World Markets 101

Become a Billionaire in a Day

That’s right, with the introduction of the new $100 billion Zimbabwe bank note we can all call ourselves billionaires; one U.S. dollar can be exchanged for a new $100 billion Zimbabwe bank note.  Mind you that a loaf of bread in Zimbabwe will set you back $2 billion dollars, a gallon of milk will cost you $12 billion dollars, and how about 30 eggs? Try $45 billion dollars. With the amount of money Zimbabweans pay for a loaf of bread, just ten years ago, they would have been able to purchase 12 new cars. 

The last inflation report, which was in February, pegged inflation at 165,000 percent, but independent estimates put the real figure closer to 4 million percent.  Many calculators can’t be used to calculate simple transactions in Zimbabwe because of the shier number of zeros.  The country is the only country in the world that routinely carries out transactions in the quadrillions (1 quadrillion = 1,000,000,000,000,000).

Several factors are to blame for the soaring inflation; large unbudgeted payments to the veterans of the war liberation, the country’s military intervention in the Democratic Republic of the Congo, and a land reform program that began in 2000.  Up until 2000, agriculture was the country’s leading economic activity, but a program designed to dispossess white commercial farmers of their land for the resettlement of blacks without land, caused the entire agriculture industry to collapse. The new land owners have failed to maintain production due to lack of capital for materials, lack of farming knowledge and multiple droughts.  The devaluation of their currency has made imports more expensive.  Analysts say the only way for the country to get back on its feet is to begin producing at full capacity and to do that they need a political change.

Could the inflation in the U.S. get as bad as the inflation in Zimbabwe?  Fortunately for us that scenario would be highly unlikely, but if I am wrong, you can sue me, and I will gladly pay you $100 billion dollars.

The Dollar Overvalued? (October 2007)

Traders were given the green light to continue shorting the dollar after the International Monetary Fund said that the currency remains overvalued relative to the Euro.  Eurozone members have been pushing for a rise in the greenback since the fall in the U.S. currency has caused European exporters to be less competitive when compared to U.S. competitors.

The IMF statement shows a lack of sympathy toward European exporters.  The IMF’s statement represents an independent view, which not surprisingly, differs from the statements of Eurozone members.  However, their economists do believe that the sterling is overvalued and that the yen and remimbi remain undervalued relative to other currencies.  The fund called on China to let its currency appreciate stating that it would be in their best interest.

The Fund thinks that the US current account deficit will remain close to 1.5 per cent of world output until 2012, raising the likelihood of a disorderly plunge in the dollar and protectionism growing over the next few years.

How Low Can It Go? The Dollar Limbo (September 2007)

If you think your portfolio has performed well over the past year than you probably haven’t traveled overseas lately to see what those gains can get you.  The Dollar has been waning as a result of huge deficits and a weakening U.S. economy.  The U.S. economy is weakening at a time when other economies are hitting all cylinders and as a result, the Federal Reserve had to reduce rates at a time when other countries are raising rates or keeping them unchanged. 

The 50 basis point move caused gold to soar to a 27 year high and oil to reach an all time high of $84 a barrel.  The Dollar fell to a lifetime low against the Euro and reached parity with the Canadian currency.  When analyzing market performance, the effect of the falling Dollar is staggering; for instance, the Dow is up 28% since January 2006, however in Euro terms the Dow is up only 8% during the same time period.  For those of you who had planned on retiring in Europe, I’m sorry for raining on your parade.

A gradual decline of the Dollar does have its advantages.  A gradual decline in the Dollar increases our exports and acts as an offset to our domestic slowdown.  In fact, real exports have grown faster than real imports over the past two years.  When the Dollar is weak tourists flock to our country to visit places like Disney World and New York City.  A weak Dollar also helps make domestic manufactures more competitive versus areas like Canada and Europe that have seen their currencies appreciate.

The Dollars fall may continue for sometime despite the already significant downward move that has occurred.  For the past decade, U.S. productivity gains have enabled the U.S. to grow with little inflation. Productivity gains have also allowed us to sustain an unsustainable current account deficit.  Now productivity growth in the U.S. appears to be slowing as countries abroad adopt technologies that we pioneered.  That means U.S. growth may be slower relative to growth in other countries for some time.

Martin Feldstein and other Harvard economists believe that a current account adjustment could cause the Dollar to fall another 20%, but it will be a gradual fall they say.  Although if the U.S. economy slips into a recession there is a possibility the Dollar could see a rapid decline that would push interest rates higher.