Are investors in the US and abroad losing faith in the dollar?
(Page 2 of 2)
Bill Gross, who manages giant mutual funds at bond investment firm PIMCO, warned this week that the United States will lose its triple-A credit rating in “at least three to four years, if that.” He told Reuters news service that “the market will recognize the problems before the rating services.”Skip to next paragraph
Subscribe Today to the Monitor
Britain, which got the warning shot from S&P this week, has government debts edging toward the amount of one year’s gross domestic product. The US government’s public debt isn’t as large, but it’s moving in that direction as the Treasury spends mightily to rescue banks and stimulate economic activity. Meanwhile, the Federal Reserve has been taking extraordinary measures to ease monetary policy, in a parallel bid to end the recession.
Debt at all levels
America’s debt burdens are widespread:
• The federal government is posting record $1 trillion budget deficits.
• Many states are struggling. In the biggest, California, voters rejected ballot measures proposed by Gov. Arnold Schwarzenegger that would have bridged a current imbalance by borrowing and raising taxes.
• Household debt surged over the past decade to about 140 percent of a year’s income, double where it stood in the 1970s and early 1980s.
• Prior to the recession, the financial industry facilitated a credit boom by boosting its own leverage, or borrowing. That business plan worked until the prices of assets like stocks and houses faltered, eventually causing a full-blown financial crisis.
These debt burdens can all weigh on the dollar if they leave investors with the impression of rising risk and diminishing potential returns.
Threat of a credit downgrade
For the federal government in particular, the threat of a credit downgrade has grown in the past year. Federal support has helped to calm financial-market panic, but the result has been new obligations for already stretched taxpayers. Banks, mortgage giants, insurance firms, and automakers have all gotten bailouts. Now some lawmakers are considering whether Congress should step in to help California out of its budget mess.
With big costs for healthcare programs also looming, some financial forecasters see the threat of big declines for the dollar.
“It's not only the foreigners buying US assets one has to be concerned about,” mutual fund manager Axel Merk wrote in a commentary Thursday. “If the trust of Americans erodes in the US dollar, that flight could have rather severe implications.”
Don't "print money"
Mr. Merk, who manages the Merk Hard Currency Fund, says that central banks should pull back “from trying to boost economies by printing money to finance government spending.”
For ordinary investors, funds such as Merk’s are one way to diversify into non-dollar investments. (Exchange-traded funds also offer a stake in single currencies such as the euro.)
Some financial experts say the simplest approach for global diversification is for people to own world stock mutual funds as well as US ones. Foreign stocks may do well, moreover, even if Armageddon scenarios for the dollar don’t come to pass.
For now, many forces in the economy are deflationary, not inflationary. Longer term, strong US economic growth could support the dollar, as long as fiscal and monetary policies are also sound.
Material from wire services was used in this story.