The Dollar Bubble of USA.com

Published in Business Line on May 11, 2007

Explains as to why the USA is a bubble economy.

Some comparisons between the Tech Bubble and the US Economy Today

Bubble Formation

.com days: The technology benefits and business models of some of the companies were real. However, what started as attractive real growth for a handful of companies (Microsoft, Oracle etc.), became overblown to an entire sector and indeed the economy itself. The peak of the bubble saw some fashionable comments as the one by Jim Cramer, the popular anchor at CNBC: “You have to throw out all of the matrices and formulas and texts that existed before the Web… If we used any of what Graham or Dodd teach us, we wouldn’t have a dime under management.”

USA.com today: The US Dollar was one of the last major currencies to move out of the Gold standard which it did in 1972. So the Central Banks when they accumulated their reserves in US Dollars were doing so for sound reasons initially. Also, during the 1970’s and early 1980’s, the US was a net saving nation and maintained a balanced budget with a trade surplus. So the reasons that were initially valid have long ceased to hold true. However, similar to analysts trashing traditional valuation techniques during the dot com era, today you have analysts justifying a trade deficit and even the negative savings rate.


Outcomes – What Caused the Bust?

.com days: The recognition that the future earnings of dot com companies are not going match the valuations as represented by the Market Capitalizations.

USA.com today: The recognition by the ACB’s that the assets that can be purchased using their US Dollar holdings represent a tiny fraction of the outstanding Dollars.

Market Impact

.com days: The Nasdaq collapsed by about 80% from its peak levels. The ramifications of the Internet bubble bursting was not felt outside of the technology sector as the US Fed engineered a bigger bubble (the housing bubble) by holding interest rates too low for too long.

USA.com today: If the ACB’s stop the irrational policy of subsidizing the US consumer, then these currencies could appreciate upwards of 50% against the US Dollar. This would ensure that their citizens enjoy a higher standard of living while leading to a fall in the purchasing power of the US consumer.