Thursday, 14 May 2009

The dying dollar and what it means to you

Outside the Box
John Mangun
Business Mirror

The financial and global economic game has changed. The result will be the most profound shift in wealth seen in our lifetimes. And you can be the ultimate winner because you are sitting here in the Philippines.

Often my ideas expressed in this column are characterized as the words of a mouthpiece of the government or the ravings of some fool who thinks the Philippines, for whatever reason, is some paradise on earth. Neither of this is true. However, the events unfolding in the USA and reflected on the global markets is going to make the next 12 months a historic turning point, particularly in the fortunes of the Philippines.

If you read yesterday’s BusinessMirror opinion page, I hope you caught William Pesek’s column entitled “Irrational Exuberance” about the huge increases in Asian stock markets this year. Pesek’s thesis is that regional markets are way out of control, showing “bubble-like” price action and are due for a rude awakening and fall. He could not be more wrong.

The historic strength of the dollar and the ability of the US Federal Reserve to control the value of the dollar have, in turn, controlled national economies from Albania to Zimbabwe and the long-term price of all commodities.

When crude-oil prices rose so high that the US economy started suffering greatly against the backdrop of the 2008 subprime crisis, the Fed simply raised the dollar value from 72 to 88 as reflected in the US Dollar Index against a global basket of currencies. Dollar up; crude-oil price down. Market reality kicked in in January 2009, and the dollar fell back to 80. But the USA, and particularly its government, needed some good news, most easily found in a rising stock market. So suddenly, the dollar went up again to 89, convincing investors that the worst was over, and they all rushed to buy US stocks, particularly foreign money, as they wanted to profit from a strong dollar.

But along came the economic proposals of the Obama administration. Since March, the dollar has dropped back to 82 and there is little the Fed can do about it. At the same time, the Asian markets, including the Philippines, have soared like an eagle in flight. Now Pesek thinks markets like ours going up is not justified. Oh yes, it is, and you have not seen anything yet.

Note these facts. The US government budget deficit is already twice as large as the total deficit for all of 2008. For every dollar the US government is spending, it is borrowing 50 cents to fund that spending. That kind of deficit spending has been unheard of in First-World countries. Second, the deficit situation is getting worse and will be a disaster before the year is over.

April is income-tax-paying month just like in the Philippines. Hundreds of billions of dollars pour into the Federal treasury. Yet last month, for the first time in memory, government spending in April was greater than revenues by some 30 percent. That deficit is paid for through borrowing and by printing dollars.

The dollar at 82 instead of 88 has caused the recent jump in oil prices. US gasoline prices are at a 10-week high, which just happens to coincide with when the dollar started dropping. The last thing the US economy needs right now are high fuel costs, and yet the Fed has done nothing to stop the dollar dropping (and oil going up) because they cannot. The USA cannot pay for its spending except by printing dollars, and this uncontrolled printing of currency cannot lead any place except to major inflation.

When the dollar reaches 80 on the dollar index, this will signal the beginning of a major spike in US inflation. At 70, this inflation will be obvious to the global markets and not be considered just an oil-spike event. At 60, the US economy will be spiraling out of control.

Although US interest rates will climb, foreign money will stay out as the interest-rate income will be more than offset by dollar devaluation. Money will flood into stock markets like the Philippines as a “safe haven.” The Philippine peso will move to a range of 40 to 42 within 12 months. Foreign investors will make profits from both stock prices going up and peso appreciation. Nominal oil prices will move much higher, but increases here will be offset by the peso’s strength. Gold will easily break $1,100. 

Pesek is wrong about the course of Asian markets. Asian markets are forecasting what is going to happen in the USA, and what is going to happen in countries like the Philippines.

The Philippine peso at 40. Inflation at 4 percent. The stock market at 2,500. These are just some of the kinds of economic numbers we have not experienced all at the same time before. We will in 2009, and this will be a positive game-changer for the Philippines and for all of us.

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