The dollar bulls are out for dollar bills. After having tumbled over the last few years while the U.S. economy grew smartly, that same broken dollar is now up 16% against the euro this year—and up more against other major currencies.
Down is up, and up is down? How is it that a growing U.S. economy was bad for the U.S. dollar, but a potentially calamitous collapse in the same U.S. economy—complete with a foreigner-bankrolled quasi-nationalization of the U.S. banking sector—has the U.S. dollar up double-digit percentages? And if bad is truly good, maybe we should nationalize the rest of the U.S. economy in a hurry while overseas investors are still digging the idea and bidding up the dollar.
There is an element of bizarro world safety here. While I wouldn't be hanging around in four years when the bailout bills come due around the same time as the boomers start retiring.
Sadly, at least for dollar bulls, it is not that the dollar is newly back to being the de facto world currency, the position it held for most of the last sixty years. Matter of fact, the U.S. dollar's so-called reserve status is more endangered than ever. The U.S. is still spending more than it brings in every year; it borrows money abroad to finance an unsustainable trade deficit; and it has lost its way with respect to building an economy around selling things for more than they cost. You know, the capitalism thing, as opposed to the financial engineering thing.
Because far from being a de facto standard, the dollar is really beginning to piss people off. The ongoing global crisis is driving home a painful truth: Over-reliance on another country's currency is a little like sharing someone else's ventilation system. So long as they do the repairs, it's generally an okay compromise—assuming they like the same room temperatures that you do. But get hooked up to a manic-depressive's HVAC system on the other side of the planet, and you risk having the heat running mid-summer, the air-conditioning blasting away during snow storms, and the fan on high when you're trying to sleep. It's somewhere between wildly uncomfortable and outright dangerous.
So, if the dollar has lots its gloss, why is it newly doing so well? There are roughly three things going on.
First, countries and companies around the world loaded up with a great deal of debt over the last decade, some of which was used to build productive stuff, and some of which was used to buy financial tchotkes from the U.S. (It turns out the U.S. is not be able to export semiconductors any more, but it's awesome at exporting useless financial instruments.) Either way, much of that debt was denominated in U.S. dollars, and, as companies and countries and hedge funds see their dollar receipts shrinking in a weakening economy, they are all racing to get U.S. dollars and stash them away for a rainy day—like maybe tomorrow—when they need to make payments, or even pay back that debt. Trouble is, when lots of companies and countries and hedge funds all start hoarding U.S. dollars at the same time it increases the demand for said dollars. Think of the dollar as Squealer the Pig collectible Beanie Babies circa Christmas 1996, and you begin to get the picture.
Second, there is an element of bizarro world safety here. While the U.S. dollar is far from safe, and I wouldn't be hanging around in four years when the bailout bills come due around the same time as the boomers start retiring, the dollar is also currently seen as less lethal than many other currencies around the world. Admittedly, saying the awful U.S. dollar isn't as lethal as, say, the busted Icelandic krona isn't saying much. Nevertheless, money is boomeranging back to the U.S. from around the world, and coming from all sorts of safe haven currencies, like the Canadian dollar, the Singapore dollar, and the Swiss franc, which have all been pounded in recent weeks as the "we're less awful" dollar trade picks up.
The whole thing is also circular. The only asset that's working right now isn't stocks, bonds, commodities, or private equity, so money is exiting them speedily and looking for someplace to go that is working.
And where's that? It's currently the dollar. Of course, as more money comes flooding into the dollar the better it does, and the better it does the more money comes in, and the more hot money (read: hedge funds) follows it. Such upward spirals are illusory, but they also tend to run longer than anyone expects, and then end badly, usually right around the time people think the ever-upward spiral is the new normal.
A good guess for when the end might come? Sometime in the next few months when arriviste gold bugs, who bought the precious metal over the last six months in anticipation of a dollar collapse, give up on gold and accept that the dollar is once again king.
