Is the US dollar recovery a false dawn?

Forecasting currencies is a mug's game but everybody does it. You just can't avoid taking a position if you are in business and have to handle cash, or hold cash and are forced to be an investor.

The total indebtedness of the USA is approximately $24 trillion, adding up all household, corporate and government debt. The USA exports only half the value of its imports. Despite the 40% devaluation of the dollar against the euro in the past five years, the trade deficit is bigger than ever.

Anyone of these factors would indicate an unfit economy, ripe for further devaluation. Put all three together and you would seem to have an open-and-shut case.

Yet the US dollar has rallied this year. Why is that? The obvious conclusion is that the weight of all this financial excess is keeping the economy growing at a time when other economies, particularly the European Union, are in difficulty; hence the relative revaluation of the US dollar.

The US housing market's price inflation spike is the clearest indicator of this process. So big has the weight of debt become on the US economy that long-term interest rates are being forced down and this is increasing investment in housing, and extending the debt position further.

One thing that is quite certain is that financial bubbles have to deflate in the end. We saw it with the dot-com bust in 2000. The US housing bubble is the one that threatens to come unstuck this time, along with the US stock market which is also trading at valuation levels out-of-touch with the future outlook.

Put more simply. Imagine you have some friends with a big house and fast cars, but you happen to know that they have taken on huge debts to pay for this lifestyle, and you know that their income is only just sufficient to pay the interest. You know that it is only a matter of time before something happens to upset this party.

Is this not the situation that the US economy finds itself in today? Is that not why Warren Buffett and his friend Bill Gates are still betting against the US dollar?

For the point will come when the debt burden becomes unsustainable; if nothing else then logic suggests that the US is now borrowing to finance its borrowings, which is clearly unsustainable. How much longer the dollar has is a tough call.

But very shortly the US dollar will drop very sharply in value. Tempus fugit, the present US dollar rally can not last!