Sunday, 2 December 2007

The "Scary Graph" signals disaster for the dollar

Take a look at the graph above, which measures private international capital flows into and out of the US. Although only published very recently, it’s already known as ‘the Scary Graph’.

And scary it is.

Focus on the extreme right of the graph. Or it may be more appropriate to say focus on the end of the line. Because, as of now, it IS the end of the line for US assets. Demand for them has, literally, in this case, dropped off the chart. This in turn reflects the warning issued earlier by your Savant. The causes are many, massive trade and current account deficits, unregulated financial markets of which the sub-prime fiasco is just the most egregious example, and the wars of Empire launched by the Bush regime.

The US could get away with this as long as foreigners were prepared to buy its assets. These include government securities, property, factories etc. The graph above shows that, at least for private investors, that has come to a grinding halt.

What about public investors, i.e. foreign governments? These, especially the Chinese and Japanese, are up to their arses in dollar denominated assets, and as the earlier post showed, they face a dilemma. If they sell off those assets, or eve sharply reduce their purchase of new ones, the dollar, and hence the value of those assets, will plummet even further. However, this can only last for a short time longer.

The bloated savages in Saudi Arabia and other oil-rich US client states in the Gulf will prop up the dollar for as long as is feasible, as their miserable worthless lives depend on it. But again, they’ll also be forced eventually to capitulate to these trends.

In many ways the Americans, even the ordinary working Joe, deserve little sympathy. They elected the worst President in their history and allow themselves fall for flag-waving God and country hogwash, and even after the Iraq fiasco still see little wrong with bombing the shit out of irritating foreign countries, and have been spending unearned ‘wealth’ like drunken sailors. Any people who take their information from Fox ‘News’ deserve little sympathy. (See this and this).However, almost 50% of Americans are not like that, and they’ll suffer just as much as the others.

More to the point, the rest of the world will suffer as well. The collapsing dollar means the American consumer will stop spending, and that spells major problems for many of the world’s economies, most notably ours here in Ireland. Added to a whole range of other problems that we face, it could be interesting times over the next few years.


Theodore Breehn said...

Mon Savant,

As a Yank (albeit one with at least as much Irish blood in his veins as you) I shall take your points and my garden will be much larger next summer.

As to W, yes, he has been horrible. I disagree that he is stupid. He serves the interests that elected him and has won two presidential elections. The choice between him and either Gore or Kerry was not a great choice to begin with, but for a man who has got us into a stupid war, he has had a good run.

He understands his constituency much better than the other charlatan. He swindles them, but is smart enough not to insult them:

SAVANT said...

Yes, there is a case for saying Bush isn't stupid. Ignorant, yes, but they're very different things. He certainly has the gift for manipulating the public. But in my view the public is largely to blame for letting this happen

SAVANT said...

Good post TVOH - but you're not a busy little blogger, are you?

Theodore Breehn said...

Part of being who I am is to admit that in all things I am not proud of myself. This is especially true in my blog output.

Theodore Breehn said...

There is a story about W's first election when he lost because he was lampooned as a pointy headed intellectual with not one but two Ivy League degrees (Yale and Harvard Business School). It was said he vowed never to be out dumbed again.

Anonymous said...

1.) It seems to me that the countries that have been accumulating US debt are, perhaps, more stupid than the US. Why are they racking up such huge trade deficits? Don't they realize that they have to convert those dollars into goods in a timely manner or see them devalued as the US prints its way to solvency?

2.) Does the end of the graph reflect that they have realized 1.)?

SAVANT said...

Skot German. Yours is a good question. I believe that those countries (overwhelmingly China and japan) need to keep employment high, and hence need to keep selling to the US. To keep this going they must buy dollars.

The others are the oil-Arabs who dont give a shit about anything other than their own hides, which the US is currently saving from democracy.

Anonymous said...

The dollar has gone through tough time before, this time isnt any different. The % of the world's reserves held in $ was actually lower in 1995.

Theodore Breehn said...

Skot German,

I've heard the Swiss have a saying that if you lend someone too much, you don't have a customer, you have a partner.

There is also a saying that God watches out for drunkards and the United States. I know how Savant feels about the deity, but if he pulls our chestnuts out of the fire this time, I'll put a little something in the poor box.

SAVANT said...

I sometimes get a feeling that the deity is up there, rubbing His hands, just waiting to get even

Anonymous said...

As you say the Chinese are unlikley to dump the dollar rapidly or in great numbers. It seems like they useing $$ to buy up African resources (and rulers). This will drive the cost of prime resources sky high.

Anonymous said...

tvoh:"Bush vowed never to be outdumbed again". Boy, did he succeed!