Monday, February 14, 2005


Forecasts in the popular press about the dollar do not sway me. However, a service, I have graded highly for years, predicts that the dollar will fall to $1.50 against the Euro. The inverse is $66.60! A bad number? (The mark of the beast in Revelations.)

What would be the consequences? Obviously the Europeans would be able to vacation or buy American goods cheaply. Do you remember the mid to late '80s when the Japanese were making so much money that they could not spend it all. Japanese investors bought Pebble Beach Golf course for $1.2 Billion dollars. They bought all kinds of real assets in the states including trophy properties such as Rockefeller Center and seemingly half the luxury homes in Hawaii and California. The driver of a bus tour in 1988 passed her house and boasted that about its increase in value from $150,000 to $2,000,000 in 12 years. The house was nothing great to look at but it was within a 3 minute walk to the beach!

This cycle it is the Chinese who are experiencing an export boom, boom, boom. The Chinese are taking in more dollars than they can spend (except to buy Treasury securities). Last month, IBM sold its PC business to a Chinese company; which American asset is next?

The question is not meant to be an alarmist question. I believe in free trade.

The irony is that many Americas beg for China to float the Yuan. If it happens and the Yuan appreciates, then the Chinese will have suddenly found new wealth. They will be able to buy American real estate, businesses and other hard assets for a fraction of the current price. When the Japanese were buying, alarmist were everywhere. One member of the US Congress said that America was quickly becoming a colony of Japan.

I must say again, that the decline in the dollar against the Euro is not the disaster the politicians like to make it out to be. International finance is complex. None of us understand it well or we would be rich beyond comprehension. However, politicians and journalist latch onto the weak or the strong dollar to support their current complaint. The fallacy most often perpetuated is that the currency is weak or strong because of a fiscal deficit. One cannot have it both ways, is Britain enjoying a strong currency because of their big deficit or is America enjoying a weak currency because of our big deficit.

The good news is that currencies self correct. Sometimes it takes a long time. During the industrial revolution, Britain led the way. The flying shuttle, spinning ginny and water powered frame were in use in Britain in the 1730's. England exported pounds to America and other colonies for decades and imported cotton, tobacco, tea and other goods from the colonies.

We are well into an information revolution. Information is going digital. Information is being stored where it can be retrieved by anyone in only fractions of seconds. Productivity is growing quickly which is another way of saying that wealth is being created at a fast pace.

Change is scary. From 1811 to 1816 the Luddites organized in England to fight against the modernization of business in England. They stormed factories and destroyed machines. Thousands of workers had found that they could no longer weave wool at home to make a living. They really did not want to have to go get a job. They looked for someone to blame.

Today, many folks blame the Chinese for Americas perceived problems. "The Chinese are practicing unfair trade by buying down their currency." When they stop, if the complainers are right, the Yuan will appreciate significantly against the dollar, inflation will spike upward and bond will collapse in value. Those who are the most scared to invest in the stock market will lose a lot in fixed investments. The Chinese will buy significant chunks of America at sky high prices in terms of dollars. They are not likely to buy Pebble Beach for $1.2 Billion but they might buy a big chunk or Myrtle Beach, one condo at a time.

.666 dollars may be a very bad number but all those who are hoping for a re-valuation of the Chinese currency might want to reconsider. I can live with the ramifications, can you?