor of euros and yen, further pressuring the greenback after its biggest two- quarter rout in almost two decades.

Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations reporting currency breakdowns put 63 percent of the new cash into euros and yen in April, May and June, the latest Barclays Capital data show. That’s the highest percentage in any quarter with more than an $80 billion increase.

World leaders are acting on threats to dump the dollar while the Obama administration shows a willingness to tolerate a weaker currency in an effort to boost exports and the economy as long as it doesn’t drive away the nation’s creditors. The diversification signals that the currency won’t rebound anytime soon after losing 10.3 percent on a trade-weighted basis the past six months, the biggest drop since 1991.

This could not come at a worse time, as the current American administration busies itself with massive new spending — and massive new debt.  The weaker dollar will make the sale of Treasuries that much more expensive, which should warn the US government away from further deficit spending.  The biggest problem afflicting the dollar, Bloomberg reports, is that there is just too much of it on the market, thanks to the increased need to cover deficit spending and the monetary policy that accompanies that need.

Does a weak dollar matter?  Should Americans care whether our currency dominates world markets?  James Pethokoukis says that whether we should or not, the decline of the dollar will almost certainly become a large political problem for Barack Obama:

A recent Rasmussen poll, for instance, found that 88 percent of Americans say the dollar should remain the dominant global currency. Now, the average voter may not fully understand the subtleties of international finance nor appreciate exactly how a dominant dollar has benefited the U.S economy. But they sure think a weaker dollar is a sign of a weaker America.

And that’s the political problem for the Obama administration. Its benign neglect of the dollar is another example of an economic policy — along with TARP and the $787 billion stimulus — that the White House thinks is helping the economy, but many Americans find wrongheaded.

In his New York Times column today, Paul Krugman makes the usual case for a weaker dollar: It helps U.S. exporters and is a necessary part of a global economic rebalancing. And there is some truth in that, particularly the idea that Rising Asia will result in a less-dominant dollar. Then again, a devalued currency hasn’t exactly been a proven path to prosperity. (Ask Jimmy Carter.)

But Krugman too easily dismisses the idea that the dollar’s decline could tumble out of control. Former Clinton economic officials such as Robert Rubin and Roger Altman have been making the case that investor concern about budget deficits could lead them to abandon the dollar. As Altman argued in a Financial Times op-ed piece today: “The dismal deficit outlook poses a huge longer-term threat. Indeed, it is just a matter of time before global financial markets reject this fiscal trajectory. That could lead to a punishing dollar crisis.”

Pethokoukis imagines a campaign slogan for 2010 and 2012 being, “Who lost the dollar?”  It might make for a good slogan at that, but blaming it all on Obama would be a little too easy.  The crisis has its roots in policies that go back at least a decade, and in deficit spending that began to get out of hand with a Republican Congress and Republican President and went insanely wrong when Democrats took control.

However, Obama’s fiscal policies are the worst we’ve seen in a generation.  In a crisis which demands a return to fiscal sanity, the White House has instead become the asylum, as these deficit projections show — even without ObamaCare and cap-and-trade:

Instead of finding new ways for the federal government to spend money, Congress and the President should be finding new ways to curtail it and demonstrate that we intend to end our irresponsible spending and massive government overreach into the private sector.  In that sense, we can blame Obama for losing the opportunity to stop the dollar crisis before it reaches a tipping point.


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Comments

It’s cool too see how totally ignorant the population is to this crime.

True_King on October 13, 2009 at 11:26 AM

And to see how much of the population still thinks a fistful of paper equals true wealth.

Dark-Star on October 13, 2009 at 11:27 AM

Gah…er…wha?

*faints*

Dark-Star on October 13, 2009 at 11:17 AM

yeah I know…I stopped talking to one of them…and she was my favorite relative on my wife’s side of the family…I was just stunned…a christian…didn’t care about abortion…socialism…nothing….race trumped all…

right4life on October 13, 2009 at 11:30 AM

and in her society….in zimbabwe…mixed people…ie ‘colored’ people like obama are looked down upon…they are not tribal members…

right4life on October 13, 2009 at 11:32 AM

and tribal politics in africa trump everything….its often ugly and deadly….shona vs. ndbele…mugabe brought in the NORKS to help him kill tens of thousands of them in the 80s…mugabe is a shona…

right4life on October 13, 2009 at 11:34 AM

True_King on October 13, 2009 at 11:26 AM

I have my prejudices against the Fed, but it IS the responsibility of Congress to provide a stable currency.

The Fed did not create itself. Congress is responsible for that. Unfortunately, we can’t go back in time.

I would say the Fed does the best it can do under the circumstances. Congress is OUT OF CONTROL, and that is the fundamental problem behind this crisis.

Congress is derelict of duty, and I wish there was a way to punish them for such criminal activity.

Saltysam on October 13, 2009 at 11:36 AM

The difference is that they still have a manufacturing base.

Vashta.Nerada on October 13, 2009 at 9:55 AM

1) The US still has a manufactuing base. A huge one.
2) The Japanese have been complaining about their industries fleeing to more friendly countries for years as well.

MarkTheGreat on October 13, 2009 at 11:41 AM

Our GDP is $14 Trillion dollars, we produce most of the worlds resources. No other nation is anywhere close.

Largely debt-fueled. The longer we continue to prop up GDP with debt the harder the inevitable crash. We’re talking a 50% reduction in GDP, a complete credit lockdown (meaning the end of “Just-In-Time” economics and lending limited only to the safest of borrowers), and 30+% unemployment.

Math never lies. You simply cannot continue in a debt-based economy without debt servicing levels overwhelming everything else. Debt either needs to be paid down or defaulted on, and neither is happening right now at a meaningful level.

There are no realistic long-term plans to settle outstanding government debt. Banks are hiding mortgage losses by changing the definition of delinquency and refusing to complete foreclosure proceedings. To do so would force the banks to recognize the mark-to-market losses and would expose many of them as insolvent.

Government will stop deficit spending when there is no other option. By that time the Treasury will have been looted and the taxpayers will be left with inflated dollars that have zero purchasing power. When the torches and pitchforks arrive in Washington there won’t be anyone left there worth stringing up.

TheMightyMonarch on October 13, 2009 at 11:41 AM

That has been happening with the Fed purchasing Treasuries to artificially hold down interest rates.

ICBM on October 13, 2009 at 9:57 AM

The result of this is a huge jump in the money supply. Which results in increased inflation.
Which results in banks raising interest rates to compensate.

In other words, having the Fed buy treasuries may hold interest rates down temporarily, but it results in higher interst rates down the road.

MarkTheGreat on October 13, 2009 at 11:43 AM

Gov. Palin mentioned this about a week ago. What’s below has started the latest string of article on the weakening dollar. There have been five or six article that have specifically mentioned Gov. Palin and all concluded she on to something. Pretty savvy for a private citizen.

Further Proof of the Need for Energy Independence
Tuesday, October 6, 2009 at 5:39pm
The British newspaper The Independent reported today that Gulf oil producers were negotiating with Russia, China, Japan and France to replace the dollar in pricing oil with a basket of currencies.[1] According to the Wall Street Journal, Arab oil officials have denied the story, but even the possibility of such a talk weakens the dollar and renews fears about its continued viability as an international reserve currency.[2] In fact, today a United Nations official called for a new global reserve currency to replace the dollar and end our “privilege” to run up huge deficits.[3] We can see the effect of this in the price of gold, which hit a record high today in response to fears about the weakened dollar.[4]

All of this is a result of our out-of-control debt. This is why we need to rein in spending, and this is also why we need energy independence. A weakened dollar means higher commodity prices. This will make it more difficult to pay our bills – including the bill to import oil.

In his book Architects of Ruin, Peter Schweizer points out that the Obama administration is focusing primarily on “green energy,” while ignoring our need to develop our domestic conventional energy resources.[5] We’re ignoring the looming crisis caused by our dependence on foreign oil. Because we’re dependent on foreign nations for our oil, we’re also at their mercy if they decide to dump the dollar as their trade currency. We can’t allow ourselves to be so vulnerable to the whims of foreign nations. That’s why we must develop our own domestic supplies of oil and gas.

Though the chant of “Drill, baby, drill” was much derided, it expressed the need to confront this issue head-on before it reaches a crisis point.

Bottom line: let’s stop digging ourselves into debt and start drilling for energy independence.

– Sarah Palin

Clyde5445 on October 13, 2009 at 11:44 AM

Hmmmm…. interest rates on debt average less than 3%… interest rates under Carter (government debt) went to 15%… that’s a five-time increase. Our current debt service eats up 10-25% of total tax revenues…

I’m sure this will all work out. I think once we devote 100% of our “income” to debt service and still fall short, we are technically bankrupt. Obama will have achieved his first objective.

CC

CapedConservative on October 13, 2009 at 11:45 AM

We still have a huge manufacturing base. It just takes a lot fewer people to run it. How many people do you need to supervise the machine that spits out the parts?

RBMN on October 13, 2009 at 11:46 AM

Check link for sources. The spam filter may eat the source links I posted.

http://www.facebook.com/note.php?note_id=148659543434

Clyde5445 on October 13, 2009 at 11:51 AM

And that’s the political problem for the Obama administration. Its benign neglect of the dollar is another example of an economic policy — along with TARP and the $787 billion stimulus — that the White House thinks is helping the economy, but many Americans find wrongheaded.

It is getting so tiring seeing this same sort of stupidity over and over. What is wrong with these commentators? Are they just incredibly stupid or is this their deep cowardice showing up in print?

There is nothing benign about what The Precedent is doing to the dollar. And if I see one more person try and float the moronic notion that this treasonous administration is trying to help the economy, I think I’m going to puke. This is worthless drivel from Pethokoukis. He should have his keyboard taken away from him so that he doesn’t pollute the world with any more of this idiocy.

This is so infuriating it drives me to Haiku:

It is not benign,
but so clearly by design,
Our nation’s decline.

progressoverpeace on October 13, 2009 at 11:59 AM

Here is a little snipped Ed neglected to mention about the Pethokoukis article. The is right before poll results Ed block quoted above. Ed you could have given Sarah some credit.

For more evidence of the dollar’s return to political salience, look no further than the Facebook page of Sarah Palin. The 2008 GOP vice presidential nominee — and possible 2012 presidential candidate — has shown a knack for identifying hot-button political issues, such as the purported “death panels” she claims to have found in Democratic healthcare reform plans. In a recent Facebook posting, Palin expressed deep concern over the dollar’s “continued viability as an international reserve currency” in light of huge U.S. budget deficits.

She might be onto something here, politically and economically.

Clyde5445 on October 13, 2009 at 12:06 PM

What should we, as individuals do? Should we be investing in the Euro and Yen as well- become money traders (which sucks since we will have to pay taxes on it).

Virginia Shanahan on October 13, 2009 at 10:46 AM

Educate yourself. Read a few books. Road to Serfdom F.A. Hayek, Thomas Sowell, Jim Rogers, Peter Schiff, Nassim Taleb. Once you have more knowledge it will help you choose and investment strategy that suits you and will help you find an investment advisor.

Theworldisnotenough on October 13, 2009 at 12:07 PM

However, Obama’s fiscal policies are the worst we’ve seen in a generation.

That’s the understatement of US history. The Precedent’s fiscal policies are the worst we have EVER seen, without any question, at all. WITHOUT ANY QUESTION. And the rest of his policies are anti-growth, anti-competitive, anti-individualist, anti-American, …

We are have a deadly serious problem whose only solution is truly robust growth and creativity and The Precedent is orienting the federal government to stop our growth and squelch creativity in every single area. THis is the worst fiscal policy in our history and oriented towards nothing but the end of the US, as is The Traitor-in-Chief’s intention.

It’s wither The Precedent or the US. Both will not emerge intact from this insane experiment in affirmative action.

progressoverpeace on October 13, 2009 at 12:13 PM

wither

Er … “either”.

progressoverpeace on October 13, 2009 at 12:14 PM

Need to spread that blame around to Ben “Clueless” Bernake and Timothy “The Tax Cheat” Geithner.

moonsbreath on October 13, 2009 at 12:19 PM

It is obvious to everyone outside of the White House and Congress that the stimulus was and is terrible, even dangerous, fiscal policy for the country. But what is answer? Reaganomics?

slp on October 13, 2009 at 12:28 PM

Our GDP is $14 Trillion dollars, we produce most of the worlds resources. No other nation is anywhere close.

Largely debt-fueled. The longer we continue to prop up GDP with debt the harder the inevitable crash. We’re talking a 50% reduction in GDP, a complete credit lockdown (meaning the end of “Just-In-Time” economics and lending limited only to the safest of borrowers), and 30+% unemployment.

Math never lies. You simply cannot continue in a debt-based economy without debt servicing levels overwhelming everything else. Debt either needs to be paid down or defaulted on, and neither is happening right now at a meaningful level.

There are no realistic long-term plans to settle outstanding government debt. Banks are hiding mortgage losses by changing the definition of delinquency and refusing to complete foreclosure proceedings. To do so would force the banks to recognize the mark-to-market losses and would expose many of them as insolvent.

Government will stop deficit spending when there is no other option. By that time the Treasury will have been looted and the taxpayers will be left with inflated dollars that have zero purchasing power. When the torches and pitchforks arrive in Washington there won’t be anyone left there worth stringing up.

TheMightyMonarch on October 13, 2009 at 11:41 AM

Amen Amen Amen

flyfisher on October 13, 2009 at 12:29 PM

BREAKING NEWS……

We’re just going to forget the 401k, let the mortgage go and just go to WAL*MART, buy a tent and some Coleman camping equipment. Then we’ll take our hybrid seeds and food stocks and ammo and head for the hills. See you all there.

Goodbye Hope and Change. Hello Ammo and the Mountains.

PappyD61 on October 13, 2009 at 1:14 PM

PappyD61 on October 13, 2009 at 1:14 PM

Best of luck to you!

(protip: try to use a bow for hunting if possible. Guns rock, but they can really advertise your location, something you’re probably trying not to do.)

Dark-Star on October 13, 2009 at 1:21 PM

Soros is probably betting heavily against the dollar, and the traitorous Osama Obama is meekly doing his bidding.

It’s all a game to scum like Soros and the money-market manipulators. They don’t give a damn about the consequences to the country they live in, since they always have an exit strategy. As long as they’re raking in the profits — in their currency of choice — they can afford to insulate themselves against the human misery they cause.

It’s time for the Chicago Jesus to be removed from office, and for a thorough investigation of sharks like Soros. They need to be stripped of both power and their ill-gotten gains.

MrScribbler on October 13, 2009 at 10:12 AM

Nail, meet head.

Interesting that Ed didn’t point out that much of Pethokoukis’ piece is in praise of the ‘Cuda.

More on the entire scheme of Obama and Soros:

http://thespeechatimeforchoosing.wordpress.com/2009/10/13/sarah-palin-is-absolutely-driving-the-debate-on-the-decline-of-the-us-dollar/

It’s time to start gearing up for impeachment. Obama and his crew are by far the most corrupt this nation has ever seen.

gary4205 on October 13, 2009 at 1:56 PM

First, it’s not “dumping” the dollar, central banks are buying less of them (37% of new holdings instead of 63%) but they aren’t selling, yet.

Second, I love to blame Obama as the next guy in these parts but this is a result of a long-term trend supported by democrats, republicans, and foreign central banks. East Asia fueled it’s economy with weak currencies that worked so long as America could handle the ever increasing levels of debt required. We reached the top of the pyramid about a year or 2 ago.

The dollar has to weaken so the world economy can get back to a more natural setup. The East Asians however can’t grow without weak currencies (against most of the world) so now the Euro and Yen are their targets. Europe and Japan cannot for demographic reasons support it so I doubt this current phase will last long.

The result for us though is America’s relative exports have surged. Our non-energy trade is now almost in balance (as Palin can tell), and given that we still have a $2-300 billion deficit with Northeast Asia, we have a massive surprlus building with the rest of the world. As the dollar weakens that will grow helping to rebuild our economy, if Washington allows. I don’t know about the rest of the world outside of Northeast Asia though.

Also, on the energy front if this news is correct we could totally eliminate that deficit as well in a decade. Again, provided Washington allowed us but Obama is already moving to block further test fields so make that in 14 years.

jarodea on October 13, 2009 at 5:05 PM

Although I shouldn’t allow Obama off the hook so easily. Even though the current situation isn’t his fault entirely, he is unnecessarily throwing fuel on the fire and making the necessary readjustment far more painful than it need be.

jarodea on October 13, 2009 at 5:09 PM

Dagnabbit, I always hit comment threads hours after they died.

jarodea on October 13, 2009 at 5:10 PM

It’s time to start gearing up for impeachment. Obama and his crew are by far the most corrupt this nation has ever seen.

gary4205 on October 13, 2009 at 1:56 PM

Based on cases in English law that happened as our founding fathers were debating what language to use in the impeachment clause, I believe gross dereliction of duty in connection with the economy/fall of the dollar would be grounds for impeachment under the impied meaning of “high crimes and misdemeanors”.

But I don’t think anything will happen until the dollar falls more. I read in Bloomberg something like a $1.25 figure against the Euro is expected. This would be another 25 cent (+/-) drop from current figures, right?

I am in agreement with those that believe this is a deliberate undermining of the United States economy. Everything this administration wants to do is based on economic/social/environmental justice and redistribution of wealth.

Greyledge Gal on October 13, 2009 at 5:18 PM

My IRA with Euro-Pacific Capital has gone up over 10% in two months. Of that, most is due to the weakening dollar.

Get out of the dollar now.

And when Sarah announces, gradually get back into it.

She is the ‘Strong Dollar Girl’.

Sapwolf on October 13, 2009 at 5:29 PM

Instead of finding new ways for the federal government to spend money, Congress and the President should be finding new ways to curtail it and demonstrate that we intend to end our irresponsible spending and massive government overreach into the private sector. In that sense, we can blame Obama for losing the opportunity to stop the dollar crisis before it reaches a tipping point.

You got that right…and if the dollar collapses, which I believe it will (and that is EXACTLY what Obama is trying to do) it will make the money we have worthless. In other words, he has found another way to spread the wealth by making most poor.

njpat on October 13, 2009 at 10:17 PM

http://www.veteranoutrage.com

I TOLD YOU
They would BETRAY US
DESTROY US
DESTROY THE ECONOMY
DESTROY THE DOLLAR
DESTROY OUR FREEDOMS

I told you morons not to vote for any of these CREEPS
ohh but you didnt listen did you ….

Now your liberal ass is in a sling..
Hey at least i held my nose and voted for mccain palin..
Honestly i was hoping mccain would then drop out leaving us with at least one good candidate..

veteranoutrage on October 13, 2009 at 10:28 PM

People are starting to tell me I was right.

Too late, jackasses.

Merovign on October 13, 2009 at 11:29 PM