2009-01-27

Back to normal - everything is stuffed

For my international readers, you may have noticed a slight drop in the quantity and (let's face it) quality of my blog posts lately. This is because Australia in January is pretty much closed down. Because we live on the upside down part of the Earth, the seasons here are the opposite of that in the Northern Hemisphere. This means that we have Christmas AND summer holidays at the same time. Add to this the fact that our convict forefathers decided to arrive on January 26th 1788 and we basically have a 4-5 week period of nothing but hot weather and holidays.

If anyone wants to invade Australia, do it during early January.

But now that Australia Day is over and done with, the kids are about to go back to school and Australia returns to normal again. My son is about to enter 3rd grade (the equivalent of "the third grade" in America) and my daughter about to go into pre school. This means that I should be able to blog better and more often.

Anyone who has been perusing the economic news lately knows that there have been some massive job cuts announced - not just here in Australia but all over the world, especially in the US. 2008 Q4 GDP will be released this Friday and I am expecting a big drop - at the very least a contraction of 1.0% or more.

I also remain convinced that the US Dollar is ripe for a crash, even though the currency has firmed in recent weeks. As I have pointed out before, there is no real reason why anyone would want to hold US Dollars at the moment - treasury yields are ultra low, the US Property market has popped and the Share Market has crashed. While the rest of the world isn't too wonderful economically either, the US is the centre of the storm and will suffer more and suffer longer than the international community. Although I am not a financial advisor (yet) I would counsel investors to invest in Euro, Yen and precious metals and sell off their US assets before the crash gets underway.

The upcoming dollar crash will be the final "event" that will plunge the US and the world into the second great depression. High oil prices (2004-2008), the bursting of the subprime bubble (2006), the credit crisis (2007-2008), de-leveraging (2007-2008) and the Bear Market (2008) were all previous events that have hit the US in the last few years.

Despite my natural relief that Bush is no longer occupying the White House I have little confidence that President Obama will be able to achieve much in the first 2 years in terms of repairing the economy. Big spending seems to be the only solution and this will frighten the markets further considering the sheer amount of debt the Federal Government has already gotten itself into before the credit crisis hit - and this fear will put downward pressure on the dollar.

Once the dollar has crashed, the only recourse will be to follow the policies outlined in The Washington Consensus, which will inflict upon America harsh austerity measures. A dollar crash will force the Federal Reserve to raise interest rates and force the Federal Government to rein in spending - the very opposite of what is currently being applied (low interest rates and lots of deficits spending).

While a part of me remains Keynesian, the Austrian part of me argues that policies and practices that created the problem in the first place should not be used to solve the problem. in other words, if America's situation was caused by unrestrained spending and injudicious borrowing, then why assume that more spending and more borrowing will solve the problem? Balance needs to be restored - and that means that America needs to save more and borrow less, to produce more and to consume less. It is therefore more important for China and Japan to stimulate domestic spending in their own countries - a process that will increase US exports and reduce imports to the US - than for the US to indulge in more spending.

This is not to say that some deficit spending may be required in the US - just not as huge an amount that is being touted.

But, the dollar will crash and no one listens to me anyway. It'd be nice if I could make money out of being right.

2 comments:

Ron Lankshear said...

Interestingly on news tonight was the resignation of government in Iceland. People in crowd had posters saying "Euro NO - US Dollar Yes"

What do you think?

Ron Lankshear said...

Invade Australia on or after 26 Jan. Enemies - be warned there is only Tennis on the TV. All the world's players are here losing weight in the Sauna sorry tennis court. Phew it has been hot.