The Dollar's Slide Isn't Overhttp://www.fool.com/investing/value/2008/08/27/the-dollars-slide-isnt-over.aspx Morgan Housel
August 27, 2008
The U.S. dollar has been a rock star in recent weeks, reaching its highest level against the euro in six months. And what a treat it's been: A stronger dollar means lower oil prices, which resuscitates consumers.
Few disagreed the dollar was getting pounded into the ground at a nutty pace. Last month, bond king Bill Gross said the euro was 30% overvalued against the dollar. Our greenback was due for a good rally, and it got it. But that doesn't mean its dark days are tucked away for good.
Not by a long shot.
But, but, but ...
And national debt? That didn't go away either. It's still $9.6 trillion -- over a quarter of which is owned by foreign investors holding a financial hand grenade over our heads. Almost 10% of tax revenue now goes toward paying the interest on public debt. Budget deficits haven't dwindled either-- the 2009 gap is expected to come in at nearly half a trillion dollars.
Get ready for more dollar pain
But in march the charlatans: Pish posh! Who says a country can't spend more than it makes?! In fact, Vice President Dick Cheney once opined to the Treasury secretary that, "deficits don't matter." The thought behind this theory is that governments have the ability to print money. Alan Greenspan trumpeted this gift, stating, "There is virtually no meaningful limit to what we could inject into the system ..." Even better, the U.S. has the luxury of selling seemingly endless amounts of debt to foreigners. Sweet! Who says "there's no such thing as a free lunch"?
Sadly, there're a few holes in this theory. For anything to be valuable, it has to be scarce. Print more money, and its scarcity (value) goes down. Ask the poor folks of Zimbabwe about this. And the thought that "Foreigners will buy our debt forever" holds about as much truth as the 2001-2007 motto of "Housing prices will go up forever." Anything done in excess will recede at some point, at which time those reliant on the kindness of strangers learn the meaning of the phrase, "In over your head."
Just to clarify how serious foreign investors take this issue, last week a former member of China's central bank reiterated the consequences of Fannie Mae (NYSE: FNM ) and Freddie Mac (NYSE: FRE ) troubles by warning, "If it is not the end of the world, it is the end of the current international financial system.'' Mm-hmm.
But back to the debt load. Here're some numbers for you to mull over: