The USD has just hit a 26 year low against the British pound and an all time (9 year) low against the Euro. In 2000, 82 cents would buy a Euro, now it takes $1.37, or 70% more pennies. The reasons for international currency fluctuations can be many. In the long term, its fiscal stability and political stability. Our budget and trade deficits are large and sustained now, and that is the primary reason the dollar has fallen. Fiscal policy in Washington has been abysmal under Bush. In the short run, interest rates have a big impact on the currency, because if rates are raised, it is more attractive for people to buy your debt than it way yesterday when rates were lower. But the international buyer of your debt will also look at your fiscal policy, and if it is not sound and the dollar is expected to fall further, he still may not buy your debt. What good does it do him to buy a 5% 5 year bond, if in 5 years the dollar has gone down 5% a year? He has earned nothing in real terms. Early in the 20th century, the British Pound was the reserve currency of the world. After WWII, the US dollar became the reserve currency, as a super power with sound fiscal policy and political stability. This created demand for dollars, people readily bought our debt, and that demand helped keep interest rates low most of the time. The 1970's inflation was an exception. But, obviously if the world can count on us for political stability, but not for fiscal stability, we could lose our status as the reserve currency of choice. If our foreign policy is disliked by the rest of the world, countries could refuse to buy our debt, forcing up interest rates and increasing the cost of US companies to do business. They could provoke a recession. The loss of purchasing power of the dollar accounts for about $21 of the price increase of a barrel of oil, from 30 to 51 (Thanks GWB). Demand from India and Chinese economic growth accounts for most of the rest, and maybe some oil company manipulation. The loss of purchasing power of the dollar affects each of us every day. The huge deficits are a sign of weakness and can be exploited, sort of like economic terrorism. http://www.bloomberg.com/apps/news?pid=20602081&sid=aIJploC0AOyg&refer=benchmark_currency_rates Its just Iran today, but if more Muslim nations around the world adopt the same stand, it could become significant. I believe WWIII may be an economic war. Our killing is just too efficient for large armies to stand in the field and whack on each other. The US wants to spend too much on war machinery (repub taking care of their defense buddies, give them a windfall like they gave big pharma with prescription coverage under medicare), while our fiscal foundation is weakening. If the next war is economic rather than military, we are strengthening in the wrong area and weakening ourselves where we need to be strong. War always evolves, and we could be preparing to fight last centuries war instead of the 21st century warfare. It's about supply and demand for dollars, and the direction of the flows.
There are always two sides of an argument. We now live in a global economy and not everyone believes a falling dollar will be the doom of the U.S. It certainly hasn't hurt our economy or the stock market, yet. Some think it's actually a good thing. The Falling Dollar: Good or Bad News Swooning Beautifully
And for the record, the budget deficit has fallen from a record $413B in 2004 to a projected $177B at the end of FY 2007. Just goes to show that it doesn't take much to reduce our deficit and tax increases aren't required to do so.
Good articles. Whether this is good or bad depends largely on your perspective, I suppose. On its surface and in the short run, depreciation of the dollar is fantastic for most of the globe, other than the U.S. It's terrible for Americans that want to travel abroad. Currency devaluation inherently pushes an economy almost to a economic protectionism of sorts, so perhaps the vocal minority of Americans that complain about jobs going overseas may see some of them staying here. I think the dollar would have to fall pretty far for that to happen, but it is viable in the long run.
Both very good articles. I think both tend to cite most of the problems, and then look forward through rose colored glasses, looking for benefits without discussing future negatives. From the fed reserve article: Hmmm. Dollar is down substantially over a 6 year period, and the current account deficit is not budging? It's not working the way it used to, we don't know why, we're perplexed. I think they do know why, and they don't want to give us the bad news. We don't make very much in this country that the rest of the world needs. We have offshored our manufacturing base to asia, and we used to export a lot of IT equipment, but the mainframe has given way to PC's and unix servers and anyone can manufacture them, so IBM is no longer exporting billions of dollars of IT equipment annually. When you become a 'service economy', what are you going to export? Wheat, beef, corn, does that look like a vibrant economy? So how do they explain this weak dollar is going to be good? Well imported stuff will get so expensive nobody will be able to afford it anymore (we'll have to tighten our belts and our standard of living will go down), and our exports will be more competitive internationally, but wait, we exported our manufacturing base to China and we don't make anything here anymore. No wonder its not working and the current account deficit is not shrinking, six years into the declining dollar game. And if it does, I don't see how its good for the average american who will be less able to afford the products that he was able to buy a few years ago. The federal reserve writers always are positive, because they don't want americans to get scared and stop spending, possibly provoking a recession. I don't think they tell us the whole truth.
I believe the economy is largely self-correcting, despite government's attempt to muck it up. If imported goods get too expensive, consumers will stop buying it. If/when that happens, we'll go back to making more of our own products like we did in the past. This global economy thing is fairly new and none of us really know how it'll all shake out. We've enjoyed being the economic superpower for decades, but times are changing. Economic prosperity around the world would benefit us greatly, even if that means we aren't the sole economic superpower.
From an economic standpoint, the real problem the U.S. faces is the trade deficit. That's a harder nut to crack than the budget deficit.
I agree. The economy is cyclical and is consumer-driven. Government's ability to micro-manage it is very limited and any such attempts usually cause more harm than good. The best thing government can do to maintain a strong economy is to put more money in the pockets of the consumers through tax breaks and credits, and to create a friendly business environment.
Excellent post. Gives the other side of the picture. The economy is generally a two-edge sword. Whether or not the devalued dollar is good or bad depends a lot on what side of the Atlantic you are on. It has both negatives and positives.
China threatens to trigger US dollar collapse http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/07/bcnchina107a.xml Well, that happened a lot sooner than I expected. There is an old saying, he who holds the debt holds the power. I'm from the old school, and I believe it. Americans drink too many Starbucks, drive cars that are too fancy that most of them can't afford, and since we consume too much, we can't afford to buy our own bonds, so we have to go to the international markets to get buyers of our debt. It looks good for a while, but in the longer term, its downside will become apparent. Read my first post in this thread over again. Think about the Chinese govt. doing this out in the open, the report is from a British news agency. Think that will embolden Putin and the Ruskies? Think how it would be different if we had a balanced budget, and did not over consume. Suppose everyone's personal budget was balanced. Entitlements, Military, Interest on the debt, Earmarks and other waste. Bout the only things that make a difference for the govt.
