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Written by José D. Roncal
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Thursday, 15 October 2009 15:58 |
The DOW broke 10,000 this week for the first time in 2009. Is it time to celebrate? It does seem to bode well for the economic recovery. But where does the value of the dollar stand in the midst of this news?
Back when the financial crisis looked the darkest, our panacea of choice was to funnel a mass infusion of U.S. tax dollars into stimulus packages. But is there another potential crisis looming – a growing lack of confidence in the U.S. dollar?
If we allow this steady return to "economic normalcy" stunt our political will to fix the problem of deficit spending, what impact could it have on the dollar?
Let's take a look at the current situation. There are huge trade and spending imbalances—the U.S. imports vast quantities of goods and services—far more than it exports. Our trade deficit in 2008 was the world's largest—a whopping $700 billion! Who's minding the trading store? Do they not realize that flooding international markets with dollars eventually decreases the value of the dollar?
Yes, it's true that in the first quarter of 2009 this deficit did decline by 35 percent. Why? Because we're in such a deep financial morass, we couldn't afford to buy as many imports. Is that cause for celebrating?
How can the U.S. afford to continue its deficit spending? Easy. It's all thanks to deep-pocketed Asian trading partners—China, Japan and Korea—who are willing to purchase and hold U.S. Treasury Securities that pay low interest rates. But now economic experts are beginning to send up warning signals.
Paul A. Samuelson, Nobel Prize-winning economist predicts a global financial panic if China suddenly decides that the U.S. deficit makes further investments of Treasury Securities too risky. China has already voiced serious concern about the potential inflationary impact of the U.S. fiscal stimulus on the value of China's $1.5 trillion in U.S. government securities. Eventually asset holders around the world will think twice about whether the U.S. is credit worthy.
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Written by José D. Roncal
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Thursday, 01 October 2009 00:17 |
As we've pointed out in our book,The Big Gamble, there really is no such thing as an investment; it's all speculation. We've also gone into detail on the subject of risk; what it is, it's various forms, and how to measure it in terms of the potential payoff. Well, here's a little something else you should consider about risk so you know exactly what you're up against.
When technology is involved, the odds are definitely not in your favor.
Do you know why there has been such a sharp increase in trading volume lately? It’s because of something called "automated high-frequency trading." These computerized trades can take advantage of minuscule price changes that are too fleeting for mere mortals to catch—such as a tiny flash-in-the-pan increase in the spread between bid and ask prices on a particular stock. From his computer, an alert broker can hit a home run with a quick keystroke. Trading happens so fast that some firms have actually relocated their computer servers closer to the exchange's computers so they can shave a nano-second off the distance that the electronic order has to travel through the wires.
This kind of trading is now as wide spread as it is fast. By some estimates, high-speed computer trades account for 60 to 70 percent of all U.S. stock trades made by investment banks, hedge funds and other high rollers.
The naysayers claim that electronic trading bears closer scrutiny because it could be manipulating the markets, or worse, may spark the next financial crisis. Some believe that computer-based trading caused the meltdown of '87 when things got out so of control so fast, more than 22 percent of the value of US stocks was wiped out largely during the first hour of trading. And nobody knew how to pull the plug.
But the yaysayers claim that lightening-speed trades are a good thing—they improve liquidity, reduce trading costs, and keep the wheels of the market slicked. More about that in a minute.
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