Cyrillic Partners

Alan Greenspan told a group of executives in Oslo that the falling dollar shouldn’t be a Federal Reserve priority unless it is creating inflation.

From Reuters: Asked if the Fed should take the weak dollar into account, he said: “To the extent that a weakened dollar is of such a margin that it creates problems, then yes, the central bank needs to address that. One has to ask what are the inflationary consequences of a weakening of the dollar.”

This question may have more to do with the mix of imported and domestic goods that a person typically consumes. A basket of mostly imported goods would drive up an individual’s consumer-price-index. It also has to do with the price stickiness of import-competing goods. As prices on imported automobiles go up, for example, how long will it take General Motors to increase the price on its cars and trucks?

At least the former Fed chairman isn’t spouting as much doom and gloom earlier this month (see our post on it).

Iran and Venezuela have proposed that OPEC move off the U.S. Dollar as its currency of choice for pricing crude oil, but it’s not going to happen. The political move is designed to further destabilize the damaged dollar, but isn’t getting any traction from Saudi Arabia–the linchpin of any OPEC decision. (See our last story on the subject.)

Steve Hargreaves, CNNMoney.com staff writer, has a good story on the subject, with some nice reporting on what the effects of OPEC going off the Dollar. From Hargreaves’ story:

The effect that switching from pricing oil in dollars to euros might have on the American currency is hard to say, but it’s possible it could further drive down the value of the dollar and hence make oil more expensive for U.S. customers.

“That’s the political weapon Iran and Venezuela are trying to leverage,” said Peter Tertzakian, chief energy economist at ARC Financial, a Calgary-based private equity firm.

The amount of oil OPEC sells on the world market is somewhere around $1.5 billion per day, said Jeffrey Currie, the head of commodity research at Goldman Sachs in London.

Compare that, he said, to the more than $3 trillion that change hands in currency markets every day.

“You’re talking about a value that’s just too small to show up on the radar screen,” said Currie. “It isn’t enough to materially change the currency markets.”

So it’s basically a smoke screen thrown up by the leaders of countries that don’t like the U.S. to further cast doubt on the Dollar. Don’t bet on it actually happening.

[See our other stories on currency issues.]

[Image thanks to EVWorld.com]

OPEC met over the weekend to discuss, among other things, the falling U.S. Dollar–the currency which it denotes its reserves. This is largely a political debate with little economic merit. Is it a coincidence that the push to move to a different currency is spearheaded by Iran?

Consider the following from the Associated Press: “They get our oil and give us a worthless piece of paper,” Ahmadinejad told reporters after the close of the summit in the Saudi capital of Riyadh. He blamed U.S. President George W. Bush’s policies for the decline of the dollar and its negative effect on other countries.

Michael “Mish” Shedlock has the right take on this red herring. He suggests that the basket of currencies OPEC considers for a replacement might be called WHSIT, short for “What the Hell Is It?” From a recent post of his:

That night you tune into CNBC and the commentator says “crude reached a new high at 102.3 WHISITs”. This would last about 3 days or less simply for the novelty of it. Eventually someone would be smart enough to figure out what percentage the US$ was of WHISITs and compute a price of oil in US$. Every country on earth would do the same thing and that would be the end of discussion of WHISITs for all practical purposes.

[Picture by Hasan Sarbakhshian/ AP Photo]

We’ve been writing a lot recently on the effects of the falling dollar, its impact on earnings and what the Federal Reserve is likely to do because of it.

Paul Krugman has an interesting blog post about it, worth reading. The takeaway is excerpted below:

Finally, there’s a fairly subtle argument about term structure and timing.

You see, the Fed only controls short-term interest rates, while investment spending depends on long-term rates. Meanwhile, the effects of a weak dollar on exports take a while, maybe as much as two years, to take full effect.

So there’s a story that runs something like this: a plunging dollar will eventually be very expansionary, and will force the Fed to raise rates to cool off the economy — not now, but a year or two from now. But the expectation of this future rise in short-term rates will push up long-term rates now, causing a recession even if the Fed does nothing.

From the FT:

Shares in Starbucks slumped after the café chain on Thursday stirred concerns about the health of the US economy when it reported its first quarterly fall in traffic at its US stores and announced plans for its first television advertising campaign.

The planned holiday season advertising comes as Starbucks acknowledged that its supposedly “recession proof” sales of frappuccinos and flavoured latte drinks were feeling the impact of broader slowdown in US consumer spending.

Shares in Starbucks fell 8.6 per cent at $22.02. The company’s shares are now down 38 per cent this year.

There’s no secret in what’s driving the Starbucks slide: the falling dollar. The coffee business is commodity based: it’s major input is coffee beans, which have to be imported. When the dollar weakens against foreign currencies, it’s more expensive to buy commodities such as coffee. Starbucks gets stuck with the bill.

But when the company tries to pass the price along to consumers with a $0.09 increase in its per-cup prices, the law of supply and demand kicks in and people buy fewer frappuccinos.

This isn’t a story about “Recession” or “Inflation.” Nope. It’s all about international trade and currency. The Federal Reserve is willing to crucify companies that are net-importers, at least in the short term, in exchange for domestic growth.

Good bets right now are on companies that are net-exporters, themselves a rare commodity in the U.S. these days.

[Image thanks to Boston.com]

Not everybody loves the Federal Reserve as much as we at Cyrillic Partners do. NORFED seems to be an organization that is so against Bernanke, et al, that it has decided to publish its own currency system, one based on silver holdings.

Everything was going fine for the group until mid last year, when the U.S. Mint issued a press release stating that NORFED’s “Liberty Dollars” were illegal. So NORFED owner Bernard von NotHaus sued the Mint and the Treasury and a bunch of other people earlier this year.

It seemed like a good idea until the FBI raided NORFED headquarters earlier last week and seized gold, silver and two tons of copper coins featuring Republican presidential candidate Ron Paul, according to a report by the AP.

NORFED’s position is particularly interesting to Fed-watchers. The organization’s premise is that backing their dollars with silver will eliminate the inflationary pressures on the U.S. Dollar. The group offers the following charts on its website:

The theory here is that increasing U.S. Federal Debt is driving the buying power of the dollar down. Right… Well anyway, people don’t necessarily have to fear inflation. It’s all about what rates you’re locked into or how sticky your wages are.

I’m not sure that the currency really “competes” with the U.S. Dollar, which is what most of the case will turn on, it seems. From The Washington Post story: In the affidavit, an FBI special agent states that he is investigating NORFED for federal violations including “uttering coins of gold, silver, or other metal,” “making or possessing likeness of coins,” mail fraud, wire fraud, money laundering and conspiracy. “The goal of NORFED is to undermine the United States government’s financial systems by the issuance of a non-governmental competing currency for the purpose of repealing the Federal Reserve and Internal Revenue Code,” he states.

Couldn’t the same thing be said for any number of “currencies” printed or created for the purpose of exchange? Postage stamps come to mind.

[Images from NorFED website.]

The Associated Press has a good Q&A-style story about who wins and who loses thanks to the falling dollar. A piece of this instructive story is excerpted below:

Q: Does anybody win from the weaker dollar?

A: American manufacturers and farmers are enjoying a surge in export sales to record levels as the weaker dollar makes their goods cheaper and thus more competitive abroad. The export boom is helping to lower the U.S. trade deficit this year following five straight years of record highs.

The growth in exports is helping cushion the economic impact from the steep slump in housing, adding nearly a full percentage point to growth in the most recent quarter. Without the export boom, many economists believe the country would be in much greater danger of falling into a recession from the combined blows of the housing slump, the credit crunch and soaring energy bills.

The falling dollar affects venture capitalists and other U.S. based investors putting money to work overseas. VCs that raise their funds in U.S. dollars and then invest in China, India, Europe, Israel and other places can expect to pay more for their deals than they would for equivalent deals in the U.S. (China is a bit of an exception, since its currency is linked to the U.S. Dollar). The falling dollar should put a tamper on venture investment outside of the U.S.

The Council on Foreign Relations has a nice explanation of the causes of the falling value of the dollar. It’s an important thing to understand, especially when people talk about the increasing cost of oil. The U.S. is a net importer of oil. When the value of the dollar falls, oil prices rise.

The falling dollar is getting the rhetoric up. Nobody’s worse than Henry Paulson. The Secretary of the Treasury has a knack for saying overly-defensive things that come off sounding insincere. Consider the last line from this story in the IHT:

“The dollar has been the world’s reserve currency since World War II and there’s a reason,” he said. “I put the U.S. economy up against any in the world in terms of competitiveness.”

Well, that’s not particularly reassuring.

So what’s caused the dollar to fall even faster? Fears that the Federal Reserve will cut rates again. Cutting rates may accelerate inflation and further send the dollar down. Stay tuned.