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Thread: Dollar Retreat Raises Fear of Collapse

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    Default Dollar Retreat Raises Fear of Collapse

    It's eerie how, when the iTulip staff make a conjecture, mainstream economists dismiss it as paranoid fantasy. Then, like clockwork, about a year later, mainstream economists start seeing the clues that the iTulip staff saw long ago.

    For example: "Housing is a bubble which may well lead to an ugly recession"

    Another example: (April 2006) "Can the U.S. have a Peso problem?"

    Today (September 2007) we have: "Dollar's Retreat Raises Fear of Collapse"

    ...But for longer than most economists would have been willing to predict a decade ago, the world has been a willing partner in American excess - until a new and home-grown financial crisis this summer rattled confidence in the country, the world's largest economy. On Thursday, the dollar briefly fell to another low against the euro of $1.3927, as a slow decline that has been under way for months picked up steam this past week.
    "This is all pointing to a greatly increased risk of a fast unwinding of the U.S. current account deficit and a serious decline of the dollar," said Kenneth Rogoff, a former chief economist at the International Monetary Fund and an expert on exchange rates. "We could finally see the big kahuna hit."
    ... While most economists just a few months ago would have dismissed the prospect of a dollar collapse outright, they now are debating the possibility that something on par with the dollar debacle of the 1970s might just happen again. ... Double-digit inflation resulted in the 1970s and only a global recession brought it to an end.... But across a horizon of 18 months to two years, investors are pondering how quickly the dollar will fall, a question to which there are no easy answers.
    After a run of strong growth, the U.S. economy has lurched into a phase of slower expansion, and last Friday the most serious warning sign appeared - an outright deterioration in employment growth.
    The data has coincided with profit warnings from major U.S. retailers like Wal-Mart Stores and Home Depot, suggesting that consumer spending, the backbone of the American economy for years, was ebbing. This step would logically follow the rapidly cooling housing market, since Americans have spent heavily with money borrowed against rising home values.
    ... All this suggests that, in spite of headline-grabbing news about the latest low, the dollar could be adjusting gradually as the U.S. economy becomes driven less by lending on the back of rising home price. The problem, as every economist knows, is that the current account deficit - about $770 billion - is still colossal in absolute terms.
    And foreigners are being asked to provide those dollars at a time when the subprime turmoil is threatening to spill over into the broader economy.
    Put another way, at a time when the psychology of crisis has gripped financial markets, intangible attitudes toward the dollar have become all the more important. And with growth strong elsewhere in the world, there are appealing places to go besides the dollar.
    "The problem is that the deficit is still very, very large," Jen said. "And there are plenty of other investment opportunities outside the United States."
    Pressed to make an educated guess, most economists opt for calm, believing the dollar is unlikely to go into a tailspin even as they mark up the odds of one.
    ... "Rather than a precipitous decline, we are probably be looking at a move steadily lower," said Simon Derrick, chief currency strategist at Bank of New York in London.


    [necron99's commentary]: As a surfer, I would like to point out that the word "kahuna" is slang for an important person, not a big wave. I suspect that Kenneth Rogoff was trying to say that a wave of debt may possibly capsize the dollar. On the other hand, being generous, I suppose he could have meant that Uncle Sam, or the dollar itself, was "the big kahuna" and Uncle Sam was going to take a serious blow where it hurts.
    Last edited by necron99; 09-14-07 at 09:10 PM. Reason: forgot to delineate a quote with indentation

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