Forum Moderators: buckworks
In the summer of 2004, I took a hard look at what was going on behind the scenes of America's economic picture and started preparing for this day by moving my investments into gold as a hedge.
In a very short explanation I realized that the twin deficits: budget deficit of nearly $8 trillion and trade deficit of approximately half a trillion a year for the last 3 years, would slaughter the US dollar one day.
Consumer debt (read housing bubble, credit cards), state debt and unfinanced social programs (social security, medicare, prescription drug plan) make the situation go from very bad to worst nightmare scenario. This is best illustrated by this quote from "Empire of Debt."
"Americans believe they can get rich by spending someone else’s money. They believe that foreign countries actually want to be invaded and taken over. They believe they can run up debt forever and that their debt-laden houses are as good as money in the bank.""That is what makes the study of contemporary economics so entertaining. We sit at our telescopes and laugh like a divorce lawyer looking at photos of a rich man in flagrante delicto, we know there is money to be made." - Empire of Debt, a New York Times Bestseller
These twin deficits were largely financed by Japan and China who bought dollars and US Treasuries and kept the dollar in a range of $1.14 to $1.37 to the Euro since 2003. Explanation: They propped the dollar up. Without these Asian economies financing our debt, the dollar will collapse.
Well, the bad news is this: Last night, Thursday, the Chinese foreign exchange administrator announced that it would start "diversifying its foreign exchange reserves away from U.S. dollars and government bonds."
Read: with the Chinese buying less dollars, the value of the dollar to other currencies and gold will fall dramatically.
"China's announcement of wanting to diversify their foreign-exchange reserves holdings is going to have a profound effect on financial markets worldwide," said Peter Grandich, editor of the Grandich Letter."It's the death blow to the U.S. dollar, which had enjoyed a temporary reprieve in 2005, and another bullish factor for gold going forward," he said.
This leaves Japan as the major financier of US debt. However, since they hold almost a trillion dollars worth already, they are flush with greenbacks and don't have the stomach for much more.
Without buyers, the dollar will drop. When the dollar drops, the Fed will have to increase interest rates to make it more attractive to investors.
And it gets worse. As US interest rates go up, inflation and recession will smilingly follow behind. The current housing bubble in the United States will crack and pop under the weight of falling dollar and higher interest. If this spawns a recession, as it should, it will affect ecommerce as a whole and internet advertising in particular. The economists I personally follow see a severe recession in 2007.
This is not a doomsday prophecy by crackpots. The USA's entire economic picture hinges on one thing: China buying up US Dollars and government bonds like Pac Man. Without them, the dollar is in a slow death spiral and the US is headed into a major recession that will slow or stunt ecommerce. It's not a complicated chain of events for things to go bad right now. It's really this simple.
As I write this, gold is up $10+ on this news to $539 an ounce, just a few dollars away from a 23 year high. Gold is only an attractive investment as a hedge against the dollar. ie, when Americans and foreigners get scared about the US economy, gold rises.
I feel this issue is extremely relevant to webmasters since most here operate in dollars: Adsense publishers, affiliate programs, Adwords advertisers, YPN, etc., et al.
To illustrate: Foreign Adsense publishers, for example, will actually make a lot less money as they convert depreciating dollars into their own currency.
Approximately this time a year ago, the dollar was about $1.35 to 1 Euro and European webmasters here were very upset by this. It's trading around $1.21 now and will probably get much worse then $1.35 in the next 3-6 months. Be prepared to see threads like we did this time last year "upset" over the low dollar.
Despite bull run market predictions for internet advertising in 2006 and beyond, none of those "experts" took these factors into account. These variables never occured to them.
But let's face it, most webmasters here target the US as their major customer. When that major customer goes into a recession, the bull stops running, stands there, looks around, and says:
"What the hell just happened?"
Gold resumes bull run as dollar falls [marketwatch.com]
China signals reserves switch away from dollar [news.ft.com]
To remind everyone of a standing WebmasterWorld rule: Leave politics out of the discussion.
On the up side, if the Dollar and the Pound both fall, I shouldn't notice the difference in Google revenue. :)
The following year, when I went to buy more stock, I saw that prices for the same stuff had risen by 50% on account of the fall of the dollar. So I had to change my package sizes.
Now here we are again. Although the Euro is not as high now as it was then, I decided that it was better for me and my business to buy as little of these European-made widgets as possible. Right now I am choosing new widgets for 2006, and I am buying most of them from a company in the Midwest. I would rather have kept buying the European widgets, because they had things we don't have here, but I will just have to create desire for the lesser known Midwestern widgets. I am also buying just a very tiny amount from the European companies that I will use to create my own widgets right here. This means a substantial investment of time and some in equipment for me, but I decided it was worth it precisely in order to avoid the downside of globalization. Then *I* will be in charge of widget production.
OTOH, I am getting a lot more purchasers from Europe since the dollar's fall. I figure if I can spin the Midwestern widgets, it will work out okay, because those are widgets they can't get in Europe and that are exotic there.
Online businesses are lucky in comparison to meat-world businesses, because we can attract an international customer base and hopefully weather exactly this sort of thing.
I do wonder if some of this is to do with UK having most mortgages tied to variable interest rates where as most mortgages in the US are fixed rate .
Many in the UK remember when interest rates increased at an alarming rate which caused the property boom to go bust and now try to borrow in more a controlled status. The other interesting thing is that the only group of consumers who are increasing borrowing are up to 25 age group
In the US consumers believe that the current property boom will keep going and they can continue to borrow against the increasing value of their property but I do not think this is the case and suspect the credit card companies also believe the same which is why they have pressed for changes in bankrupcy laws and have agreed to raise the minimum payments required on card balances
I do not think the recession when it comes will be as bad as painted in that article but I would not be suprised to see some of the largest and well known names in corporate America dissapear and a new breed of companies appear
The US is a consumer society that consumes and consumes so if the US Economy Sneezes the world economy will feel it , just 1 example the largest market for German cars is the US .
So I think that we who earn our money on the Internet be it US or other areas of the world will all feel the effect if the US does enter into a recession
Just my own view and without the benefit of the brains of many smarter financial wizzards
steve
Thank you for preparing us for the finale. You should have saved it 'til last... two thumbs down.
>Without buyers, the dollar will drop. When the dollar drops, the Fed will have to increase interest rates to make it more attractive to investors.
Correct... assuming that the US debt is "without buyers".
> ... The USA's entire economic picture hinges on one thing: China buying up US Dollars and government bonds like Pac Man.
Your pinpoint analysis hinges on a 20-yr-old video game? You had me up until now.
> ... It's really this simple.
I couldn't have summed up your post better than that.
Thanks for the insight, and let us know how the price of your gold is doing, ok?
Price of artwork and sculptures have been climbing again for 5 years ;))..asia has been diversifying investments quietly since that long ..the euro isn't a much safer bet than the dollar ..our countries accounting practices would get me locked up if I sent my tax returns in calculated like they do ..
The french post office, government owned has a hole in it's employee retirement fund of over 100 billion dollars and rising ..the rest of our system has similar liabilities ..Germany's too.
I dont think it will all crash ..but it will shake , rattle and roll over those who are only looking at paper assets ..
A little patch of land and the knowledge and ability of how to grow ones own food will come in handy before many more years are passed ..or you won't be able to afford to eat your greens as the transporting of them to the supermarket will cost so much they will be a luxury item ..
energy costs are already starting to accelerate towards the $100.oo per barrel..maybe this year?
nice post freedom ..
If China stops buying the greenback it would effectively kill off its largest export-customer. I doubt China is minded to shoot itself in the foot in such manner.
If its export-markets collapse, China would be in far deeper trouble than the US as its export industries are about the only thing propping up a derelict centralised-economy (i.e. communist) economy in transition. Outside the glamour and glitz of Hong Kong and Shanghai, China's population largely remains very poor.
As with most "public" announcements by China, there may be a political element to it. There have been some events on this front recently, so that may have to do with it.
I am minded to be not too alarmed about it, even though most of my customers are based in the US too : )
(Just my 2 cents as a Hong Kong webmaster..)
Gold makes major runs every fifteen years or so, then it goes into deep bear markets that lasts for years. I was fortunate enough to buy some battered gold stocks in '91 under .10 a share - seriously! Total investment $1,000. Today 2 of 10 chosen are over $20 per share while the other three vanished. One certificate I lost and still can't find it. Be careful with gold- it can turn in a dime.
My point is that when the worlds economy re-adjusts or shifts foci or loci , gold is always negotiable for basic commodities or services ..
It is it's own "backer" as it has intrinsic worth in chemical proceedures upon which many basic things such as electronics or organic chemistry and it's derivatives etc are built ..
Also in spite of their relative poverty , many countries ( witness India )place for cultural reasons a great deal of store by gold .( they are lifting the price as their economy picks up ..newly rich people spend ostentatiously ..gold is the first purchase of they newly rich ) much of the worlds major voyages and historical events were the result of searches for gold ( spices are more perishable ..) ..as is artwork although gram for gram picasso is worth more than gold ..
But then I come from peasant / trader stock ..I can trade gold for more things than I can trade oil or paper etc ..and in a wider variety of circumstances ..like for water in the desert ..try trading oil or paper for water if you are thirsty .:)..
Take the long term veiw like the gypsies ..gold is a proven exchange media since thousands of years ..you wear your possible economic salvation/security as jewelery and you buy more when you can ..you can move it fast ..and yourself with it :)
the UK is a good example in that real people are not increasing their credit debt and are being overall more sensible in borrowing habits
Actually, that's not exactly true. Britons aren't doing much better on debt.
Credit card debt catches up with Britons [usatoday.com]
And jwolthuis, my gold investments are doing wonderful and I really don't understand your alterior motive for the hostility. Seems like I touched a nerve there. I apologize for upsetting your emotions.
Credit card debt in the UK is close to half the amount of US consumers but credit cards are only one part of the picture. In the US line of credit loans on home equity has grown at an alarming rate therefore creating a hidden credit debt mountain on US consumers if you look at the overall percentage of equity on US homes - UK homes the picture is much more alarming .
I do agree that as the article states UK consumers are closer to US consumers in spending habits but still some way to go
steve
The OP states a view that the US dollar will fall and that a recession will ensue. However, the OP fails to establish a strong link between why a low US dollar would negatively affect e-commerce. Would a US recession disproportionately affect the ecommerce sector, as compared to other sectors of the economy? I'd be interested to hear the OP's views on that.
From an economic perspective, the OP's argument makes a great number of key assumptions, none of which are stated by the OP.
Personally, any time I see someone make a statement like "It's really that simple", I run for the exits. It is not really that simple, it never is.
In my view, Webmasterworld is the best resource on the web for what it is. I hate to see its relevance diminished by allowing off topic threads.
All IMHO of course.
Yeah, I was hoping to read some other businessfolk talking about how the dropping dollar had actually affected their business and what they had done about it instead of advice to buy gold. Although I did not raise it when I commented, immediately when I read the initial post I thought of just how much it was of a piece with the constant fear-mongering in the US. All the time the sky is falling. I get so fricking sick of it. Sometimes I think people WANT the sky to fall.
I would like to hear what others have done in terms of their business and the fall of the dollar, and how they would go about protecting themselves from the effects of that fall. If I want to read about hiding precious metals in the backyard and storing up a ton of dried beans in the basement, I can go to a homesteading forum.
It is highly unlikely that the US$ will collapse without any kind of intervention by the G7. A gradual depreciation is the more likely scenario.
This could actually bode well for the US economy as a softer US$ means more competitive exports => helps the trade defict, budget deficit etc.
US remains the biggest economy in the world and nobody, definitely not China, would want to see it collapse.
But then again, anything can happen.
If it were so easy to predict the direction of the US$, why would the great Warren Buffet cut loss on his short US$ position?
When the consensus opinion is heavily weighted in one direction, the opposite usually occurs. Crude oil is a current prime example. My bet is it will hit $30.00 bbl before it hits $100, although it may be a few years. Hey that has something to do with ecommerce doesn't it? We need transportation to ship our goods. Transportation costs are significant with the price of crude playing a key role.
In '98, a large urn of ancient Byzantine gold coins was unearthed in Israel. The 7 pounds of 751 gold coins had a bullion value of several million dollars (and numismatic value far beyond that).
Forbes noted two things:
1) Buried gold was perhaps the only way wealth could have been passed down in that turbulent region for 1,300 years.
2) If that 7th century wealth had instead been successfully invested at even 3% interest for 1,300 years, the resulting wealth would be $6.4 sextillion!.
Forbes: The paradox of gold is that it can be the finest speculation and the poorest investment.
They were attributing the relative value of that weight of gold at the time of it's burial far in excess of it's actual worth at the time of it's burial ..not forgetting that all "value" is relative ..the aztecs had so much they gave it no particular value and died not really understanding what they were being killed for ..
There are many places in the world where you cannot exchange dollars or other major currencies for a meal in a hut if you are starving ..gold you can ..
You can travel with no currency just plastic ..and your bank can go bust or your account can be emptied or garnisheed or frozen while you are away from it ..your can wear your gold ( enough to last a very very very long time ) quite comfortably ..
Ever visit a truly historical trading nation Lebanon , Malta , Dubai , or again India ..those who have learned throughout the centuries how fast economic events can and do turn ..all put their store in wearable gold ( bullion is if they have even more ) ..
Their countries have seen many systems come and go ..instinctively this gives them the long term veiw ..
The delinking of currencies from gold was done purely at the instigation of the currency speculators in many countries for their short term ( less that 100 year outlook motives )..certainly not because it made economic sense over the long haul ..
Possession of basic commodities is what gives economic power to a country ..Russia has just demonstrated this with the Ukraine ..they backed off after the outcry from the US and the EU as the EU supplies were affected ..and then the next day did the same thing 400% price hike with Bulgaria ( no pipeline to the outside goes through Bulgaria ..no one protested ) the situation is still not resolved ..
The chinese may begin to ask to be paid by the US in freely transported grain ( they do not have enough food ) and in high grade metal ores such as iron ore which they need ( and are the largest customer for it worldwide already ) from Brazil ( from where they also import much food ) ..neither of these countries needs dollars "per se" ..gold can and does buy all these things ..your "local currency" may or may not do so ..
Those who advocate paper currencies do so in order to avoid facing the reality of their own house of cards being built out of such flimsy stuff ..however afraid one is of the real world and the winds of change one can hide from the winds of economic change and its attendant nightmare creatures much better behind metal than behind paper ..
And such things will affect ecommerce which is not a "closed system" :)..it pays to go out more and widen ones horizons :)
Again this is not a political judgement ..merely based upon recorded history ..about 10,000 years of it to date ..
Oi'm goin' back under me bridge to count me gold 'n' listen to the 'ooves ..;)
Diamonds are a terrible investment despite DeBeers efforts to convince people otherwise. We could also talk about silver. "Storehouses of Value" come and go. Very faddish. Aluminum was once very rare.
Now a #1 listing in Google...priceless!
The chinese take a much longer term veiw than you do or do most westerners ..which is why this is not the first time that they are a regional economic giant and the will be the next economic superpower ..the energy superpower status will be Russia's position ..
Diamonds outside of their industrial uses are hype ..silver was idoit speculators getting their come-uppance ..aluminium still has uses but it's production is incredibly energy intensive ..it was never particularly valued ..
Power is in the control of basic commodities ( and not in the speculation on their future values ) ..grain , fresh water , metals , exotic woods even , oil ( for now ), information ( for now as most of you understand it ) , information "per se" will always be valuable ..( oops nearly forgot land ;) think mineral rights ;) and ships ..not paper currencies ..
In the US consumers believe that the current property boom will keep going and they can continue to borrow against the increasing value of their property but I do not think this is the case and suspect the credit card companies also believe the same which is why they have pressed for changes in bankrupcy laws and have agreed to raise the minimum payments required on card balances
This in particular will be a huge problem in the US, IMO, particularly in areas where housing seems way too hot.
A lot of people live paycheck to paycheck, and they will eventually find that they can no longer afford the home they are living in. (be it renting or owning...) Also... some of the hot real estate markets are in hurricane prone areas. Higher insurance will help pop the bubble in those areas as well. People will find that their $1,000 per month residence is suddenly a $1,500 per month residence. Not only will there be an increase in used homes hitting the market, but consumers will have less to spend.
A recession in the US will certainly affect ecommerce, as it will local commerce, and other things mentioned throughout this thread. While I don't like the outlook, I'll keep chugging along until the train stops.
As far as the dollar falling, I see nothing wrong with gold as a hedge. You really only own what you possess, and can defend or hide.
It's incredible how wealthy many U.S. senior citizens are. They live modestly in their long-paid-off home and shower kids and grandkids with cash gifts. Many still work at old age...because they want to.
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My two biggest economic problems: 1)I don't have a garage big enough to hold my 4 cars. (and cars are assets too); 2) I have absolutely every possession I can use so that I virtually never shop anymore.
Bursting the home bubble would harm some, but most of us can coast a long time.
The Internet (information and ideas) + freedom, will overcome them all.
I live with the up and down of the US dollar everyday as I live in Canada
My situation is somewhat similar. I am still based 2/3's of the time in Canada, but much of my work and earnings are done-in/based-on Jamaica. The J$ tracks the USD, so in Ja my expenses are down, but in Ja, everything serious is priced in USD, whether it's science-funding, map-sales, or ecotourism, and as I still have many expenses in Canada, the steady drop in the USD has been eating into my income. I was thinking of moving some of the pricing into Euros, but the CDN dollar has also gone up against that. I might just start charging exclusively in CDN dollars (and see how it goes, of course) after adjusting everything to the USD/CDN rate as of a year ago. Those American tourists we're taking hiking through the hills, and the ones who are buying maps, are giving me less money all the time, although they're not in the slightest bit aware of it (I get the impression that many Americans still assume their dollar is some sort of big deal).
jdsinger ..if you consider your cars to be an asset then we are using a different and incompatible lexicon ..I would just point out that ostriches tend to get their a$$es bitten even when their heads are in the sand :)
see .."f"? ..explaining choral polyphany to those with their noses entrenchedly in their personal trough is only of transitory amusement value ..
fdrfdr.
So when everything breaks down at least I will be good looking!
So when everything breaks down at least I will be good looking!
You're solid on both fronts. Everything won't break down, it will just shift around, so as long as you're flexible, not a problem. With all those skin care products, you'll always have a great complexion (maybe, you ever checked the ingredients?)
I recommend: move all your liquid money into coffee, beer and/or rum, smokes, whole heaps of food that stores well, and avoid war-zones. Then, if things go bad you're still comfortable. Also, don't take any wooden nickles.
