Goodbye, US dollar.

[Michael Fisher]

Today, China and Malaysia dropped their currencies' alignments with the US dollar.  Now Hong Kong is the only country left with a peg of its currency to the US dollar.  China will now stop accumulating US dollars, and may even divest itself of its current holdings.

Imports to China will become cheaper.  Imports to the US will become more expensive.

Austrian economists have predicted doom for the dollar and the US economy for decades now, but is this the final blow to the US economy?  We'll soon find out!   



Who Says No One Rings a Bell?
By Peter Schiff         
July 21, 2005
www.europac.net

The old saying "no one rings a bell," certainly doesn?t apply today, as China rang the "mother of all bells."  So deafening was its sound, that its vibrations will be felt around the world.  Nowhere will the amplitude of these waves be more pronounced than in the United States. 

China?s decision to change the nature of its currency peg means that it will no longer be in the dollar buying business, or by extension, the U.S. Treasury buying business.  That means that America will be losing its biggest benefactor.  China will no longer act as the principal enabler of America?s irresponsible extravagance, ending its subsidies to American consumers and borrowers.

Changing the nature of the yuan peg is a first step in the ultimate direction of either allowing the Yuan to float freely or possibly pegging it to gold.  In the meantime the Yuan will remain undervalued, as it will likely be pegged to a basket of other currencies using current exchange rates that clearly undervalue the Yuan.  Chinese imbalances will continue to grow, along with all the domestic inflationary implications that result.

However, the pressure on China to prop up the dollar will be greatly diminished.  To maintain the peg against its new basket, Chinese monetary authorities will most likely now be buyers of those other currencies likely to be included in its basket, such as the Euro or Yen.  Since its reserves are already disproportionately held in dollars, it will likely rebalance those reserves to more accurately mirror the basket to which the Yuan will be pegged.  Such a rebalancing will only exacerbate the dollar?s decline.  However, a declining dollar will not automatically require offsetting dollar buying by the Chinese as it has during the period of the yuan-dollar peg.  As long as dollar weakness is offset by strength in others currencies in its basket, the peg can be maintained.

The implications for America are enormous.  Far from being the panacea that American politicians proclaim, China?s decision to alter its peg could be the pin that finally pricks America?s bubble economy.  For America, the direct result of this action will be the following: 

1.  Higher consumer prices.

2.  Higher interest rates. 

3.  Reduced profits for American companies, particularly those dependent on domestic consumption and consumer debt.

4.  Lower stock prices, as earnings decline and multiples contract. 

5.  The busting of the housing bubble, as tighter credit standards and higher interest rates squeeze current home prices.

6.  Rising unemployment, as higher interest rates and vanishing home equity slow consumer spending and reduce jobs dependant on that spending.

7.  A severe recession as a result of all of the above.

8.  Rising federal budget deficits, as recession reduces tax revenue, while higher interest rates and escalating outlays increase expenditures.

In conclusion, July 21, 2005 will be another date likely to live in infamy.  This time the aggressor is China not Japan, and the bombs are purely economic.  Though there will be no immediate loss of life, and no American retaliation, the financial damages will be devastating.  History will remember this date as the beginning of Chinese independence, and the beginning of the end of America?s ability to depend on China.

Peter D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.

[tracysaboe]

We're going to be looking at a rough next few years.

<Sigh> <shakes head>

Onfortunitely all I have is a fixed interest rate mortgage, and some gold and other prrecious mettle mineing stocks.

My $500+ worth of mining stocks shot up to $800 today. I need to start watching them again.

Tracy

[KBCraig]

Today, China and Malaysia dropped their currencies' alignments with the US dollar.  Now Hong Kong is the only country left with a peg of its currency to the US dollar.  China will now stop accumulating US dollars, and may even divest itself of its current holdings.

Imports to China will become cheaper.  Imports to the US will become more expensive.

The last line only applies to US/China trade. As I understand it, Chinese imports to the US have been artificially cheap because the yuan was tied to the dollar. So long as the currencies were tied, there was no free trade between the nations, either in products or currency.

If there's an economic change as a result, consider it a market correction.

Kevin

[SWilliams]

good... maybe once the cheap Chinese crap gets more expensive, American companies will start manufacturing goods here again

[Michael Fisher]

good... maybe once the cheap Chinese crap gets more expensive, American companies will start manufacturing goods here again

Exactly.  But first, our economy of ultra-consumption must be shattered into oblivion before people will stop being so picky and go back to work in factories again for a cheaper wage.

Oh yeah, and the government will have to get out of the way for our economy to adapt, but that isn't likely to happen.

So, yeah, we're in deep doodoo.

[AlanM]

good... maybe once the cheap Chinese crap gets more expensive, American companies will start manufacturing goods here again

Exactly.? But first, our economy of ultra-consumption must be shattered into oblivion before people will stop being so picky and go back to work in factories again for a cheaper wage.

Oh yeah, and the government will have to get out of the way for our economy to adapt, but that isn't likely to happen.

So, yeah, we're in deep doodoo.

Mike, John Taylor Gatto, in his book, discusses the dual indoctrination of America through the schools and the media, to encourage mass consumption. You have to read his book.
http://www.johntaylorgatto.com

[Michael Fisher]

Argh, I really need to get a hold of that book!!! 

When I have the money...   

[AlanM]

Argh, I really need to get a hold of that book!!!?

When I have the money...? ?

You can read it online. It's on his website.

[Michael Fisher]

It is?   ???  It IS!     Thanks!

[AlanM]

You're welcome. 

[tracysaboe]

Yup, he's got it availible for free.

http://www.johntaylorgatto.com/chapters/index.htm

[Dreepa]

Another great book you might like to read is:
"Affluenza"  I am sure that a local library has it.  Great book about Consumerism.

[Dave Ridley]

well they say the market sees the future better than we can and on the precious metals market silver is only up about 1 percent since the 18th...that's no more than a normal market fluctutation although it does reverse a two week down trend in silver prices.   You'd normally expect silver to go up if there were anticipation of a problem with the dollar.   

[Michael Fisher]

The market didn't see the future very well during the dot-com bubble!

[AlanM]

We do not have a free market, so why should it?