Niall Ferguson on the U.S. Dollar

Written By Brian Hicks

Posted October 23, 2009

There were dozens of noteworthy sound bytes at Buttonwood last week. But none set off a firestorm like Niall Ferguson’s. The controversial Harvard professor’s comments on the dollar have fueled the currency buzz this week.

Ferguson warmed up the audience with this blunt observation: "We are living through a gradual shift away from the dollar-centric system." Subtle.

But when an audience member asked him about sustainable solutions for America, the professor came through with the quote of the day: "The problem of being a declining empire doesn’t have a solution."

The audience instantly snapped to attention. Anyone dozing off was roused by booing and nervous laughter. And, for a conservative bunch such as this one, boos, hisses, and laughter are not considered proper etiquette during a discussion panel.

Professor Ferguson went on to say that in ten years, we will look back and realize this period was a major turning point — that this was the point at which power truly began to shift from West to East.

Bold claims, and ones with major implications for investors.

So is Ferguson on to something? Or is he trying to sell his book, The Ascent of Money?

Perhaps a little of both. . .

Shunning the Dollar

An ominous emerging trend seems to support Ferguson’s theory. Foreign central banks are shunning the dollar in favor of what they perceive as sound(er) currencies, like the euro and yen. Another emerging trend is China’s worldwide commodity grab. In prior years, they might have spent those reserves on U.S. t-bills or higher-yielding mortgage-backed securities.

The key difference is this: central banks have talked for decades about diversifying away from the dollar. Now they’re actually doing it.

According to Bloomberg News, the dollar is making up a shrinking percentage of foreign reserves. The greenback recently dipped to 37% of new foreign reserves. That’s down from an average of 63% in 1999.

This does not bode well for the dollar — or for America’s continued ability to borrow on the cheap. Our status as the world’s leading reserve currency allows us to carry a higher debt load than most nations could bear. As Ferguson points out, a gradual shift away from the dollar does indeed appear to be underway.

Dollar Bears: Lemmings or Savvy Traders?

These days, everybody and their brother is betting against the dollar. They’re directly shorting it, buying commodities like gold, or playing the "carry trade" (borrowing cheap $US, and buying higher-yielding foreign currencies), to hedge against its decline.

These situations are always tricky. Crowded trades like long-gold or short-dollar can reverse quickly and violently. Some contrarians are long the dollar because of this. However, these long-term trends can go on much longer than people think. There are strong fiscal and monetary forces at work here.

Some even think the Fed and Treasury want a weaker dollar because it will allow debt to be paid off with devalued currency.

The Dollar Bull Case

Many dollar bulls are betting on Fed interest rate hikes next year, and betting against more reckless fiscal policies. I’m skeptical that the Fed will jack up interest rates in 2010. It’s certainly possible, but Bernanke has made clear that he’s willing to do whatever it takes to "help" the economy. 

A short-term rally in the dollar seems inevitable, but the long-term trend is clearly down. Until fiscal and monetary policy change, the dollar’s path seems unlikely to do so, either.

Lastly, and as promised, here are some of the best quotes I heard during the 3-day conference.

Notable Quotes

Elizabeth Warren, Chair of TARP oversight panel and Professor of Law at Harvard:

The reason banks lost confidence in each other is because they looked at their own books. (As a reply to a question on the role a "loss of confidence" played in the crisis.)

We need the toughest possible accounting standards. . . You can’t trust anyone’s books these days.

What we have confidence in is the fact that big institutions will be bailed out. (In response to a question about the importance of confidence.)

Tim Geithner, Treasury Secretary:

We’ve got unsustainable deficits over a five- to ten-year window.

We have been ‘remarkably effective’ in stabilizing the financial system.

We need a way to put them [too big to fail institutions]. . . how can I say this, ‘out of existence.’

The emerging world will be a much stronger source of strength, it is showing resurging strength that will support us.

George Soros, Chairman of Soros Fund Management (arguably the most successful currency trader in history):

The U.S. will remain a drag on the world economy. World growth is bound to be flat for a number of years.

Yes. (When asked if Wall Street has "captured" our government, as prominent economist Simon Johnson has said.)

Diane Garnick, Investment Strategist at Invesco (during a session on executive compensation in finance):

The credit crisis may be over, but the credibility crisis is just getting started.

Our most important resource is human capital, and we won’t maximize our potential as long as such a large percentage of our top talent is attracted to finance.*

Compensation in the Western World is a bit like Dolly Parton: there is a huge bubble at the top. (Diane prefaced the simile by mentioning that the joke always bombs in Asia. For the record, it basically bombed to the ~40 people in this session, but I liked it.)


Jeffrey D. Sachs, Columbia University Economist and Director of the Earth Institute

Wall Street is patting themselves on the back for making lots of money, for making profits on fantastically easy monetary policy.

They [Goldman and other investment banks] have been allowed to "feed at the Fed" on loose money, and profited from it.

Richard Bookstaber, Risk Management Expert and Author of A Demon of our own Design. (The following quotes were from a debate on this proposition: Financial innovation boosts global growth. Bookstaber was on the ‘con’ side.)

Derivatives are the current weapon of choice for gaming the system.

Derivatives create risk, not protect against it.

I’m all for capitalism, but Wall Street is only half capitalist. When things are good, they’re capitalists. When things turn bad, they become socialists.

Jeremy Grantham, Chairman of Grantham Mayo Van Otterloo (also known as GMO, a firm with $89 billion under management. His role as a money-manager make his comments that much more interesting.)

Finance produces nothing of value, no widgets. All we do is shuffle money around and collect fees.

The more complex and opaque the [financial] instrument, the more likely that it is ripping people off.

Larry Summers, Director of the White House’s Economic Advisory Council, former Treasury Secretary under Clinton:

We need financial regulation that recognizes human nature; trying to change it is pointless. Even in the annals of speculation, there are few successful careers based on predicting bubbles and going the other way (short).

To be sure, it is easy to predict bubbles. Just predict them all the time. But that is surely not a realistic view to regulate based on.

Angel Publishing Investor Club Discord - Chat Now

Brian Hicks Premium