The Down, Down Dollar
Anyone who has crossed the border into Canada recently, not to mention Europe,
doesn’t need an elaboration of this post’s title.
Today’s Wall Street Journal gives background and lays blame — in the process seemingly going against Wall Street’s own fervent desires.
To understand the dollar’s current woes, you have to look elsewhere — to monetary policy and economic management. The supply of dollars in the world is ultimately controlled by a single source, the Federal Reserve. With its aggressive easing in September, and again in late October, the Fed has signaled to the world that it cares more about creating dollars in the hope of limiting U.S. credit problems than it does about the dollar’s value. Investors can see this, and so they are dumping dollars and looking for other assets to hold. This includes commodities such as gold, which is now at $835 an ounce. The nearby chart from economist Michael Darda gives a sense of how far the dollar has fallen this year.
The world can also hear the silence from U.S. economic officials, whom they have come to believe are content with the dollar’s decline. Treasury Secretary Hank Paulson mouths the ritual lines about a strong dollar, even as he keeps pressuring China to revalue the yuan. Fed Chairman Ben Bernanke yesterday told Congress that inflation remains a risk, which shows that he at least has noted this week’s dollar rout. But his previous actions have left him and the Fed with a growing credibility problem that is perilous for any central banker.
I am not an adept in the dismal science, and would appreciate any “takes” by those better tutored than I.
I am not better tutored than you Bob; I don’t even read the WSJ. But reading elsewhere, let me throw in the following factoids: U.S. exports are up because of the decline in the dollar’s value, i.e., U.S.-made goods are now cheaper abroad than they once were. Paulson may extol a strong dollar, but the Bush Administration may want a strong export market. (Big city dwellers also know that a weak dollar is also drawing tourists to our preceincts).
The rise in oil prices has been linked to increased demand, refinery limitations, and speculative heat, but on the Newhour last evening, an economic’s reporter for the WaPo also pointed to an obvious point: If oil is paid for in dollars, which it largely is, the decline in the dollar will cause suppliers to push the price up so they don’t lose money by getting less per barrel because of the dollar’s fall. Got that!
The same reporter, however, pointed out that the U.S. economy continues to be productive and that too much attention to markets and dollars and oil creates more anxiety than necessary. His concluding point: none of us can do much about this. Better to maintain an even keel than plan to reallocate your pension funds!
I’ve been told by someone who is admittedly pessimistic but seems very aware, that with the popping of the housing bubble, the economy is heading into a steep decline. But the Fed has been staving off disaster by lowering the interest rate repeatedly, so there will still be spending, but this makes the long-term problem worse.
What’s needed now is industry and payroll that will fund the spending of the bread and butter average America. Ironically, the disastrous fire in California and the consequent blue-collar work that will be necessary for rebuilding may save California’s economy, which is the fifth largest in the world.
Still, even with a robust economy here, the US government owes enormous sums to foreign investors. This would leave us open (my friend thinks) to an economic coup d’etat, if the US military were not so dominant.
I wouldn’t pay any need to what the WSJ editorial page says on economics; their outlook is blinkered, to say the least.
Here’s the problem: the US dollar, by most reasonable estimates, is substantually overvalued. That means a number of things. First, the economy shifted away from producing things for export, to non-tradables (especially houses). The implication is a rising current account deficit. Second, the counterpart is that the US is attracting large capital flows. In the 1990s, that was caused by the tech boom. Now it’s simply countries like China buying US assets to keep their currency artificially low. The US gets a huge advantage out of this: the government can finance large deficits on the cheap (does Bush understand this?), and households can live beyond their means by borrowing like crazy. And of course, the US buys imports from China, and the circle continues.
I think we all agree that this is not sustainable. In the technical lingo, there is a riks of a “disorderlying adjustment in global imbalances”. To address the problem, the US dollar needs to depreciate, especially against China. That encourages exports, and gives a helping hand to blue collar workers who are suffering greatly amidst the great wealth generation of this bubble economy. For sure, depreciation can pose problems, especially when it overshoots. For a start, it can raise inflationary pressures.
Bernaneke’s decision was based on his assessment of inflationary and growth pressures, not the exchange rate. Had he kept rates high, the risk would have been a sharp economic slowdown– that would also bring about the adjustment in global imbalances, but that avenue would be very painful.
I’m sure that this fact has no small part to play in this matter:
http://biz.yahoo.com/ap/071107/national_debt.html?.v=1
A view from where the dollar is up, up, up!
From the view of a Canadian citizen who has in his lifetime lived through this scenario, every post here has shared part of the truth of what is causing the US$ decline.
Jimmy Mac, that 9 Trillion deficit is indeed one of the primary causes. Even with America’s huge economic engine at full tilt that has to be stopped. The Bush government is largely to blame for this rise and much of that is explained by the need to finance Iraq. The war is about to hit home, hard. This is what the Trudeau era did in Canada by over spending on domestic programs.
Morning Minion’s is correct too. In response Canada’s dollar was depreciated until it hit the low 60 cent range. My take is America’s dollar has not yet hit bottom. I am quite afraid it has some way to go. MM is correct too, in that it can cause higher and higher interest rates. It took 21% , near 10% unemployment and wage and price controls to stop the rise. That is Bernaneke’s painful side.
The increase in exports is a real consequence but it has a down side. It makes manufactures lazy and dependent on the dollars low value. That is what has happened here. It also causes industry to not invest in updating its technological infrastructure which further slows down the economy and places the nation at an economic disadvantage against those still upgrading. This has traditionally been a strength of the American economy and a weakness in the Canadian economy. With the strengthening of the Canadian economy we are now in a position to buy that technology more cheaply from the rest of the world which often means leapfrogging missed layers of forgone investment which for the U.S. only makes matters worse.
MM also mentions that China is buying up America’s assets. If you think it is bad now just wait. It is not just China. It will if the dollar goes lower and stays there long enough (and I think it is likely especially if more Iran sabre rattling occurs) will become a crisis of the lost of control of America’s economy by Americans. Canada is largely there. We are little more than a branch plant of first the USA, then I do not know the order. Decisions get made at American based head offices first, based on U.S. needs not Canada’s. That is what is going to happen to former U.S. owned firms once they get into European, Japanese. Chinese, Indian and maybe even Canadian hands. I also wouldn’t be surprised to see a little revenge factor built in after years of American investment abroad due to the US$’s high value.
Canada’s dollar has risen faster than any other currency, rising not only against the US dollar but against the Euro/£/Yen etc. This is largely because China & others had to find an alternative investment location for those pulled dollars. Canada is attractive because we have so much of those now over-priced commodities like oil (unknown to most America’s we may have the largest known reserves in the World-the higher the price rises the larger they get because of high extraction costs) and gold etc.
The rise has a major downside. Exports from the manufacturing provinces of Ontario and Quebec have slowed down (100,000 jobs lost in Ontario last month alone-but don’t quote me on that it might be a quarterly figure) Meanwhile the Alberta oil economy is booming to the extent that the country actually had an increase of 70,000 jobs over the same period.
I live in a pulp and paper town. The high dollar will likely kill the town even with one of the most technologically advanced fine paper mills in the world.
My big fear and it should scare the U.S. is of a run on the U.S. dollar. Every nation is trying to avoid it because it may bring the whole world into a depression like we haven’t seen since the “Great Depression”. Don’t fool yourself it has little to do with America’s military strength. You can’t use that military if you can’t pay for it. From an economic perspective it is now overbuilt and under manned. Its use will make the economic picture worse not better.
I hope all that is not too pessimistic.
Usually when America coughs, Canada sneezes. I suspect we are both in for a heck of a bad flu.
And I fear there is no vaccine on hand.
A wee bit of cough medicine would be stopping this obscene “off books” drain of our assets, morale and lives in Cheney’s playgroud in the Middle East.