The Rise and Fall of the Dollar: 1800-2009
HT Mises.org
“China Allows Yuan Trade Settlement, Offers Tax Breaks” via BB:
China will allow companies to use the yuan to settle cross-border trade and let them keep their entitlement to export tax rebates, seeking to reduce the reliance of importers and exporters on the U.S. dollar. The People’s Bank of China will encourage banks to offer yuan settlement services from today.
“It’s China’s first step to make the yuan global,” said Shi Lei, an analyst in Beijing at Bank of China Ltd., the nation’s largest foreign-currency trader. “It will protect exporters from swings in exchange rates and boost the yuan’s role in the world currency system.”
“Dollar Caught in Catch-22: Default or Debase?” via Minyanville
“Every fiat currency through history has a finite lifetime and ultimately collapses,” he said. “We’ve had a nice run with this one. But the likelihood that the dollar eventually collapses as a global fiat currency is 100 percent.”
“A sneak attack on the U.S. dollar?” via Politico
Happy Anniversary, America!»
76 years ago today, President Roosevelt signed into law a bill passed by the US Congress that outlawed gold held by citizens. Keep in mind that private ownership of gold was not decriminalized until the 1970’s.
Here is an excerpt from Wikipedia on the Emergency Banking Act of 1933:
The Emergency Banking Act (also known as the Emergency Banking Relief Act) was an act of the United States Congress spearheaded by President Franklin D. Roosevelt during the Great Depression. It was passed on March 9, 1933. The act allowed a plan that would close down insolvent banks and reorganize and reopen those banks strong enough to survive.
On March 5, 1933, the day after Roosevelt’s inauguration, he called a special session of Congress which instituted a mandatory four-day bank holiday. This act provided for the reopening of banks after federal inspectors had declared them to be financially secure.
The bill also gave the Secretary of the Treasury, William Hartman Woodin, the authority through an amendment to the Trading with the Enemy Act to confiscate the gold of private citizens, excluding dentists’ and jewelers’ gold and “rare and unusual” coins. These citizens received an equivalent amount of paper currency which was subject to later devaluation with relation to gold. Ultimately, the US dollar was devalued by approximately 40%, ending the deflationary spiral the American economy was experiencing.
Within 3 days of the act’s passage, 5,000 banks had passed inspection and were reopened. Roughly two-thirds of U.S. banks quickly reopened under this act, and faith in banking institutions was somewhat restored.
This act was a temporary solution to a major problem. The 1933 Banking Act passed later that year presented elements of a more permanent solution, including formation of the Federal Deposit Insurance Corporation (FDIC).
For additional info, see also:
Paraphrasing Jim Rogers on Bloomberg: Buy assets whose fundamentals are unimpaired. Get out of US dollars, a “terribly flawed,” “maybe even a doomed currency.”
“An entire generation of American policy-makers - Clinton, Bush, Rubin, Greenspan, and the Congressional leadership of both parties - has come perilously close to ruining a great nation. The creation of the credit bubble was one of the most disgraceful episodes of economic government in western history. Nothing can justify it. There is no parallel to the Spain of Phillip II, who ruined his empire to pursue the religious cause of Counter-Reformation, or to the bankruptcy of the British Empire combating fascism. It occurred because America abandoned all restraint and gave licence to consumer hedonism. Having said that, I still believe that the US has the cultural vitality to pull itself out of this debacle.”
“Financial crisis: Does the US face a full-scale run on its currency?” by Ambrose Evans-Pritchard in the Telegraph
Brad Setser discusses dollar trends in “The worse the US does, the better the dollar does…”
The dollar hasn’t fallen along with the US stocks, US Treasury yields or US employment. There is now a broad consensus that the US is currently in a recession, something that might be expected to lead to a fall in the dollar.
But the dollar, instead, has rallied. Against the euro. But also against a host of Asian currencies and commodity plays like Brazil and Russia. And it is soaring against the Icelandic Krona …
Some have called this a flight to quality. That though doesn’t seem quite right. The US is the source of much of the bad debt that has brought the world’s financial system to a near-standstill. The default of a US institution — Lehman — triggered the current panic in the shadow financial system. The price of “insurance” against the risk of a US government default suggest that US government debt is now considered a bit more risky than German government debt.
Rather this seems to be a flight away from risk.
Remember, the dollar rallied last August too, for the exact reason jck of Alea highlights.
Of course, there is now a new dynamic at play as well — namely mounting evidence of a broad global slowdown, and a sharp slowdown in Europe. That is quite different from last August, when the US slowed and the world didn’t. The dollar has to have something to depreciate against … and right now there aren’t many good candidates.
But there is also reason to think that the dollar’s current strength reflects something other than the United States relative economic fundamentals. A recent research piece from Sophia Drossos and Yilin Nie of Morgan Stanley argues that global deleveraging is a major current source of support for the dollar.
He closes with:
The net result, though, has been rather surprising in a lot of ways: dollar strength amid US economic and financial weakness. I at least don’t think we really know what the long-term impact of the current crisis will be on the dollar. Zhou Enlai’s classic quip about the French revolution applies with force.
We still don’t know what will happen once the forced buyers of dollars by actors scrambling to repay dollar debts ends. The US will likely still have a sizeable external deficit that needs to be financed for a while longer, which could drag the dollar down. On the other hand, the US won’t be the only country in a recession. Rather than competing in a beauty contest, the dollar is the United States entry into a competition that will be “won” by the country considered to have the least ugly currency in an increasingly grim world.
