Why Promiscuously Supplied Dollar Will Remain Strong

January 18, 2000

At no other time in history has the supposedly almighty dollar been easier to come by.

Wall Street deals are bigger than ever, loans everywhere are cheap and mortgages plentiful. Leveraged dollar instruments traded around the world reportedly total more than $100 trillion.

With the supply of greenbacks expanding so promiscuously, how do we account for the fact that the dollar is now entering the sixth year of a bull market, eclipsing every other major currency except the yen?

The answer is one that traders may be better equipped than economists to understand. For, while the guy on the exchange floor may not understand monetary theory, he does know the meaning of the phrase, "opportunity moves to size."

We'll come back to that concept shortly. But we should first note that the professors and pundits thus far have failed to distinguish themselves with predictions that Europe's new currency, the euro, would challenge the dollar's global hegemony.

Here is Columbia professor Robert Mundell writing in The Wall Street Journal nearly two years ago, just before the euro was launched in futures markets:

"The euro will create an alternative to the dollar .... [involving] a massive realignment of currency preferences in world banking, in international reserves and in capital markets, with permanent effects on the pattern of current accounts and trade balances."

Not by a longshot it hasn't, at least not yet. And although the day may come when Mundell's paean to the euro glows with prescience, it should only have caused him embarrassment so far.

For the euro stumbled badly after being launched on currency exchanges a little more than a year ago. From a high last January of $1.17, it fell to as low as $1.00 and now threatens to break below parity.

How could this have happened? It surely is no exaggeration to say that the supply of dollars is almost beyond estimation, having spun wildly out of control over the last several years. The evidence is everywhere.

Start with the banks and finance companies, which evidently have more money than they know what to do with. Why else would they be pushing credit card loans for 2.9% and practically begging us to borrow 150% against the equity in our homes?

You and I may stash these overly generous offers in a file cabinet, but Wall Street's financiers do not wait idly for opportunity to knock. Beckoned by a potentially limitless supply of credit dollars, they have contrived to network global securities markets into a frenzied bazaar of high finance.

Since 1995, corporate borrowing has increased by $1.73 trillion -- most of it not for new plants and equipment but for mergers, acquisitions and stock buybacks.

That's a lot of bucks. Lay them on the ground and they would cover 6,850 square miles -- roughly the combined area of Hawaii, Liechtenstein and Manhattan.

The cloudburst of greenbacks that has rained down on the world since the early 1990s is the gift of a Federal Reserve increasingly mindful of Japan's now decade-long recession.

In recent months the Fed has expanded the monetary base by 14 percent, allowing commercial banks to stimulate credit growth at an annual rate approaching 20 percent.

That is why lenders are pushing money at us at 2.9%, and it is also why household debt, already at $6.5 trillion, continues to soar.

A lot of this cash has found its way abroad. Because of our persistent and growing trade deficit with the rest of the world, foreigners have been piling up surplus dollars at the rate of about $30 billion a month.

So why, with new dollars spewing forth like pollen spores in June, has the greenback remained one of the strongest currencies in the world?

It is toward the trader's maxim, "opportunity moves to size," that we should turn in search of an answer. I first came to appreciate the concept more than a decade ago, while trading Microsoft puts and calls on the floor of the Pacific Coast Exchange.

One day, when I was rooting for Microsoft to rally, a million-share block of stock was offered for sale. I was dismayed by the size of this obstacle, but a colleague with considerable more experience said the gigantic offer was actually bullish and that it would soon be eaten up.

And so it was. Like a school of piranha attacking a carcass, traders picked the huge block of shares clean in less than thirty minutes. Some may have used the stock to offset the sale of puts or calls; others may have bought it without hedging; and still others probably employed strategies beyond my grasp or yours.

It was opportunism in the purest economic sense, with hundreds of traders, investors and hedgers finding ways to exploit the determination of one seller to unload a million shares.

Similarly are opportunists of all stripes and nationalities finding or inventing ways to exploit the limitless supply of dollars that exists today and which can be augmented effortlessly in ways unimagined just a few short years ago.

Whether you are a venture capitalist, an arbitrageur, a real estate swindler, a merger-and-acquisitions specialist or just about anyone else looking to turn a profit, there is no better place on earth to attempt it than in America, and no easier way to raise cash than in dollars.

So long as this holds true, investors from around the world will flock to the dollar. And that is why it will continue to rise relative to other currencies, at least until the 1990s economic boom comes to a definitive end.

Textbook economics simply do not apply. The collective aspirations of capitalists and entrepreneurs in this instance will continue to overwhelm the theories of professors, as well as concerns about trade deficits and Europe's practical if prideful desire to propagate a strong currency.

The purity of gold is measured in carat weight.

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