In for a Dollar, in for a Pound
by Paul McGoldrick
When I was a child in England, my uncle - a Catholic priest in Oregon - would often send my brothers and myself each a Dollar bill as a Christmas present (together with salmon he had caught, canned in nearby Winchester Bay). We would take our bills to the bank and receive, in exchange, 5 Shillings, which was the fixed rate of exchange set up to help Britain repay the huge loans of military materiel made by the US during WWII. Even the slang for 5 Shillings was a "dollar." With 20 Shillings to the Pound, that was a USD4 to GBP1 exchange rate.
Then the gloves came off exchange rates -- allowing the marketplace to determine what they should be -- and when Nigeria punished the UK by, overnight, pulling all its Sterling holdings and converting them into US Dollars, there were major economic problems in the UK and the difference between a Pound and a Dollar was suddenly minimal.
The current administration has insisted that the US economy is strong:
"A future of hope and opportunity begins with a growing economy – and that is what we have. … This economy is on the move, and our job is to keep it that way, not with more government, but with more enterprise..," suggested George W. Bush in the 2007 State Of The Union Address.
But we all know that this is not so. The exchange rate for the Pound is now back to over 2:1, and the US and Canadian Dollars are, on the whole, a wash.
As I write, stock markets are churning huge amounts off values and, even more importantly to the private investor (who is going to suffer in the markets rather less than the professional), the housing market is in disarray. To see the mighty Countrywide mortgage company in trouble, effectively maxing out its corporate credit card to the tune of $11 billion just to stay in business, is incredible. This is particularly so in light of the fact that they have not been in the so-called subprime market. I have been through the loan process three times with Countrywide and they have been very careful on each occasion.
In 41 states the value of homes has fallen over the last year while interest rates have been increasing, so we can assume that there are an awful lot of subprime borrowers who are going to be thrown out of their homes in rather rapid order. That additional housing stock will reduce house values yet again, loans will be tougher to get, and then a further price slump will happen. Despite the fact that the Feds pumped over $50 million of liquidity into the economy at the end of last week, it is certainly not a shoe-in to bet that they don't increase rates yet again.
I believe we are headed for a full-blown recession in the United States, and quite soon.
How does this affect our industry?
Fortunately, most of the product that moves in the electronics industry is moving around various Asian countries, even the wafers that are fabbed on US soil. The weakness of the US Dollar makes it cheaper to export and most contracts and facilities are probably being paid in Dollars -- although more will be needed.
But, despite this insulation from the core domestic problems, there will undoubtedly be some who get into a blue funk about the economy and they will pull projects, programs and support -- and they will regret it when the competition takes advantage of their weaknesses.
What should worry us more is that China has, for over a year, been reducing its US debt holdings (estimated at about half of the total USD202 billion debt that the US carries) to reduce its risks. It is unlikely that they will do a "Nigeria" on the US because that would completely destroy the US economy and, with it, China’s primary market. But it may happen if the US Government pushes just a little too hard about something.
And we all know how diplomatic the present administration is with the rest of the world…
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