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The US Peso - going down like free beer

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Current spending - $3trn
Total Commitments - $12trn
Total Unfunded Liabilities - $53trn

The hole that the US government finds itself in is MASSIVE. It boggles the mind. Everybody has been calling for the demise of the dollar, some for +10yrs.

But against what? Europe is in a bad way too, and several economies - UK, Ireland, Spain, have seen reckless borrowing as well. Japan (and to a lesser extent Germany) bet all its growth on exports, and that is gone. Japan faces the added burden of population decline. Currently 127mm Japanese walk the earth, and that will shrink to 100mm by 2050. Their policy response? Bribe foreigners to leave.
The point - while the US is a basketcase, the rest of the developed world is not much better, and arguably worse.

I believe the carry trade is far from dead, and rising interest rates in the US relative to Euro and Yen rates will eventually drive more money into the dollar. The purchasing power of all currencies will be eroded more or less uniformly.

The history of this depreciation is a topic for a book, but suffice it to say that while the US Peso has depreciated against gold at roughly 4.8% per annum, the Yen has depreciated at closer to 6%. So Japanese thrift and industriousness has been no hedge against central bank and central government profligacy.

What to do - If your liabilities are in US$, and your income is in another currency, do not become too smug in the long term. For the balance of the year I think you will look smart. But whether we like it or not, the US economy is the sickly 800 pound elephant in the room.

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Guest Monday, 25 May 2020