Beware the "Dollar Bubble"
Before expounding upon the current dollar bubble, let me wax philosophical on herds of monkeys...
When will people evolve? Biologists classify us as monkeys, and we are monkey-like, but you'd think we would have evolved beyond "Monkey see, monkey do," by now, especially where money and investments are concerned.
Bubbles are caused by herd-like behavior, and apparently monkeys move in herds. Everybody buys tulips, tech stocks, houses, or whatever, and the prices of those things skyrocket until people look down and get scared (or see the opportunity to take profits), shortly after which point a mad rush for the exits ensues. At that point, the bubble pops.
Global financial markets are in the midst of another bubble. That's right: a bubble. Few have seen it and none have named it [Update 2-4-09: It seems I was wrong. A couple other obscure bloggers had named it at the time this post was written -- I apologize.] It is a dollar bubble.
It is totally unprecedented for the value of everything to fall. What I mean is, commodities, stocks, bonds, other currencies, real estate -- all of these things are falling in value. Why?
Because everyone -- and I mean everyone around the globe -- is scared, and they're following everybody else and sitting on cash in the form of dollars. This is bound to end badly. The U.S. government has been pulling dollars out of its butt for the past eight years. The national debt doubled from around $5 trillion to over $10 trillion in that time. We have had bailouts, economic stimulus packages, very expensive wars. The simple Law of Supply and Demand would dictate that the dollar should be plummeting in value, but it is not. The reason is very simple: The demand for dollars has gone insane, just like the demand for houses went insane and the demand for tech stocks went insane.
An optimist -- which I am in many respects, believe it or not -- would tell you that this is a good thing for Americans because it will control inflation. When your money is worth more, you can buy things more cheaply. That would be true if the money were actually worth more, but it's not really. The rise of the dollar is a bubble just like the real estate bubble or the tech bubble. Ignore this fact at your own risk. At some point, institutions holding vast amounts of dollars will get spooked and look to cash in by dumping dollars and buying something else. A few people will grow richer, but many will be wiped out, as with every bubble. At the end of the day, the current dollar bubble will not control inflation and may exacerbate it tremendously.
Let's compare it to the tech bubble:
1) The Internet is the "hot new can't-lose thing."
2) A bevy of sexy dot-coms are born.
3) People trample over each other to buy them, and their prices skyrocket.
4) It becomes clear that this is a money pit and few of these companies will perform to expectations.
5) Everybody sells, and the stocks become worthless almost overnight.
Here's how the dollar bubble is going:
1) Things are scary in the big, bad world of finance. Nobody knows how to value anything.
2) The U.S. government floods the market with dollars.
3) People trample over each other to get out of their current investments (commodities, stocks, bonds, real estate) and into "safe" dollars.
4) ... [People realize that there are too many dollars in the world, and nothing real backing the currency, plus, other investments start to look attractive at discounted rates]
5) ... [Everybody dumps their dollars]
The fundamental dynamic is:
1) Demand is created
2) Supply is created (too much supply)
3) Supply is snapped up
4) It becomes clear that the supply is too high and that demand can't last.
5) Everybody sells, but there are not enough buyers so prices collapse.
Don't be a scared monkey hovering over your dollars. Diversify. Buy some solid global companies that make real things and have real assets, and wait it out. Buy some gold. Buy some bananas. Buy a Directv system.You want no part of this great bubble of nothingness that is the dollar.
When will the mad rush for the exits on the dollar transpire? I have no idea. It could be in the next few weeks or months. It could be in the next few years. It may never happen, but this certainly has all the appearances of a bubble.