[Note: Some of these issues were discussed in a lively thread a few days ago. I thought I’d say a bit more about it here. It was interesting to see just how emotional a response this topic generated.]

I spoke with my mentor in NYC on the phone for about an hour last week and he shared with me his thoughts on the economy, in particular the strength (weakness) of the US dollar and how this will affect us all in 2007-8. I am no economist, and do not have the knowledge or skills to debate these arcane issues intelligibly. I do know, however, that the media are confirming many of the things he told me 10 days ago: the price of oil and other commodities will continue to rise in the long term; the dollar in the foreseeable future cannot recover no matter how much Bush urges us all to go shopping, and all the Fed can do is print more dollars, pushing us closer to inflation; China will probably sell a healthy chunk of its dollars (in Chinese, via Shanghaiist) after the New Year (things are orchestrated to allow us to enjoy our holidays); the housing slump will further slow down the US economy (so many jobs and ancillary industries are linked to the housing market, as they are to the auto industry); as always at a time of slower growth and diminished supplies of resources, the best investing bet for the next two years will be commodities, precious metals, natural gas, etc.

For an extremely opinionated outlook on these issues, you may want to peruse this site. The author is obviously banging his agenda-driven drum loudly, even hysterically, but I find enough nuggets of insight there to make it a daily must-read. And the guy is no quack. I overhauled my entire portfolio this week to protect it against a weakening dollar. I put some of my savings into a fund that shorts the US dollar, as well as mining stocks and commodities funds.

I am not predicting the collapse of America, just some hard times for many and some surprises for those whose hopes and dreams are pegged to the dollar. And I may be totally wrong – God knows, I was wrong during the dot-com bubble, though I like to think I learned a lot from that experience (I haven’t lost any money since). All we can do is watch and wait.

About my mentor: He is a professor in NYC, my oldest and closest friend, and he has an astonishing track record when it comes to investing. He is a contrarian and sees all “establishment” thinking on the economy to be fraudulent, almost a form of brainwashing. His philosophy: The oligarchy rules and we serve, and while there is no way to alter this, we can open our eyes and see how the oligarchy operates, and from time to time we may even outwit them. Evidence of how the powers that be is there, right in front of our faces, but most of us choose not to look. Ignorance is bliss. One splendid recent example, via Sinclair, is the Federal Reserve’s recent decision to mask the dollar’s perilous position. Money quote:

With their decision to put an end to the publication of M3 and other indicators designed to measure the evolution of Dollar ownership worldwide, the US authorities initiated a policy of “hidden monetisation” of the US debt. The Bush administration’s incapacity to handle the various deficits (budget, trade) and the related debt will result in a monetary creation of unequalled proportion, leading to a dilution of the American debt in an ocean of Dollars. The process has in fact already started: during the first three and a half months of the US fiscal year (beginning in October), the Federal Reserve has increased by 320 billion USD its stock of currency, that is 5 times more than it did over the same period last year…

I increasingly like the thought of going to work in China and being paid in RMB. I am delighted that my contract states my pay in RMB and not US dollars.

The Discussion: 21 Comments

All I have is my house and a 401K – I guess my question would be, do I still want to keep $ in bonds? I have it split about 30% in bonds, 30% in a growth fund that has done well over the years, 30% in a Euro-Asia growth fund and 10% in this blended fund that so far is kind of a dog (it’s timed to get more conservative closer to a targeted retirement date).

I figure I’m pretty much screwed but not as much as some.

December 30, 2006 @ 3:25 am | Comment

The Euro may not be so hot either, as the UK pound is almost 2-1 against the dollar. France and Germany are said to be casually examining leaving the euro for the same buying power.

China can sell its US debt, the US will suffer but that means a much smaller market for chinese products…then there is the 27.5% tariff coming in the spring.

who wants to play monetary chicken?

December 30, 2006 @ 4:10 am | Comment

I can confirm what you said regarding the post-New Years selloff and the switching of assets into the JPY.

The PBOC and the BOJ seem to have a bit of a nasty game of chicken going, trying to make the each others’ currency appreciate more vis a vis the dollar.

I expect some oil producers to switch out of dollar reserves and into a mix of Euros, sterling, and yen soon.

December 30, 2006 @ 7:54 am | Comment

I hear ya, Richard. When my wife and I sold our house in S.F., we moved the proceeds to Switzerland and into other currencies. We continue to shift U.S. dollar-denominated assets there from time to time, but our banker says not to even bother converting dollars into euros because the rate is so far down. Metals are the way to go if you want to get out of dollars.

December 30, 2006 @ 3:00 pm | Comment

Richard, invest in the City of London and Sterling. Your money will be as sound as a pound! 😉

December 30, 2006 @ 6:44 pm | Comment

Let the Saudis get rid of their dollar holdings, that is a sure way to keep the US from protecting them from an upcoming thumping by the Iranians.

December 31, 2006 @ 2:47 am | Comment

I think the slide of the dollar and the slow-down in the US economy is going to last more than a couple of years.

The US debt is huge and other nations are starting to worry about the US governments deficit spending, which is leading them to diversify their currency reserves.

The Chinese government has been financing US deficit spending by purchasing bonds from the US government and sooner or later the US is going to have to pay-up which will mean higher taxes, inflation and interest rates for Americans.

I think the US will bounce back, but not any time soon.

December 31, 2006 @ 3:15 am | Comment

THM, we actually agree on something. 100 percent.

Lisa, you are too cautious! Time to dump everything in exchange for some precious metal funds or a foreign currency funds.

December 31, 2006 @ 3:29 am | Comment

I don’t have that option, Richard – it’s a 401K, and it’s basically what funds it invests in.

At least I don’t THINK I have that option…

Luckily (?) it’s not like I have a ton of money in it, in any case…

December 31, 2006 @ 4:09 am | Comment

And a big F*** you to the Bush Administration for destroying our economy with an illegal, unjust war.

Yeah, I know these are systemic problems, but how much worse has the Bush Administration made them? Of course, they and their cronies will do just fine, regardless of what happens to the rest of us.

December 31, 2006 @ 5:08 am | Comment

Can’t blame Bush alone. Millions of Americans voted for him twice. Fortunately, even Kansas, as in What’s the Matter With Kansas is finally waking up. A Republican senator was ousted in the November election by a former Republican who turned Democrat in order to beat him. The papers are now speculating openly where he ranks in the top ten worst presidents ever. Clinton is ranked, also, owing to his impeachment.

December 31, 2006 @ 5:41 am | Comment

@ Songagi:

I think it’s safe to say that a fair amount of blame can be placed squarely on the Bush administration’s shoulders because as Richard pointed out with his Money quote, the Bush Administration is the one who ultimately decided to stop the publication of the M3 report; an attempt, in my opinion, to conceal the actual depth of our nations debt. I believe that is called misleading? I can see no other reason for such actions.

I may get under Richard’s skin at times with my support for many of Bushs’ policies, but I have stated from the begining that Bush is no fiscal conservative – in that respect, he’s another FDR.

December 31, 2006 @ 9:54 am | Comment

Lisa, check your 401K choices carefully – there may be a fund that is commodities-focused, or at least not dependent on the US stock market. My last company offered us a whole basket of Fidelity funds for our 401K, some of them that went counter to the usual stock funds (like their Contrarian Fund).

December 31, 2006 @ 12:44 pm | Comment

Richard, my Euro-Asia pac is all about off-shore investments. But I’ll call them on Tuesday – my 401K is with Fidelity.

December 31, 2006 @ 12:58 pm | Comment

Kudos to Richard for his suggestion to invest in foreign currencies. This was a strong suggestion given by my economics professor this semester.

The Yuan is actually a good currency to invest in because it is believed to have been held artificially low for quite some time now and eventually the Chinese government is going to be left with no other choice but to allow it to rise.

Gold is always good, but another friend of mine has done quite well with is investment in Petro China.

As for myself, I have some cash stored away for a nest egg, but I decided to take my excess student loan money this past semester to purchase a nice chunk of gold. Hopefully it will appreciate enough to pay of the dept that financed it.

December 31, 2006 @ 2:23 pm | Comment

Bush is an FDR who spent our money to enrich himself and his cronies, rather than one who used it to build social services that benefited common people.

I know libertarians really despise FDR for enlarging the scope of government, but I’ll take an FDR over a Bush in a heartbeat.

January 1, 2007 @ 2:58 am | Comment

What makes me hesitant about these threads on the impending demise of the U.S. economy by Sociologist Li and the (late?) Ivan is that it’s been predicted so many times before. I think it looks bad, but I’m paranoid. I remember after Bush stole his way to another four years of reign and ruination, I would wake up in the middle of the night during November and December 2004 in a sweat, worrying that the rest of the world would turn against the dollar before I could get my money out. As some wit said about the crumbling of Yugoslavia, “there’s a lot of ruin in a country,” meaning it takes a long time for everything to be stripped down to the bare walls. And that was a small country they were talking about. However, all the fundamentals are pointing in the direction of a crash. Sooner or later, the Chicken Littles are going to be correct.

January 1, 2007 @ 1:06 pm | Comment

Bukko, it may sound like an old and often-repeated chorus; all I can say is I havent’ expressed deep, deep concern about the state of the US economy in general and the dollar in particular before, ever. I truly believe all the signs are there for a big problem, especially as evidenced by Bush’s playing with the traditional M3 transparency. You don’t do that unless you are deliberately trying to hide very bad news from the public. And you’ve heard all the oter arguments – I’ve never before seen all the ducks lined up like this in such perfect formation to lead to a…well, a big problem.

Again, all we can do is stand and wait. Threadsd like this are purely speculative and perhaps thoroughly devoid of meaning. So with that in mind, here’s my prediction: Wall Street sees a big upsurge in early January, a burst of jubilation as people are swayed to think, “Hey, things aren’t that bad, and the markets are coming back!” This will be followed by the rug being pulled out from under the suckered masses, as always happens. I’ve never been a chicken little about the dollar or the US markets. Only now. Let’s see what happens over the next 6 months.

January 1, 2007 @ 2:28 pm | Comment

This ignores what happens (and is already happening) when the dollar weakens — the US sells more products. I am not saying you are wrong, but I am saying macroeconomic forecasting is hugely unreliable.

January 1, 2007 @ 10:58 pm | Comment

Yes, macroeconomic forecasting is treacherous and usually wrong. But in this circumstance I thought it safe enough to go out on a limb and offer my predictions. The low dollar is great for exports and some people will greatly benefit. But I see the dollar’s fall is a negative for the vast array of investors and average citizens, especialy if we also see a surge in the prices of raw materials. I would guess that we’ll have a good picture of where we stand in about 6 months, when we can come back here and either blast commenters for their bad predictions or praise them for their prescience.

January 2, 2007 @ 1:53 am | Comment

Plus the biggest problem with the fall of the dollar is that it hollows out the economy. That $100,000 you had saved for retirement? It now can only buy what $50,000 used to. The gallon of petrol that used to cost $2.50 is now $5 because the dollars used to pay the Saudis for it are halfway to worthless. And the side effects ripple through EVERYTHING.

It would be nice, Dan, if the weaker dollar meant America could sell more. But what does America make that anyone wants? Entire factories have been packed up and literally shipped to China and other countries. As Al Gore pointed out in “An Inconvenient Truth” U.S. cars can’t be sold in China because they don’t meet Chinese fuel efficiency standards. The U.S economy is militarised. For the past 20 years, the focus of industry has been on building more deadly tanks, jet fighters and other weaponry. I recall a Jesse Jackson speech from 1988 about how the Japanese were concentrating on building better VCRs while America was working on better MX missiles, but the Japanese could sell a lot more VCRs than the U.S. could ICBMs.

And even if it does work out macroeconomically that the U.S. could sell more stuff, there’s a time lag of years before trade patterns change enough to be felt in terms of masses of Americans having jobs for export industries. Plus, can’t you hear the nativists screaming about “Why are we sending all of our good stuff to those foreigners?”

What’s going to happen is that America won’t sell STUFF, it will sell ITSELF. Outsiders wanting to use those increasingly worthless dollars will buy American land, corporations and other real assets. That way they can avoid default, if America simply tries to cancel its debts a la Russia early 1990s; or weasel out by inflating the currency further. U.S. property will seem like fire sale prices. It won’t be a wholly owned enterprise, but foreigners will control a lot more of America. Welcome to the new Colonial States! It’s going to be an interesting time, but it will be more fun to read about it from far in the future than it will be to live through it.

Then again, I’ve been wrong before. I hope I am this time.

January 2, 2007 @ 11:34 am | Comment

RSS feed for comments on this post. TrackBack URL

Sorry, the comment form is closed at this time.