Poom Time ?
May 14, 2006 5:27 AM   Subscribe

Storm Warning. Seems like Iran has already started flexing it's economic muscles-haven't seen it reported that widely anywhere else, but these two events seem to be connected. Then again, maybe I've been spending too much time reading itulip.
posted by jaksoul (35 comments total) 1 user marked this as a favorite
 
War spending keeps the dollar relevant. You (might now have) heard it here first.
posted by pmbuko at 5:34 AM on May 14, 2006


...not...
posted by pmbuko at 5:36 AM on May 14, 2006


So, do I move before I get drafted in August?
posted by Raoul.Duke at 5:39 AM on May 14, 2006


The dollar has lost 7 per cent against the euro, yen and sterling since the beginning of April

Makes you wonder what has fundamentally changed about the dollar's situation lately. I mean, haven't we all seen the US deficit growing for *years* (with no remedy in sight)?

About the Iran move: wow, that sounds pretty significant. Will others follow? (Venezuela et al spring to mind)
posted by beno at 5:39 AM on May 14, 2006


pmboko-it's not so much about war spending, rather the dollar keeps it's value despite incredible adverse economic fundamentals because it is the defacto currency for any oil transactions-ie everyone must but dollars before they buy oil. If that situation changes the dollar could devalue radically. War or lack thereof is by the by
posted by jaksoul at 5:53 AM on May 14, 2006


it's is a contraction of the words it and is, whereas its is the possessive form of it.
posted by killdevil at 6:25 AM on May 14, 2006


pmboko-its not so much about war spending, rather the dollar keeps it's value despite incredible adverse economic fundamentals because it is the defacto currency for any oil transactions-ie everyone must but dollars before they buy oil. If that situation changes the dollar could devalue radically. War or lack thereof is by the by..

(thanks killdevil)
posted by jaksoul at 6:32 AM on May 14, 2006


Isn't oil just a small fraction of foreign dollar spending? How about the colossal mountains of consumer crap made in China? Doesn't China have to accept dollars to receive business for that? Just curious, 's all.
posted by rolypolyman at 7:06 AM on May 14, 2006


Iran (and Venezuela) get more credit than they deserve.

The meaningful players here are commited to stable markets.
posted by sameasthem at 7:46 AM on May 14, 2006


I TOLD all my rich friends to buy euros in 1997, and they all laughed at me. Dammit! Think I'll get me some rupees.
posted by DenOfSizer at 7:53 AM on May 14, 2006


Another take on the Iranian Bourse.
posted by IndigoJones at 7:54 AM on May 14, 2006


I can't find the article, but sometime in the last few months Iran has talked about opening its own exchange in Tehran that would only accept Euros.

I remember the analysts pooh-poohing this since only Iran's oil would be traded in Euros, and eventually traders will tire of having to use two currencies to trade. And if the UN drops sanctions on Iran, the oil market will be completely irrelevant.
posted by dw at 8:10 AM on May 14, 2006


The meaningful players here are commited to stable markets

Which is exactly why they'd want to stop using the US Dollar as the international energy currency, because for the last six years, "stable" isn't a good description of the US Economy.

Personally, I made a bet about three years ago, and a good portion of my retirment is in Euro Stocks. They're doing well on thier own, in terms of dollars, they're kicking ass.
posted by eriko at 8:23 AM on May 14, 2006


The reason the dollar has been dropping is because we're printing way too many of them, and have been for the last fifteen years or so. We got lucky, in the sense that the profound deflationary effect of globalization happened at the same time that we decided to paper over all problems by flooding the market with currency. It masked the inflationary symptoms for a long time, and gave Greenspan a sense of control that he didn't actually have.

He seems to have been of the belief that there were only two acceptable economic conditions, 'boom' and 'less boom'. His profligate liquidity injection (read: money printing) resulted in the stock market bubble that popped in 2000.

Realizing we were in desperate straits (the popping of a bubble is the economic equivalent to a nuclear bomb), the Fed absolutely flooded the market with money, once again papering over the problems. This did stop the incipient collapse, but all that money had to go somewhere. The Fed WANTED it go into the stock market, to help hold it up...and some of it did. But a much larger chunk of it went into housing, causing a run-up of housing prices like nothing we've ever seen in this country.

It appears that that bubble may, too, finally be popping. But this bubble is a lot bigger than just the stock market; it affects almost everyone in the country. So the Fed is likely to try the exact same thing again. It may even work for awhile.

It's not working as well as it used to, though. The biggest reason is because the Japanese and Chinese have been absorbing huge quantities of dollars, by printing their own currencies and buying ours. The resulting availability of their own funds both stimulates their own economies, and keeps their exports cheap, so they can sell to us. But those two central banks have accumulated many hundreds of billions of dollars, and their appetite may be faltering.

Basically, the proper trajectory for the dollar's value is STRAIGHT DOWN. The fact that it's been dropping probably isn't a sign that someone is actively attacking it. Most likely, it's one of:

A) Someone has stopped actively defending it as strongly;
B) The world is turning away from dollars because they're realizing it's not a good store of value, or perhaps because they realize we're run by madmen;
C) The continued abuse of our status as the world's reserve currency is exceeding the ability of our allies to defend it;
D) 'Hot money' speculation: floating currencies have created a new class of financial parasite, currency speculators. They have profound, unearned influence. They contribute nothing, and drain the economies they attack of immense amounts of wealth;
E) Some combination of the above;
F) Something I haven't thought of. :) (realistically: this is the most likely scenario.)

The longest, hardest economic winter we've seen in living memory is coming. It should have been here about four years ago. The longer they delay it through financial shenanigans, the worse it will be. Be sure to let the Fed know how thankful you are for their assistance when times get tough.
posted by Malor at 8:57 AM on May 14, 2006 [3 favorites]


Soo Malor... yes? I should move?
posted by Raoul.Duke at 9:34 AM on May 14, 2006


I think Iran is funny.
posted by obeygiant at 9:53 AM on May 14, 2006


We're moving to Iran?
posted by mert at 12:37 PM on May 14, 2006


I wonder whether the extremely fast run-ups in oil prices we have seen recently are the fruit of last ditch efforts by the Bush administration to forestall a run on the dollar by taking dollars out of the hands of those who will sell dollars if it's in their financial interest to do so (such as the central banks of our Asian, South American, and European trading partners) and put them into the hands of those who will never find it in their interests to do anything we really don't want them to: the oil-rich, extremely unpopular regimes of the Middle East, which might fall in a matter of months if the U. S. were simply to stop propping them up.
posted by jamjam at 1:40 PM on May 14, 2006


The new Bourse, and the switch to Euro oil valuation, has been planned for not quite an entire year now, and some people who like to spin fun conspiracy theories like to think that it's yet another reason that the US is so gleefully doing its sabre-rattling routine.

I don't know if this is the Chinese Century, as I've read here and there, but it's definitely not going to be another American Century. Sell your dollars. :)
posted by blacklite at 3:38 PM on May 14, 2006


Oh deat blacklite, those chaps who are on about the Project For A New American Century won't be pleased at all ;)
posted by Jimbob at 4:42 PM on May 14, 2006


By the way Malor, your comment reminded me how little I know about economics, and how much I plan to learn. Some day. I still can't get my head around the concept of governments printing money. How do they know how much to print? Where does it go after they've printed it?
posted by Jimbob at 4:46 PM on May 14, 2006


Jimbob, that's Malor's point. The US is essentially printing too much money, and that's going to bite everyone in the ass.
posted by [expletive deleted] at 4:54 PM on May 14, 2006


Yeah I know, but on a more basic level...once they print that "extra" money, they don't just go mail it out to the citizens at Christmas time. They don't send people out to stand on street corners handing it out to homeless people. And, I assume, they don't just spend it themselves - add it to general government revenue - do they? I assume that would have serious implications for inflation, not to mention fiscal resonsibility. So where does the money go to?
posted by Jimbob at 4:58 PM on May 14, 2006


When people like Malor say "print money," they don't mean printing money. They mean reducing interest rates and making other policy choices that have the economic effect of creating money (or of making existing money stocks more liquid). So the money goes into easier credit, mostly. Or comes from easier credit, if you want to think of it that way.

Actually printing money is much simpler. The Mint and Bureau of Engraving and Printing respond to demand for currency from banks. When there's higher demand, they print/mint more, nothing more rocket-science than that.
posted by ROU_Xenophobe at 5:37 PM on May 14, 2006 [1 favorite]


From the Federal Reserve Board: All you wanted to know about open market operations, but were afraid to ask.
posted by raysmj at 5:40 PM on May 14, 2006


Much speculation about currency is based on the old notion of (extended) mercantilism--that if not based on specie, like gold and silver, then money must be based on "something", some tangible good or service.

This idea is flawed, because it is just a static picture of a dynamic system. It only shows a snapshop, not the underlying reasons for relative strength or lack thereof.

Granted, the "real" strength of a currency is this, it is true. But real strength is only a fraction of the total, the rest being made up by what I call "imaginary money", seen only in the dynamism of a particular currency.

That is, if you have a dollar bill, you can easily picture what that dollar bill is worth, based upon a single transaction against some real good or service. This is the snapshot.

What you don't see, but is very real, is the "imaginary" effect of that dollar as it goes from person to person. What might be called a multiplying effect comes into play that would not exist if the dollar was just spent once, then not spent again--taken out of the market.

In other words, a dollar bill not spent is worth only a fraction of a dollar bill used in a hundred transactions in a short time. The latter dollar bill is powerful and potent, worth far more to the system as a whole than its face value. It creates all sorts of new demand in the marketplace, it requires new supply to meet that demand. All because it is used, not idle.

Now consider that most currency does not even exist as paper money, but only as data on computers. It is the virtual flow of this "imaginary money" that determines the strength or weakness of an entire economy.

Internationally, this results in an odd circumstance, because of the economic rule that "bad money pushes out good money". That is, when there are two competing currencies, everyone wants to save the "valuable" currency, and trade in the "weak" currency.

Inside a country, having a weak currency would result in inflation, but outside of a country, it results in a triple whammy, benefitting its country of origin. First of all, it gives them greater control over international commerce, such as the example of the oil bourse (within limits, for example, nobody would trade in Iranian Rials, it is just too weak and uncommon. That is why they would switch to Euros. But that would only work if Euros were less desireable than dollars as a trading currency.)

Second of all, the US being a debtor nation, it creates a situation of inflation *relative* to other currencies. And inflation favors debtors, not creditors. Inside the US, at the same time, ironically, there could be zero inflation, as a dollar would still buy a dollar's worth of whatever.

Third, and the one most often quoted, is that a weak US dollar makes US exports very desireable. This not only constrains other currencies, but boosts the US economy and lowers the US trade deficit.

The bottom line of all of this is that any efforts to cripple the US economy have to be powerful enough to not only overcome our "real" money, but perhaps also the 95% that is "imaginary" monetary strength. I would not bet on that with anything short of a crippling disaster--and one that takes places domestically, not internationally.
posted by kablam at 6:06 PM on May 14, 2006


I think there is a deliberate move afoot to concentrate all power and wealth in the hands of a few thousand people. They will retire to Dubai, and the rest of us will become as serfs to them.

It would not surprise me in the least to discover the US dollar is being deliberately manipulated downward because it best suits the avarice of the ultra-wealthy. No doubt they're making a bundle on it.
posted by five fresh fish at 7:43 PM on May 14, 2006


My cynical side says that a falling U.S. dollar is likely to be buoyed significantly by the planned unpleasantness soon to transpire between the U.S. and Iran. Where money is concerned, flights to quality reverse in a day to become flights to safety. 24 hours and 100 cruise missiles over Tehran, and my cynical side thinks the U.S. will be awash in flight capital, once again.
posted by paulsc at 10:09 PM on May 14, 2006


Jimbob: I started to write up a little essay, and I couldn't remember the name for 'taxation through debasing a currency'.... so I did some google searching, and I discovered an old set of posts of mine on Slashdot that cover things pretty darn well. Amusingly, I couldn't remember it then either. It's called 'segniorage'...the King's tax on currency.

This is the Slashdot story, 'The Monetary Economics of Thurston Howell III'.

I made many, many posts in that thread, but this was my main one. You can read all of what I said by searching for my username, Malor, but if you read this one thread and the replies, it'll cover most of what I think I know about money.

I am still confused about the actual process of 'printing' money. I know it's lent into circulation, rather than just 'dumped'... the Fed issues X number of notes at Y% interest. The weird thing is that if they don't continue to print more notes, the debts can't be repaid, because they're the ones that control the supply. If they've lent 1000 dollars at 5% interest for 1 year, the loan can't be repaid unless they print 5 additional dollars. That's pretty strange.

In a mint system, private citizens (or gold miners) go to the Mint with raw gold, and have it turned into coins for a small fee... this is how new money enters the system in what I would consider the 'normal' way. This thing of lending money to create it really looks like a racket to me. It appears to force perpetual inflation.... which may be a correct reading, since we've had perpetual inflation since the Fed was created. And it would appear to let the Fed profit with a tax on all the currency ever lent into circulation.

If that's the case, it would make the Fed profitable beyond imagination.... at our collective expense.
posted by Malor at 1:50 AM on May 15, 2006


24 hours and 100 cruise missiles over Tehran, and my cynical side thinks the U.S. will be awash in flight capital, once again.

That used to be true, but the whole problem is that the USD is being considered as more risky and worth less. Flight to quality is a very real phenomenon -- the question is "Is the US Dollar quality anymore?"

What makes the USD such a power is simple -- the US Government says the dollar is good, and since the forming of the country, it has made good on that statement. The US has never renounced a debt, and it is either rare or nonexistent that the US has even declared any currency non-legal tender, though spending a very old dollar as a dollar would be stupid.1

That's one reason US Bonds have historically not been the best investment, compared to selected others. The risk of the US not paying back the bond with interest has been as close to zero as you can get in finance.

The rub: the world isn't banking (ahem) on that anymore. A war with Iran will pull millions of bbl/day off the markets. This will spike energy prices. Countries that use more oil will be hurt more than countries that use less.

The US, being the king of consumption, would be hurt the most. Add in huge debt, real estate inflation, massive consumer debt, and a historically low savings rate, and you have a bad combination -- a massive attack on the foundations of the current economy, cheap transportation, cheap energy and cheap capital.

Finally, BushCo's popularity is a fact. There are plenty of people who won't move to dollars, even if it was in fact the right thing for them to do. The invisible hand might be biased, but people run things, and they're often irrational (in the economic sense.)


1) Last time I discussed this, someone pointed out gleefully that the US refused to accept the Confederacy's debt and ruled the Confederate Dollar not legal tender. I asked how this changed my argument about the US government. Still haven't gotten an answer to that.
posted by eriko at 4:33 AM on May 15, 2006


So now that I've sold my house, where should I put my money? (That's not a joke question by the way. We're renting while waiting to see what the housing market does, but given everything else that's going on, I have to wonder if even T bills and CDs are the way to go. Suggestions welcome. Again, Malor, thank you for your comments- always a pleasure.)
posted by IndigoJones at 6:04 AM on May 15, 2006


eriko- you can also point out to someone that Confederate currency is roughly twice the face value or even better of the modern greenback.
posted by IndigoJones at 6:08 AM on May 15, 2006


Indigo, I wish I could clearly answer that question. If you were asking me even six months ago, I'd have said 'buy some gold and silver'. I've been saying that since mid-2000, to the point of exasperating friends and family.... however, I'm not looking quite so insane now... it was $290 or so back then, and it's been over $700 the last few days.

I honestly don't know what the heck is happening now, though. The recent gold runup certainly isn't a bubble, but it's been so nasty and spiky that I don't trust it. Most times I've seen gold spike hard like that, it's also fallen back even harder. So I'm really nervous about suggesting a buy in the short term. You might nibble a little (always a good idea with commodities... nibbling reduces your exposure to weird price shifts.) I think a big buy might be a very bad idea just now, at least over the short term.

It's my overall belief that we're moving into an era when commodities will rule, and stocks will underperform. Already, even if you accept the profoundly understated government figures on inflation, the stock market has barely budged in the last six years. In 2000 dollars, at least as of a few weeks ago, it was at 9800. It LOOKS higher, but in real buying power, it really isn't.

You might want to look up Marc Faber's website, Gloom, Boom, Doom. He's brilliant, and I think he's got a better picture of the macro environment than probably anyone. He was saying back in 2001 that if he were young enough, he'd learn Chinese, move to Hong Kong, and get quietly rich. I haven't been following him of late, so I don't know what his current advice is, but it's worth what he charges for it.

Bill Fleckenstein, of Fleckenstein Capital, is an extremely accomplished and talented investor. He writes a Daily Rap that's well worth reading. I've been subscribing there for years. He goes both short and long, and he definitely blows it sometimes, but he gets it right much more often. Right now, he really likes Newmont Mining, one of the biggest gold producers(NEM), and to a lesser extent Pan-American Silver (PAAS) (of which he's a director). He's been selling some gold and buying NEM lately, because NEM hasn't moved much for like the last two years. I believe he figures that even if the gold prices drop back into the 500s, NEM should pay off handsomely, either with dividends or with stock price.

If you're really interested in gold stock info, John Doody's Gold Stock Analyst has more condensed knowledge of the mining industry than probably exists anywhere. John knows MINING, more than MARKETS, and he rates companies based on their mining operations.

I strongly suggest diversifying away from gold and silver. Don't just go there. The reason is because gold is a political metal, and governments hold a lot of it, so they can cause large short-term swings in the price. You can play these to your advantage, but you have to be very agile, smart, and connected, and most of us aren't. Silver could potentially pay off BIG, but it's very risky. A lot of the silver price is simply opinion on the state of economies, particularly the Chinese economy.

Before you do ANYTHING, read. Read a lot. If you act in haste in this environment, you could really blow it. There are currents and cross currents and cross-cross currents, and making heads or tails of them is very difficult.

I will say that my guess for the overall trends is this: dollar down. Way, WAY, WAAAAY down. With the promises our government has made, and our enormous trade imbalance... a lot of people talk about the dollar dropping by 40%, but my personal guess is more like 90% over the next 15 years or so. Things are just so extreme.

Commodities up: waaaay up. Oil is absolutely essential: it's the methamphetamine of the world's economy. Like real drug addicts, we'll do ANYTHING, pay ANY price, to get it. Energy in general is likely to be an excellent investment, even buying in at the high prices we have now.

I think housing is going to start falling off a cliff: the Fed will intervene, cut rates, and print money to stop the slide. This may or may not hold house prices steady, but it's likely to produce a lot more inflation. It may cause bubbles in other things.... like, say, commodities. I don't think we've even started one yet, but we could.

I guess, overall... focus on real wealth, not just paper money things. Focus on NEEDS, not luxuries. And read, read, read.

Also... there does remain a very small possibility of a total systemic collapse. Derivatives are a very new thing, they're extremely widespread, they've never been tested through a really major downturn, and they scare the hell out of Warren Buffett, among many others. If we had another bad terrorist attack, or another Long Term Capital Management fund blowup, things could get very dicey, very quickly.

It would be wise to have cash for a month's worth of expenses on hand... not in a safe deposit box. I'd also suggest about half that much in small-denomination gold and silver coins. Just enough to keep you eating awhile, not enough to make you an attractive target. You also want to keep the amount small because the chances of needing it are so low. Treat the metals as a small investment: assume the cash is a loss, an insurance premium.

When Greenspan talked about Long Term Capital Management, he mentioned the possibility that they could have sunk the entire global economic system. He estimated that chance as 'less than 50%', which to me implies 'greater than 40%'.

The 'have some cash' paragraph, in other words, isn't _quite_ as crazy as it sounds. :-)
posted by Malor at 8:19 AM on May 15, 2006


Thank you Malor. Mrs Jones thought gold would be a good idea about five years ago but allowed herself to be lulled out of it by ValueLine. (I'm no better. I thought Berkshire at 200 was totally insane.)

The Long Term Capital Debacle, hm, would it really have pulled the whole show down? I'm not convinced. I think propping it up gave a green light to ensuing hedge fund craze, which really could bring the whole show down. Moral hazard? Apparantly not an issue. Ditto bailing out the Mexican peso.

BTW, and speaking of commodities, you wouldn't happen to know what's up currently with Jim Rogers' two funds? I was about to throw money into them last year, then suddenly Refco went into Chapter Eleven and he and they went into litigation. Despite this, the shares are still advertised, but I can't get a firm handle on what the status is (some shareholder distress, of course), or would be for new money going in. Failing him, do we know anyone else is getting into that game?
posted by IndigoJones at 10:02 AM on May 15, 2006


Well, it can be argued the absolute flood of money the Fed printed in response to LTCM and the peso crisis set off the stock market bubble, and yes there are huge moral hazard issues. But it scared the bejezus out of Greenspan at the time, and Warren Buffett has been warning about how bad derivatives are for four or five years now. (He bought a company that had a lot of them, and has been going through hell trying to get them unwound.) Whether or not it was the right thing to do, and your arguments that it was wrong definitely resonate with me.... it's still worth understanding that a bigtime derivatives failure is very scary for the pros.

The total collapse of the entire world financial system is at least conceivable, and I'm not aware of any other time that that has EVER been the case. Even in the very bad 1930s and 1970s fiscal crises, there was no doubt at all that the system itself was sound and would survive, even though many companies and banks didn't. Bank A failing tended not to have much of a direct impact on Bank B. But they're all interrelated now, and we thus have the (remote!) possibility that most of the major financial players in the world could go down at the same time, domino style. So a little cash on hand isn't a bad idea. Maybe a month is too much, but have SOMETHING, a few hundred bucks at least.

I'm sorry, I wish I knew more details, I'm still pretty ignorant in many areas... there's a very very great deal I don't know. I did most of my reading in the gold and gold-stocks area... I can talk with at least a little knowledge there, but general commodities, not so much. I don't know any more about that fund than some random cab driver off the street would.

My suggestion would be to to subscribe to Fleckenstein Capital (a good idea anyway, the Daily Rap is highly entertaining) and write an Ask Fleck letter on the subject. His one to four sentence answer will have more concentrated knowledge than every word I've ever written on the subject. If he doesn't know, he should at least know who to ask.

If you really aren't interested in subscribing, I could probably drop him a note and see what he says. I try not to bug him, but that is a good question.
posted by Malor at 5:21 PM on May 15, 2006


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