inflation/devaluation redux

[ritaxis]

Idiotic straight extrapolation -- If CZK300,000 went from $12,000 to $16,359 in five months, in a year it would go to $22,461, which is a rate of increase for CZK/decrease for dollar of 87%. I think.

But the Canandian dollar has only gone to $1.10, which is what? I forget how much the Canadian dollar was earlier this year. But not more than a third less than it is now, surely?

Maybe what we ought to do next year is go ahead and borrow the full amount of his expected expenses for the rest of the time, turn them into CZK, and have him pay us with his loans -- to pay off our loans, which won't wait until he is finished -- while paying his fees from his stored CZK. Which he'll have to turn into Euros at some point. Next year?

Does anybody think the dollar will rally especially in the next six years?

Does anybody know anything about money?

Comments

[cpxbrex.livejournal.com]

Yeah, I know something about money. For the record, it's from a fairly socialist perspective so take that as you will.

I've actually been waiting for this to happen for several years. Indeed, I had intended to buy a house during the worst of it - which will probably be sometime next year - because I'll be able to save 10% or so as it becomes a buyer's market. Alas, my wife is getting her Ph.D in a community where our downpayment is a drop in the bucket, hehe. Oh, well.

But this has been coming for a while. The American economy is a service economy with a strong emphasis on low end jobs. We're in debt up to our eyeballs - this year, every man, woman and child in America borrowed more than twenty bucks each and every day - and we don't really make anything. Industrial jobs STILL continue to drop. And while we're willing to put money into research (even if almost all of it is military) more than 1 in 3 engineers and scientists in the US are here on some sort of visa. In my wife's office, about 8 in 10 of the professors are from other countries - the problem gets worse at higher end positions. So, we're poorly educated, we're not making anything, and most of the jobs in the economy are selling Big Mac's and soda pop, and we're getting in huge piles of debt that we can't pay off.

Additionally, the US is engaged in several foreign adventures. Usually, war is pretty good for business, but the Bush administration in it's wisdom has lowered taxes. So, the finances of the government have gone from . . . pretty good during the Clinton administration to totally fucked during the Bush administration.

The housing fiasco is just the first way Americans borrowing more than they could every hope to repay is coming back at us. The stark fact is that most Americans will now never be able to afford a house, and now the banks know it. Oh, there will be a number of short term recovers in the US housing market, but like the auto industry it's headed for a long, slow decline unless a fair bit changes in the United States in the next decade or so. We're deeply in debt and in the lower 3/4ths of wage earners in America their income is stagnant to declining. It doesn't take a math genius to figure out when your debt goes up and your wages stay the same, eventually you'll pass the point where you can repay that debt. That's the whole country.

The weakness in the US economy is also due to the relative strength of "emerging markets". That'd be India and China, mostly. As people in India and China start earning money, their middle class (which is hundreds of millions of people; it's relatively smaller than ours but India and China have roughly 8 times the population of the US) are starting to demand the same sorts of things that Americans and Europeans take for granted. So, at the same time as all of this is going on, India and China are churning out double digit growth rates. In China, they're worried about their economy growing too fast. And while it has liberalized, much of it is still a command economy. The big bosses in China are willing to devote incredible state resources to developing the country economically. India's growth follows an even more exploitative neo-liberal model, and has somewhat lesser growth, but there are over a billion of them.

*con't, hehe*

[cpxbrex.livejournal.com]

One of the things about oil people never talk about is that it doesn't have to run out to run out. All that happens is demand has to exceed production. Say in the instance of two and a half billion people wanting to live like Europeans or Americans. And, of course, in the end, the oil will run out. Whether in 2010 or 2050, there's only so much of it and the earth isn't even making any more! (Since that time period, there's been a lot of evolution in single celled organisms - they are much more efficient at breaking down organic matter. The earth is making far smaller amounts of coal and oil as it did tens and hundreds of millions of years ago.)

So, the price increases in oil are as much about greater demand as political instability in the Middle East. Where does oil fit in? Well, right now, all oil, everywhere in the world, is traded in dollars. So, as the dollar weakens the price of oil goes up for us here in America. In the past two years, a barrel of oil cost $30 bucks and now it costs somewhere over $90, except for, say, Germans who buy oil in euros. That same barrel of oil is costing them somewhere in the $60 a barrel range, really. Yeah, it's more expensive, but not as crushingly expensive as here in America. Oil barons are watching. What they're thinking, right now, is, "Because we're not selling oil in euros, we're missing out on thirty dollars a barrel when we sell to Europeans, who account for 15% of our total sales. We're missing making a huge fortune because we don't sell in euros."

What does all of this mean? It means that the dollar will recover. The US still has tremendous economic and political power, unless one of several things happen. We enter a depression. What will be worse than the US entering a depression is that the rest of the world might not oblige, which would mean a serious reordering of finance around the world which would change, in the long term, the relation of US economic strength to the rest of the world. The US might enter a depression. What would bring this about, and these are just a few of the reasons, is 1. the collapse of the auto industry, which could happen; the whole mess of it tetters on the brink, 2. continued financial breakdowns; the credit problems in the housing market could pretty easily spread to other credit markets as people are crushed under credit card debt as that continues to build, 3. global oil markets start to trade oil in dollars and euros.

Of the three, the last is the worst scenario and it's inevitable. The US has been able to write blank checks for a while not because every government on earth needs to have a big wad of dollars to buy oil. If oil begins to be bought in other currencies, those dollars will start to flow backwards into America, causing a currency crisis that makes this look insignificant.

It is my personal feeling that this will be held off for a while. Currently, the US possesses unique military power. We are still a very culturally important place. And we do have a huge and powerful economy, even if it is troubled. The Powers That Be want the US to recover, at least for the time being, so it probably will. The fall of the US from the preeminent industrial position is something that will cause some real problems, and the more intelligent financial minds of the world want to shepherd this along with as little pain as possible. Who wants a US that turns into an economic disaster area? We've got nuclear weapons! No one wants a destablized America. So, in the middle term, yeah, the dollar will recover.

[fivemack.livejournal.com]

I don't think anybody knows anything about money six years out.

There are analysts who think that America and Europe are doing the same sort of wrong things with a few years of separation between them, that doom has come due for America this year and will come for Europe in a couple of years, so now isn't far from as bad as it gets, but this is by no means universal.

On 1 January 2007, one dollar would buy you (http://www.oanda.com) 116 Canadian cents or 20.91 CZK.

On 7 November 2007, one dollar buys you 93 Canadian cents or 18.54 CZK. On 7 July 2007, five months ago, one dollar bought you 105 Canadian cents or 21.04 CZK; so 300,000CZK has never as little as $12000 this year. The least it's been this year is $13725, on 28 January; the most it's been is $16179, today. The last time it was $12000 was 10th November 2005.

[this is assuming that you can convert money without paying a premium; you're being charged about 1% for converting the money into CZKs, but I suspect you'd have been charged the same whatever the exchange rate]

The Czech Republic is not immune to the kind of trouble hitting America, though, since it doesn't host very many very large financial institutions, it's immune to the first-order effects of purely financial panic.

It has the same class of house-price trouble, though to a lesser extent; it's an EU member, which means that people from the EU can buy property there, and there's a certain kind of rich British person who believes that the intrinsic value of a house is at least $200,000 and therefore that he should devote most of his spare money to buying houses in Prague when the Czechs are selling them for $50,000; this means it's pretty hard for an average Czech to buy a house in Prague.

It has mining and manufacturing; being a former-communist country, it has salaries for doctors which are extremely low by American standards and not high by local standards - 'doctor' is a prestigious but poorly-paid public-service job, like 'teacher'.

[madwriter.livejournal.com]

Just a few "talking points" to add to the commentaries above, and why I think the dollar isn't going to recover at least within the next couple of years:

At last report, the U.S. debt and other "obligations" totaled $55 trillion. There's a better-than-even chance that there isn't this much money in the world, much less the U.S.

The problem with the housing crisis is that it isn't just housing, but the staggeringly large debt pyramids that banks and other lenders built on top of mortgages while not keeping enough money in reserves. I think in the near future you're going to be seeing a lot more things like CEOs retiring (Citigroup) and big houses being investigated for hiding losses (Morgan Stanley).

Every year since something like 1913, the Treasury reported how much money it was printing annually. This year, for the first time, they decided to keep that information secret. The cynic's view of this might be that they're trying to hide the numbers in order to prevent hyperinflation as the dollar drops and interest rates are cut.

There are two big ways this country has supported its debt: oil sales (oil can be used to back up our money as gold once was, put simply--"petrodollars"), and other countries buying dollars for their reserves. Now other counties (as said above) are starting to take Euros as well...Iran made the mistake of saying it would only take Euros, which lends more fuel to the fire between us...and they're shedding dollars from their reserves. Not dumping them--that would hurt them as much as us--but they are doing significant downsizing.

And if we attack Iran, the effects on the dollar might not be foreseeable, but there's a strong probability they would be catastrophic.

[randwolf.livejournal.com]

Essentially, you are thinking about speculating in the currency markets. This is a very risky thing--what if the dollar rises instead of falls?--, and generally not something to do with money you or someone you care about really needs. I do think it likely the dollar will continue to fall for the next six months, so converting currency for the next six months--provided you can absorb an unexpected loss ("hedge")--is probably sensible. I wouldn't go further than that, but I am a very conservative investor. For longer-term tracking, keep an eye on Brad Delong's blog; he covers the fundamentals in this area very well, and if you pay attention to his discussion of the dollar currency balance you can get a sense of what the fundamentals driving the exchange rates are. The problem is that one has to watch politics as well as economics; exchange rates are influenced mostly by large investors, especially central banks, and the central banks can change their policies overnight. Trading currency is not like buying and selling something that people directly consume; the fluctuations in demand can be quite dramatic.

One usually isn't allowed to spend student loan money on anything non-academic, and I'm not sure how far that stretches. Essentially, you are proposing lending money to your son and then repaying it with his student loan money. I'm not sure that this is allowed, and I think doing it for more than six months ahead is a serious exposure for your son, since you might end up spending much more money than necessary, and he would be paying the debts.

The best basic reference books on this, as you might expect, are the small handbooks the Wall Street Journal publishes, but also read Mandelbrot, the (Mis)behavior of Markets as a corrective to some of the unreasonable assumptions about risks that the WSJ books promulgate. If you'd like a copy of the Mandelbrot book, I have one I'm planning on getting rid of; if you want I'll send it.