Wall Street Weekly | 10/09/2009 12:45 pm

Sinking Dollar Fair Warning to Obama, by Liz Peek

Image: WhiteHouse.gov

Bears, Bulls, Chickens and Pigs: wOw’s Wall Street Weekly with Liz Peek (Week of 10/5)

Editor’s Note: Liz Peek is a financial columnist.

The New York Times ran a story this week about the art that the Obamas have chosen for the walls of the White House. Featured in the piece was a painting by Ed Ruscha. The chosen canvas has a red background with the words "wait a minute," "maybe yes" and "maybe no" floating across the space. What an appropriate choice for our young president, who is suddenly irresolute about Afghanistan. Having once pronounced Kabul as central to the war on terror (oops! make that the Overseas Contingency Operation), the president is now angling for a Goldilocks position: not too little, not too much, responding to polls that show waning support for our activities in that desperate country.

President Obama is uncertain not only about our military options, but also – dangerously – about economic choices. He recently affirmed while addressing a Wall Street crowd that "I’ve always been a strong believer in the power of the free market." That was good to hear, because almost none of his proposed programs suggest a love affair with capitalism. Instead, he has offered up one measure after another that substitutes government fiat for market economics – most notably in autos, health care and energy. The newest entry is the proposed Consumer Financial Protection Agency whose czar will be empowered to decide on "the manner, settings and circumstances for the provision of any consumer financial products or services." Moreover, he has revved up his antitrust department, sanctioned pro-labor policies burdensome to American employers and started a trade war.

This litany of business-unfriendly stances is taking a toll, not only on the president’s popularity, but on the dollar. The dollar took a sizeable hit this week (and gold soared) when the Australians boosted their key interest rate, signaling a recovery in that country. While earlier this year global investors drove the dollar briefly higher in their quest for safety, they have since had second thoughts. The euro, for instance, has gained 18% in value compared to the dollar since March. You don’t have to read the tea leaves to find reasons to sell the dollar – you can simply delve into the budget projections.

To put things in perspective, note that budget deficits in the U.K. are about to sink the Labour Government. The IMF puts the U.K. budget deficit this year at 11.6% of GDP and at 13.2% next year. The net public debt of Great Britain is expected to amount to 92% of GDP in 2014, up from 58% today and 38%in 2007. (The Obamacare folks should note that the IMF has called for the U.K. to rein in their health-care program, a leading budget-breaker.) The Brits are alarmed about this state of affairs, which is why they are about to junk their existing government. David Cameron, the Tory leader most likely to take over as Prime Minister, has warned that the country is in for tough times – severe cuts in social spending and higher taxes. That is not the usual campaign rhetoric, but the country is looking the future square on, and does not like what it sees.

Here’s the sobering news for the U.S.: we’re not that far behind the U.K. Our budget deficit will total 12.5% of GDP this year according to the IMF, and our national debt will soar to 85% of GDP by 2014. These figures are spurring talk that the dollar will no longer be the world’s reserve currency and that oil producers may move to price their product eventually in a basket of currencies.

249 Reader Comments (so far…) Sign In or Register to comment

By Patty E on 10/09/2009 4:27 pm

Thank you for the above information and your excellent research into the issues. I for one have no patience for it, so I really, really appreciate your good work. I have been so angry with President Regan for so many reasons, but the whole methodology his Administration used in handling our economy really *issed me off! Also, unrelated was his decision as Governor of California, to empty out our mental hospitals and dump hundreds of people on the streets of CA, because they had no alternative housing plans.

I got a bit side-tracked… my point simply is unless we have some assemblance of community in our country, and find a way to come together, I really fear that we will remain splintered for decades to come.

Lastly, I do not comprehend how anyone can make assertions about the present economic situation, without tracing most of it back to the past administration!??? How many times must the progressives come behind and clean up the messes before some finally come to the rational conclusion that the Republican Party is no longer… It is a convoluted mixture of conservative, moderate conservatives, and the mishmash of those who hang onto the tailcoats of either party, creating ever more division and chaos for ALL of US! Ultimately what we have are those who fall somewhere between the lines in either party, who only seem to want more and more division. I am quite dissatisfied with both major parties right now! There are too many fringe people and groups who are just raising havoc and stirring the pot, almost as a game or fun-filled adventure!

I want to hope and believe that if given the time President Obama will finally lead us toward a more wholistic and healthy nation. It is so far past time to come together again! This is the kind of leadership we really need right now.

By Ro H on 10/12/2009 7:31 am

e-mail alert

Obama is the last person that will "lead" us or anyone else towards a better nation or world. His lack of experience has collasped our economy and his efforts to sell America to a world governance will end our country as we know it.

He is the single most destructive man that has risen to power in our Nation. Until his Presidency is over, we can only hope to keep the utter devastation at bay, nothing more.

By Smarterthan That on 10/14/2009 1:09 pm

e-mail alert

Patty E, finally an article has been written on the new wave of foreclosures that aren’t being talked about by Obama and his administration. This is the bad news I’ve been posting about in terms of Obama’s fall report card. The personal bankruptcies will be next which will rock the bailed out banks. Bandaid economics. Obama really should have done something in January for all of the small businesses in our country. Lack of jobs….high unemployment are to blame.

Rick Moran
The real estate meltdown is far from over.

What started as a correction in the overheated, overinflated housing market is affecting all sectors of the real estate industry now. Many banks are in a state of near collapse as a result of the commercial real estate depression. And in the traditional loan market, defaults have nearly doubled.

Now, even homeowners in expensive neighborhoods are going under, as this Wall Street Journal article by Nick Timiraos explains:

About 30% of foreclosures in June involved homes in the top third of local housing values, up from 16% when the foreclosure crisis began three years ago, according to new data from real-estate Web site Zillow.com. The bottom one-third of housing markets, by home value, now account for 35% of foreclosures, down from 55% in 2006.
The report shows that foreclosures, after declining earlier this year, began to accelerate in the late spring and that more expensive homes have more recently accounted for a growing share of all foreclosures. "The slope of that curve in recent months is much sharper than it was recently," said Stan Humphries, chief economist for Zillow. Rising foreclosures among more-expensive homes could create added pressure for a housing market that has shown signs of stabilizing in recent months as sales of lower-priced homes pick up.

The Zillow research compared homes against the median values for their local market and broke each market into three tiers by value. Zillow then looked at the share of monthly foreclosures in each tier over the past decade.

Foreclosures are rising in more expensive markets as home values in those areas fall, leaving more homeowners with mortgages that exceed the value of their properties. Prime loans accounted for 58% of foreclosure starts in the second quarter, up from 44% last year, according to the Mortgage Bankers Association. Subprime mortgages accounted for one-third of foreclosure starts, down from one-half last year.

There really is no end in sight. The administration is trying desperately to artificially prop up the value of homes by forcing banks to renegotiate terms and softening up loan guarantees by Fannie Mae. But housing prices continue to fall. And as they do, more Americans wake up one morning to find the value of their house is less than the loan they took out to pay for it. At that point, it becomes an economic albatross and drags the homeowner into default.

Some analysts believe home values must further plummet as much as 30% before we see a turnaround nationwide. That will probably take years - in which case, any recovery from the recession will be weak and probably short lived.

http://www.americanthinker.com/blog/2009/10/mortgage_defaults_growing_in_h.html

By deber B on 10/12/2009 3:39 pm

e-mail alert

An officer of the local IRS Dept. said a few years ago at a meeting I attended,"Jobs are lost and the dollar goes down right after an election. It takes at least a year for the economy to stabilize again."

By JJ GB on 10/09/2009 5:19 pm

e-mail alert

Nice article. President Obama has not even been President a year yet, and he has already turned not only our country around, but the world to. He is a man among men, and can only be seen as better then the one he has replaced! He not only has taken on the corruption within our country, but has put a collar on the "Dog’s of War".

By Mark Rowe on 10/09/2009 5:21 pm

e-mail alert

Mark, are you serious here? Are you not aware of the unemployment numbers? Have you not heard of his associations and failed appointments? Have you not heard about ACORN and the Goldman Sachs deals? Are you not aware of "green" deals? Have you not heard of Iran and North Korea?

Or are you a socialists?

By Smarterthan That on 10/13/2009 8:49 pm

e-mail alert

I am weary of trying to counteract Liz Peek’s supposed financial pieces when they are simply political in nature and bring out the people who delight in posting spurious splatterings that hold very little weight. I would, however, like to comment on Ms. Peek’s mention of Obama’s alleged dithering on key decisions that effect our country. Unlike some other presidents, Obama gathers people from differing mindsets, puts them in a room, sometimes for seven hours at a stretch as he did with the decision to help the car companies, let them slug it out and come to some conclusions which he then decides on. In fact, Geithner and Summers became friends on the basis of straight forward talk: Tim was the only one who would tell Summers he was full of shit or that an idea was stupid. As Ryan Lizza writes in his excellent piece in the New Yorker on Larry Summers and the economic team:

"So far, none of the worst fears of those who believed that the stimulus was too small [I think it should have been much more as did Romer, but would never get past congress] or that nationalization was the only option or that taking over car companies would destroy the fabric of capitalism have materialized…With unemployment at around ten percent and still on an upward trajectory, the Administration is left arguing not that jobs are being created but without Obama’s policies things would be worse. And, undoubtedly, the huge government intervention laid the groundwork for the political backlash against Obama that was unleashed this past August and which has jeopardised his larger agenda on health care, global warming, and financial regulation. Obama and his team have pulled the economy back from the abyss, but they will get credit only when it has been rebuilt."

"No small part of our current economic difficulties can be traced to ignorant zealots who gained influence by providing answers to questions that others labeled as meaningless or difficult. Sound theory based on evidence is surely our best protection against such quackery."

Larry Summers

P.S. the decision re: Afghanistan/ Pakistan needs to be deliberative, taking all voices into consideration-this takes time. Isn’t that, for god’s sake, what we want from a leader????

By phyllis Doyle Pepe on 10/09/2009 6:00 pm

e-mail alert

This is a good analysis, especially of Liz. I have noticed that she is willing to respond to her supporters, but doesn’t respond to any arguments (or questions) of her statements, regardless of whether they are political in nature or just economic differences. If Milton Friedman were still alive and questioned Liz, I doubt she would respond. Which, to me, shows how political her column is, when it should be based in economic fact.

By camb 94 on 10/09/2009 11:42 pm

e-mail alert

Liz is RIGHT on the intersection of politics and economics, at both, domestic and international levels!

These two forces( politics and economy) interact to affect political outcomes and policy choices, economic performance and social welfare. It’s called political economy, one without the other is unrealistic!

There are many books to educate yourself on the subject. Liz is doing a great job writing for wowowowo!

By sibelle daubigne on 10/10/2009 9:34 am

e-mail alert

I certainly did not mean to imply that politics and economics were not connected or that they were mutually exclusive. My point is that Liz has a political viewpoint that sometimes overwhelms basic economic tenets. Any economist can tell you that there is such a thing as "market failure" — i.e., parts of the economy that are not as efficient in a free market economy — most obviously public goods such as national defense, etc. Liz puts her political viewpoint before her economic philosophy, hence the argument that the falling dollar is "bad". There are economists (and MANY, MANY of them made this point the last time the dollar dropped during the Bush administration) who argue that a devalued dollar is a good way to kick start the economy. It makes our manufacturers more enticing and can increase exports, the more expensive markets can’t sell here as easily, bringing down imports and balancing our trade imbalance. There are good and bad things associated with a low dollar, but Liz is trying to make a political point, but acting like it is a good economic analysis.

By camb 94 on 10/10/2009 8:24 pm

e-mail alert

I understand your point of view. Personally i am an independent and did not vote for Obama. I do feel free to enjoy and move in whatever direction i please. Liz happened to be a financial and business columnist with experience, humor and i am sure that she is aware of the "Basic economic tenets" that you mention. I also believe that she is entitled to her political point of view like anyone else. Now if you are looking for a "Good economic analysis" maybe wowowow is not the right place for you to look for!

Finally, i agree with you that there are good and bad things associated with a low dollar

By sibelle daubigne on 10/11/2009 12:32 am

e-mail alert

I understand that this isn’t the place for a good economic analysis, but that is what she is trying to pass off. She is free to express her opinions, but couching them in "business expertise" when she is either: a. conveniently leaving off any information that doesn’t fit with her political leanings or b. ignorant of them, means that she is not really doing her job. She is here as someone who is supposed to present a business/economic point of view, and she is merely cherry picking her data to fit what she believes.

On an unrelated note, but in response to many of the people claiming that Obama has been crazy to increase the debt in a recession, I suggest that they read Milton Friedman’s analysis of the the Great Depression. He (along with Anna Schwartz) wrote an Economic History of the United States, where he demonstrated that the biggest cause of the depth of the Great Depression was that following the Stock Market Crash the Fed raised interest rates to keep to the gold standard. The result was a 30% reduction in the money supply (literally there were less dollars). Now that the U.S. is not longer on the gold standard, the way to avoid such a prolonged economic disaster is to increase the money supply and increase government spending, in the short term. Hence, the stimulus and government deficits.

NOW, I do agree, that next year the government will have to cut back, but that is the problem. Not the current spending.

By camb 94 on 10/11/2009 12:56 am