The US currency is in a free fall, and people who survey such things say there is no end in sight. Many believe it will take years for the greenback to recover its former value and prestige.
The dollar fell to a 12-year low against the Japanese yen Thursday, dropping below 100 yen to the dollar for the first time since November 1995. Meanwhile, the euro rose to all time high and is currently trading above $1.55.
The dollar has steadily eroded in value against the euro and other currencies since 2002 as U.S. budget and trade deficits ballooned, but fears of an American recession and credit crisis have sent the dollar to stunning lows amid predictions the slump will continue for a long time.
While the dollar has fluctuated for many years, what's different this time is the existence of the Euro. While foreign funds and governments used to buy up US Treasury notes, bonds, and other securities -- which had the effect of propping up the dollar -- the Euro and other currencies are now seen as safe and are paying higher yields. Simply put, that means that better returns on investments can be found elsewhere.
"You have the U.S. still holding this trade deficit, but now you have the possibility of a U.S.-led recession, and you have a weakening currency. So it's a very dark outlook for the dollar," said Gareth Sylvester, senior currency strategist with the British firm HIFX Inc.
"People just don't want to be holding U.S. dollars and U.S.-based equities," he added. "If you are an investor with a million dollars to invest, you look for the highest yield — you're looking at South Africa, Australia, New Zealand."
Meanwhile, oil prices set a new record high on Thursday of $111 per barrel, setting records in 12 of the last 13 trading sessions. Analysts blame the spike on weakness in the dollar. Interest rate cuts further weaken the dollar, and have helped fuel oil's rise. Another reduction is expected next Tuesday at the Federal Reserve's regularly scheduled monetary policy meeting.
"This cocktail's been whipped up by the Federal Reserve," said James Cordier, founder of OptionSellers.com, a Tampa, Fla., trading firm.
Analysts expect the price of oil to maintain its upward track. "There's really no end in sight to this," added Cordier.
Gas prices are following crude, reaching a record national average of $3.267 a gallon. And gas prices are expected to rise much higher this spring; estimates range from about $3.50 a gallon in the Energy Department's latest forecast to $3.75 or even $4 a gallon according to some analysts.
Higher pump prices result in higher costs for food and consumer goods.
Despite the weak dollar, the U.S. trade deficit still increased 0.6 percent in January, reaching $58.2 billion. Though exports increased 1.6 percent to the highest level ever, the U.S. still buys more from other nations than it sells abroad. So much for the benefit of a weak dollar.
Perhaps the most troubling news is that the wars in Iraq and Afghanistan are now costing U.S. taxpayers $12 billion per month, according to the nonpartisan Congressional Research Service.
And a Nobel Economist just issued a report indicating that the total cost of the war could exceed $2 trillion. That figure is more than four times what the war was expected to cost through 2006 according to congressional budget data. The White House predicted in 2002 that the war would cost between $100 billion and $200 billion.
Add all of these factors together and it's a frightening mix, a witches brew of economic trouble that may haunt the U.S. for years to come. This indeed seems to be a "perfect storm", as imperfect as these realities are.
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Comments: 16
This is a very good article. You do an excellent job of reporting the many forces affecting the economy. Jim's comment is correct... this has been visible for a long time. The implications are mind boggling!
Who will be the pioneers that lead us out of our approaching stagflation? Maybe it will be the investors and entrepreneurs who most successfully redefine the commodity playing field... the ones who successfully invent and market alternate energy sources and transportation.
As your article points out, commodities now trump dollars in desirability. Oil is black gold. We must radically change our energy policies in order to survive.
Short term... I hate that the Fed accepted mortgage backed securities as collateral for, what is it, $200 Billion Dollars that they are "loaning" the big banks!! Really... that is your money and mine that Bernake just handed to Citibank, Merrill, et al.
There is so much more at stake here than recession.
I just watched the President give a speech on this very subject. The amount of misdirection and outright lying was amazing. He played to people's fears and lack of understanding of basic statistics. One statement stood out as particularly egregious as it is, on its face, true; but it is in reality untrue and fear mongering. Mr. Bush said that if the congress doesn't make his tax cuts for the wealthy permanent the "average" tax bill will go up by $1800.
Consider for a moment two people. One pays nothing in taxes and lives under a viaduct. The other is a multimillionaire, lives in a mansion, and pays $1 million in taxes. Their "average" tax burden is $500,000. This figure in no way reflects reality for either person. It's the same for Mr. Bush's claim. What will happen if the tax cuts for the wealthy are not made permanent is that the super-wealthy one half of one percent (those who benefited most from the cut) will see their tax bill go back to where it was before the temporary cuts were enacted. For the majority of citizens, however, who got nothing or next to nothing in cuts in the first place, the change will be negligible. For instance, were I still in the workforce, my tax burden would go up $15/mos. That does not add up to $1800 a year even using Mr. Bush's math.
Oh, and don't ask what they are all for.... real transparency there... right. Trust us...
We are heading into a "perfect storm" and have little room to maneuver due to the fiscal irresponsibility of the Buffoon in Chief.
This would look far different if we still had the Clinton surpluses.
I'm in the industrial market companies right now are only doing inventory trying to save, until this war is over I think we in for a freefall
Just kidding, you are right.
Actually, it reminds me of one of those Dr. Seuss situations wherein his lead character is being atttacked by a skritz and a skrink and a vulpiniguss at the same time, and each time he takes a swing at the skrink the other two bite him on the A**. It would be funny if it were not quite so horrible. The mortgage mess convinces the Fed to lower interest rates, and the lowering of the rates causes Gasoline to cost more because it makes our dollars worth less and gasoline is pegged to the value of the dollar... no way to make it work out right.
Bottom line, funding a mini boom of the economy on borrowed cash from China was not a swift move. It was the kind of voodoo economics that his daddy, GHWB, used to argue against.
This article is nothing more then I have been hearing from the talking heads for some time. I do agree Sean's writing style is very nice it has an eas flow and and it is well organizad. My disappointment is he brings nothing person to the article. For me it is so-so.
Sean,
What do you mean by a perfect strom? Normally storms bring trials and tribulations, a perfect storm should bring calmaity and deveistation. I would think the Great Deprssion would be the results of a perfect storm. DO you or any of the readers believe this will be the same losses, the destitution, unbleiveable unemployement, years of these conditions and so much more economic and social disaster? Or it will it be the double digit unemployement and inflation? I don;t think either scenario is just over the horizon. Yuo didn;t even find a quote to suggest it.
When I opened the article I expect you were using "The Perfect Storm" for what we were experieincing economicaly, instead it was the typical media hype. At best the we come out of this a "greener" economy with the poorly run lending institutions gone, the FED a little more educated and attentive, and some consumers a little more wary of too good to be loans and personal debt. SIply the freshening after a good drenching rain.
bruce k.,
I appreciate your compasion for those that will be hurt, I suspect that all of the readers of this article have similar feels. I don;t doubt that the degree of discomfort (for some actual financial and emotional suffering) will vary across our country. I truly believe that much of the indiviudal problems could be avoided, and if those that are suffering listened to Dave Ramsey and practiced his approach or some variation of it they would at least mitigaste if not avoid these problems in the next cycle. Even though Sean claims this is a "Perfect Storm" we go thorugh them on a regular basis, some less severe and some much more severe, so any one that does not prepare does take on some of the responsibility for their situation.
The people that are losing their second home due to the subprime they got, the compaies that over extended themsleves in lending into the subprime market, the people that feel that we shold never have to experieicne economic cycles and lived as if that were true, etc. get a very small smattering of my sympathy.
Chris W.,
Have you considered the old saying, I paraphrase, own the bank a few thousand dollars and the bank owns you, own the bank (your local) a few million dollar s and you own the bank. If th rest of the world owns all of our debt then they can afford to let us fail let alone make us fail.