The incredibly shrinking dollar

 

BY MORRIS R. BESCHLOSS

PVF & economic analyst emeritus

 

“The value of U.S. commercial real estate prices of all types has plunged 39% between its peak in late 2007 and current evaluation.”

 

This disconcerting analysis emanating from Moody’s Investors’ Service and Real Estate Analysis emphasizes the shock that the construction industry has had to absorb in a relatively brief time period of one year or less. And the end of this deterioration may not yet be in sight, despite increasing glimmers of improvement in certain parts of the country.

 

Although not as well-publicized as the calamity that has befallen hundreds of thousands of residential homeowners, it will likely cast a longer shadow, as a nationwide turnaround depends on the return to normal health by the economy as a whole. This is especially dependent on personnel rehiring and capital expenditures, which are currently nowhere in sight.

Commercial real estate, which encompasses shopping centers, hotels, motels, office buildings, educational, religious and medical institutions, high rise condominiums, restaurants, etc.— has been hit with devastating price plunges across the board. In fact, the consummate total value of America’s largest aggregation of fixed assets has fallen to the lowest level in more than five years. This was the base point during which this vibrant sector had jumped off to unprecedented expansion, both in prices, as well as square footage.

 

In assessing future potential for commercial and industrial growth, current developments seem primarily focused on health-related facilities and assisted living for the increasingly aged sector of America’s population.

 

With government-oriented initiatives geared toward universal healthcare, renewable energy, climatological innovation and tighter financial regulation, the chances of nationwide development in most phases of commercial real estate are remote. China’s avowed intent to spend billions of dollars to purchase U.S. fixed assets may generate some pricing comeback, but will do little to engender commercial expansion.

 

The opportunities that had seemed inherent in last year’s drive toward greater energy development and conventional focus on power generation are foreclosed under the current Administration’s governance. Consequently, a renewed industrial construction and energy boom does not seem apparent in the foreseeable future.

 

During this ongoing hiatus in new construction, there does appear to be greater emphasis on maintenance, repair, and upgrading projects. Reports from all geographical sectors allude to these developments.

 

This, of course, applies to the residential and original equipment sector as well. Although not a viable long-term substitute for the dynamic projects that abounded in the period leading up to the last five years, it does at least provide work opportunities for a large segment of the plumbing-heating-air conditioning and mechanical segment of the phcp-pvf sector. But a major pickup in overall work opportunities for this important industry area will have to await progress signs not yet apparent on our forecasting radar screen.

 

Incredibly shrinking dollar acquires new meaning

 

In a litany of repetition, successive U.S. Treasury Secretaries have consistently called for a strong dollar, no matter what the vagaries of various economic cycles implied.

 

Since World War II and the preeminence of America’s dominant world economy, the greenback quickly climbed to the top of the global heap, replacing the British pound as the world’s currency of choice. Such universal commodities as oil, copper, steel, and agricultural products have, for decades, been denominated in dollars.

 

This provided colossal strength to the American currency, since the monies utilized by the world’s currencies had to be first converted to dollars before these multi-billion dollar purchases could be made.

 

In the various economic gyrations that have occurred in the past 60 years, the dollar has had its ups and downs, primarily at times of recessions, resulting from inflation caused by too few goods being chased by a surge of dollars, driving prices out of sight.

 

This was normally accompanied by the price of gold vaulting upward, and a wide range of producer and consumer goods galloping to record levels. This inevitably depressed the value of the dollar until such time that supply/demand regained its balance, effectively ending the recession.

 

But this is the first time since the Great Depression that a deep recession has occurred at a time of deflation.

 

This was precipitated by a near financial meltdown and a deleveraging by a bloated U.S. economy primarily built on debt leveraging that has now imploded.

 

The current shrinking dollar is caused by the Federal Reserve Board’s flooding the arteries of commerce with literally trillions of dollars to reverse the seize-up of money flow that had threatened to bring America’s $14 trillion economy to a standstill.

 

With interest rates dropping to a record low, due to this new flood of excess money coursing into banks’ balance sheet reserves, the dollar is now not competitive with a basket of global currencies. This time it’s not higher prices, but the reverse — falling costs and income, with expanding manufacturing capacity, growing unemployment, and a surfeit of all types of goods crowding shelves of manufacturers, distributors and retailers alike. Gold is an exception because it’s not dependent on economic usage, but is valued in dollars.

 

Although this trend aids America’s growing export activities, it deflates U.S. purchasing power and makes the dollar less attractive to foreign investors, due to the disappearing investment returns.

 

Eventually, this will be balanced by a Fed exit strategy that will start moving interest rates back up. However, due to a deflated world economy, this will not be manifested by a stronger dollar and an inflationary trend for a long time to come.

 

Cap-and-Trade Senate battle heats up as Copenhagen world showdown beckons

 

While the healthcare plans’ Congressional rhetoric becomes ever more ferocious, the Obama Administration is forcing a Senate showdown on “cap-and-trades,” as the President prepares for his second Copenhagen trip (after his failed Chicago Olympic advocacy). He is ready to provide U.S. world leadership in the battle for climatological purity.

With the highly controversial cap-and-trade legislation barely passing a House vote earlier this summer, Obama must have a signed deal in his pocket when he addresses the global-warming gathering in Copenhagen in December.

This runup to the Senate vote is enlisting such utility giants as San Francisco’s Pacific Gas and Electric and Exelon, the biggest operator of nuclear power plants in the U.S. These have gone so far as to quit the U.S. Chamber of Commerce over the Association’s adamant opposition to the odious cap-and-trade legislation. A further split has been caused by a consortium of other business opponents suspending their membership in the American Coalition for Clean Coal Electricity (accce). This trade group for coal and utility companies is fighting a desperate battle to save its still dominant position as a major resource for America’s massive electric utilities.

 

This split in America’s business and industry has become increasingly political, as such relatively clean providers as nuclear energy and natural gas burnish their ‘green’ credentials in the fight for eventual resource supremacy.

 

Although the climatological extremists, led by Al Gore, former Vice President and film protagonist, would prefer wind, solar, and geothermal — even they are waking up to the fact that such marginal resources for power providers would contribute only a fraction of the void led by the condemnation of coal, clean or otherwise, from its present cost-effective, but highly pollutant position.

 

Although facing opposition in the Senate by coal state senators, and the overwhelming majority of America’s small business owners and the U.S. population as a whole, the Obama Administration is working feverishly to push cap-and-trade legislation through the Senate, while the verbal war on universal healthcare dominates the headlines.

 

Expect this showdown to reach its climax before Thanksgiving, as both of these Obama initiatives vie for a successful conclusion in the waning weeks of 2009.

 

Deflation holds the upper hand — for now

 

As the 2009 fiscal year ended September 30, with a resounding record budget deficit approaching $1.8 trillion, you would think alarm bells would be clanging nationwide, with banner headlines bemoaning this calamity.

 

But the worst that can be gleaned from public reaction is a shrug of the shoulders, despite the fact that this ignominious deficit is four times the total of last fiscal year’s near $500 billion all-time record.

 

And neither year has included much of the excessive spending associated with the military campaigns in Iraq and Afghanistan.

 

The main reason for this seeming apathy is the disinflationary economic environment that has transcended the world, reeling from the worst financial crisis and recession since the end of World War II.

 

Whereas all the previous recessions befalling the U.S. in the last 60 years have occurred in the throes of inflationary storms, the current disinflationary trends have put the sure-to-come inflationary tsunami on the back burner.

 

The biggest gripe I hear from business owners and managers at all levels is the inability to get price increases. While wages have been at a practical standstill in the past year, continuing job losses and tight credit availability have weighed heavily on consumer demand. Production in most cases is related to inventory rebuilding, which had dropped to irreducible minimums.

 

While the runaway prices of oil derivatives of the 2008 summer are becoming a distant memory, the excess of surplus labor, manufacturing capacity, and the commodities glut have superseded inflationary fears. Natural gas prices actually hit a multi-year low recently, although bouncing back somewhat in recent weeks.

 

Instead, capital spending for expansion and debt-leveraged consumer spending have been replaced with an emphasis on productivity by industry, and the highest savings rate in a decade by consumers.

 

A burgeoning U.S. national debt is just around the corner, but for now it’s overshadowed by more immediate worries.     

 

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