The Falling Dollar

© Carlos T. Mock/Enkidu 2004

Much has been said (mostly by the foreign press) about the current fall of the US dollar.  With our current debt at almost 5% of GDP, it is no surprise that China, Japan, and Korea have stop buying American debt and shifted into the safer Euro.  The fall of the dollar is supposed to improve our trade deficit by making American products cheaper, and foreign imports more expensive. Unfortunately American appetite for foreign goods has made little difference in our trade deficit.  But to forecast the American economy we must look at recent events in the US.  “It is the country, therefore, and not the currency that merits our attention.” (Amity Shlaes Financial Times 12/13/04)

Mr. Bush re-election to a second term with Republican majorities on both houses of Congress all but guarantee the following:

• Cost of War on Terrorism – present course in Iraq will be carried through at any cost - both monetary and in human lives.

• There is the possibility America will start another war on Mr. Bush’ second term.

• Every war president has raised taxes to pay for the war except Mr. Bush

• Extension of the tax cuts – zero revenue increase

• Medicare reform – prescription plans will be implemented on Mr. Bush’ second term adding another $400 billion in debt

• Privatization of Social Security will add another trillion dollars to the debt as we convert from the present system to the private accounts

The fiscal disaster that is being talked about in Washington these days could easily bump the American debt to 10% of GDP.  On February 11, 2002, after reaching a similar amount of debt the Argentine government was unable to find creditors to keep the government afloat and was forced to de-evaluate the peso which had been pegged to the US Dollar in 1992 at a rate of 1 peso = $1.  If we continue the course of this fiscal irresponsibility we may one day wake up in another country – much similar to Argentina – with no one willing to finance our debt.

Part of the reason that Mr. Bush’ economic plan worked in his first term was the amazing resolve of the Reserve Bank to lower interest rates.  Most Americans took advantage of the low interest rates and cashed out all if not most of their equity and were able to keep their lifestyles unaltered and the economy going.   As the Federal Reserve Bank continues to increase rates, and with no equity left in most American homes to help pay for American fiscal irresponsibility, the burden of paying for our country’s debt will fall on foreign countries – most of which have already started jumping ship. 

I strongly recommend everyone to diversify by doing the following:

• If you are capable, buy actual Euros or Yens

• Buy gold, or a gold fund

• Buy foreign denominated stocks

• Buy foreign denominated bond funds, or bond funds such as FAX (Australian), or GIM (Euro).

• Buy US Stocks that will benefit from a falling dollar.

Carlos T Mock, Chicago