You probably haven’t noticed, but the value of the US dollar fell to an eight-month low during last week’s Washington fiasco.
And I know you probably don’t care. But today I’m going to explain why you should.
On the plus side, when our currency drops in value in relation to others, it makes goods produced in the US cheaper in foreign markets. And products made overseas, including oil, become more expensive for Americans to purchase.
So the declining dollar could help improve the US trade deficit with the rest of the world. Our exports could benefit, and imports might slow.
But that’s about the only good thing that happens when our currency depreciates, and a lot of bad things are possible.
Let’s start with funding our budget deficit. The US was running an annual deficit of $750 billion through September, which was considerably below the $1.164 trillion during the same period of 2012.
The government attributed this decline to $41 billion in spending cuts and $284 billion in additional tax revenue coming into the Treasury.
As of last Friday (the day after the budget deal was signed in Washington), the official US debt total exceeded $17 trillion. Each day our total debt hits a record high. And every day we rely more and more on foreigner investors floating us loans through the purchase of our government’s securities.
There are also the fake purchases being made by the Federal Reserve under the quantitative easing program.
The Fed prints money and enters itself in government securities auctions as a shill buyer, which then competes against real buyers like the Chinese and Japanese governments, OPEC, Brazil, Caribbean banks and many, many more.
This buying could eventually cause a revolt among our foreign lenders.
With the Fed’s shills in the market, Treasury yields are lower (and prices are higher) than they should be. And when interest rates eventually go up (and bond prices automatically come down), as they have been without Fed approval since May, foreign investors in Treasury securities lose money.
The belief is that foreigners have no place other than the US to safely store their money, so they will put up with all sorts of financial injustices. And so far they have, except that the Chinese — holders of nearly $1.3 trillion in our government’s debt — have been openly questioning the wisdom of investing in the US.
Now it’s time to discuss the declining dollar.
Each time the dollar drops in value, those foreign investors I just mentioned suffer paper losses on their US Treasury securities holdings.
With QE nipping at their assets on one side, the declining dollar taking a bite on the other and Washington showing few signs of getting its act together, there may come a day when foreigners decide that buying gold mines in Africa or fine art in Paris or condos in London are better deals.
The US no longer has a debt limit. We can spend as much as people are willing to lend us. The White House thought that would be a good way in the months ahead to avoid another debt fight like the one we’ve just been through.
If foreign investors agree, they will push the dollar higher. If they don’t, then things could get ugly — a slower economy in the US even as interest rates and inflation rise.
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I remember my grandfather telling me about the times he and friends would offer to make sure nothing happened to people’s parked cars if they just paid them a little fee.
That was when he was a kid.
The implied threat, of course, was that something would happen if the car owners didn’t pay.
What my grandfather was doing is lovingly called a “shakedown.” Pay me — or else.
That gets me to JPMorgan Chase, which is currently being shaken down by Uncle Sam for $13 billion, which is about half the amount that bank earned last year.
Shortly after that, the US government is expected to announce a $1 billion or so deal with SAC Capital, which is owned by billionaire Steven A. Cohen.
SAC is being accused of trading stocks — and making a lot of money — from information that wasn’t publicly known. JPMorgan is on the hook for misleading government agencies about the quality of mortgages, engaging in risky trading with the London Whale and some other things the government probably hasn’t come up with yet.
There’s a lot of bad stuff that happens on Wall Street. Much of it doesn’t get disclosed or prosecuted, often because the companies involved are “too big to fail,” “too large to prosecute” and/or “too well-connected” in Washington.
So is it a good sign that JPMorgan and SAC Capital are now coming under government pressure?
Well, yes and no.
I’ll be happier when the Obama Justice Department isn’t willing to forget these crimes just because a company can write a big enough check. Put people in jail if you want to deter this kind of behavior.
Sure, $13 billion will hurt JPMorgan shareholders, and Cohen may have to sell a few pieces of his famous art collection.
Ordinary people, however, would go to jail for insider trading and deceiving the government on billions in mortgages. We shouldn’t allow the executives of these companies to get off easy just because they can afford to pay for protection.