Early Retirement Blog

After months of “The Dollar is crashing!   The Dollar is crashing!” stories, the U.S. Treasury Dept. reports today that “foreigners” purchased a net record $114.5 billion of U.S. Treasuries in November 2009.   Reports of the Dollar’s death, as Mark Twain would say, have been greatly exaggerated.

What’s going on? The dollar was supposed to crash and burn, forcing Americans to push wheelbarrows filled with bogus Benjamins to the supermarket just to buy a loaf of bread.

Why is the dollar rising? And who are these “foreigners”, who have suddenly fallen back in love with our previously worthless currency?

To understand why the dollar is rising, one has to understand who these “foreign investors” are, or as the Treasury report calls them “Private Foreign Investors”.    Because they are not, as the report indicates, the normal buyers of U.S. Treasuries.   The Chinese and Arabs have reduced their holdings of U.S. Treasuries and the Japanese have increased their holdings only slightly.

The “Private Foreign Investors” are  American banks and American hedge funds, who after engaging in the very lucrative dollar carry trade over the past year, borrowing money from the Federal Reserve at zero interest rates and investing the money in emerging markets, are suddenly taking their profits and pouring the profits back into U.S. Treasuries.

The proof is in the headlines that appeared on the same day as the stunning Treasury report about the rising dollar.   “Citigroup Loses $7.8 Billion in Q4″, “JP Morgan sets aside $7.28 billion for failed loans during the fourth quarter”,   “Dollar gains vs. Euro on investors’ concern over Greece default”,”Brazilian Real declines against dollar.”

When the sub-prime crisis in the U.S., caused the global economy to collapse, the dollar actually rose in value.   It was erroneously reported in the MSM, as most things are, that the dollars rise was due to a “flight to safety”.  Hogwash.

The dollar’s rise in the face of a collapsing U.S. economy happened because American banks and hedge funds were forced to repatriate their foreign holding to cover loan losses and redemptions.   And the same thing is happening again.

Over two years after the credit crisis began, American banks are still taking loan losses,   their record profits this year from using the dollar carry trade to speculate in foreign markets masked the losses.   Continued rising unemployment, foreclosures, and now the apparent beginning of the commercial real estate bubble implosion, has banks scrambling to increase their reserves.

Add to all of that, the Federal Reserve is starting to reduce it’s purchases of Mortgage Backed Securities.  “Liquidity” is draining out of the credit markets once again.

Okay, that’s enough of the economics, how does a rising dollar impact your retirement?  If you are already retired, and  the rising dollar trend continues, you can expect to continue to receive near zero interest income on your Bond holdings.  A rising dollar reduces interest rates.

If you are not yet retired, a rising dollar will help keep the housing and stock markets propped up, for as long as the trend continues.  Low interest rates caused by a rising dollar benefits the stock and housing markets.

While the mainstream financial media will most probably spin the rising dollar story, as an indication of the strength of the U.S. economy, and the resurgent faith “foreigners” have in the U.S. economy, the truth as usual is quite the opposite.

A rising dollar is an indication that, after a year of record profits, the U.S. financial system is back in trouble again.

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