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| 7/8 |
| 2004/12/7-8 [Politics/Domestic, Politics/Domestic/President/Bush] UID:35198 Activity:high |
12/7 Economist article on the slide of the dollar
http://economist.com/opinion/displayStory.cfm?story_id=3446249
\_ What I got out of it:
(1) Dollar falls too far
(2) Foreign banks which keep a lot of dollars (as a currency which
retains value) will convert to Euro / yen
(3) Dollar falls even farther
(4) The U.S. government and consumers just can't buy as much with a
dollar == Inflation
The unmentioned kicker:
The U.S. will beat the shit out of any foreign government which
wants to sell its dollars.
\_ Much as I'd like to see it happen, I don't think the US is going
to start nailing most of Asia and Europe. The countries we are
capable of "beating the shit out of" are most likely not the
ones holding a lot of dollars, or are they? -John
\_ Are Dubya and friends working on ways to make it economically/
politically painful for foreign governments to sell their US$?
\_ what for? dubya and friends want the US dollar to fall,
just not in an uncontrolled panicky way. foreign governments
all want the US dollar not to fall too much, but they also
don't want to be the one left holding the bag.
\_ Isn't low Dollar good for our exports?
\_ insofar as imported stuff getting more expensive in the U.S.
is good and domestic stuff getting more expensive at a
smaller rate -obviously not an economist
\_ Yes, but our exports are way out of whack vis a vis imports.
\_ true, so what happens to the 90 pct of consumer goods
we buy that are made in china when the renminbi increases
50-100 pct over the value of the dollar?
\_ at most 20 pct. prc government won't let it float
freely but just increase the range where the yuan
is allowed to trade.
\_ That will not be true if the dollar falls a lot,
though. The other plus of a weak dollar is that it
makes it less expensive to pay back the debt we are
borrowing. The US will raise the dollar once Iraq
stabilizes. Right now, we want it weak since we are
borrowing a lot for the war.
\_ It creates pain for holders of our treasuries,
but does it make it less expensive for us?
The debt is still in dollars and dollars are
what we have. No? It only becomes less
expensive for us if there's inflation?
\_ If we borrow Euros then we have to borrow fewer
of them. A falling dollar is much the same as
inflation.
\_ don't understand what you are saying.
all our debt are denominated in dollars.
\_ Yes, US don't export much anyway. The main effect
would be inflation since we buy lots and lots of
stuff from overseas.
stuff from overseas. I mean, what does US export?
Mainly like food stuff. But yes, letting dollar
slide is the least painful way for US to get out
of its fiscal and economic mess.
\_ Uhm, the U.S. is the single largest exporting country
in terms of dollar value. We are basically the
bread basket to the world. We are also the largest
importing country in the world. We just simply
import more than we export in terms of dollars.
\_ the difference isn't that much either, only
about 500 billion a year. US economy is
like 10 trillion.
\_ Try spending 5% more than you make every
year and see how long you can get away
with it. Then again, the average American
consumer is probably doing just that right
now. Oh a cold rain is gonna fall!
\_ Well, we could just not repay the debt.
It's not like this is the first time an
industrialized country just reniged on
it's debt. Since we're the proverbial
300lb gorilla in the room, you think
anyone is really going to mess with us
if we just say "sorry, we're just not going
to honor all those treasury bonds"?
Sure, there would be economic repercussions,
but it isn't like we'll be invaded and I
doubt that other countries will just stop
investing in us. After all, we are the
largest market in the world.
\_ Do we do that against US based holders
of those bonds? If not, how do you tell
who is who? In any case, as dire as
the current situation is, I don't
think we're at the stage where such
a drastic and disastrous measure
needs to be taken.
\_ Nobody invaded Argentina when they
defaulted on their debt either, they
just suffered mightily economically.
As we will if we defualt on our debt.
\_ How about software exports? Is it big $ in the big
picture of things?
\_ what you missed in the last paragraph:
"American bond yields (long-term interest rates) would soar,
quite likely causing a deep recession."
Another article quoted that 50 pct of new mortgages are
variable interest rates. In fact, Greenspan himself urged
consumers to borrow @ variable interest rates. When bond
interest rates start to soar, mortgage interest will soar,
and the number of defaults and bankruptcies will be epic.
Don't be a home-owner when that happens. Oh, not to
mention interest rates for all other debts: equity lines,
credit cards, etc. The US consumer is deeply deeply in
debt, and when interest rates start to rise, the picture
won't be pretty.
Oh, the other thing you missed. the US will not do anything
to the Asian countries which will do the majority of the
dollar reserve sell-off. China which has $515 bn in reserve
has already announced a planned sell-off that will likely
accelerate as the dollar fars further.
\_ Oh look, Mr. Housing Bubble Is Going To Pop is back
with a better argument. Are you still bitter that
you didn't buy a house in the Bay Area back when
you could still afford it?
\_ Hmmmm, if nobody can afford to buy a house in the bay
area in the future, wouldn't that mean that house prices
will FALL in the future?!?!?!
\_ This has nothing to do with the housing bubble. This
is about overall massive recession of the US economy,
which will take housing prices with it. If you have
a house, and you're making 5 pct 30 yr fixed mortgage
payments on it, more power to you. Just hold on to
your job, and weather the storm.
\_ US is stuck in Iraq. All our allies hate our guts.
Nobody will give a damn about us "beating the shit out of"
anyone.
\_ Troll. Has the US announced war on China?
\_ I like US dollar falling. It makes my parents very rich
when they move to the US. |
| 7/8 |
|
| economist.com/opinion/displayStory.cfm?story_id=3446249 E-mail this World economy The disappearing dollar Dec 2nd 2004 From The Economist print edition How long can it remain the world's most important reserve currency? Get article background THE dollar has been the leading international currency for as long as mos t people can remember. But its dominant role can no longer be taken for granted. If America keeps on spending and borrowing at its present pace, the dollar will eventually lose its mighty status in international fina nce. And that would hurt: the privilege of being able to print the world 's reserve currency, a privilege which is now at risk, allows America to borrow cheaply, and thus to spend much more than it earns, on far bette r terms than are available to others. Imagine you could write cheques th at were accepted as payment but never cashed. If you had been granted that ability, you might take care to hang on t o it. America is taking no such care, and may come to regret it. The cost of neglect The dollar is not what it used to be. Over the past three years it has fa llen by 35% against the euro and by 24% against the yen. But its latest slide is merely a symptom of a worse malaise: the global financial syste m is under great strain. America has habits that are inappropriate, to s ay the least, for the guardian of the world's main reserve currency: ram pant government borrowing, furious consumer spending and a current-accou nt deficit big enough to have bankrupted any other country some time ago . This makes a dollar devaluation inevitable, not least because it becom es a seemingly attractive option for the leaders of a heavily indebted A merica. Why would anybody want to invest in a currency that w ill almost certainly depreciate? A second disturbing feature of the global financial system is that it has become a giant money press as America's easy-money policy has spilled b eyond its borders. Total global liquidity is growing faster in real term s than ever before. Emerging economies that try to fix their currencies against the dollar, notably in Asia, have been forced to amplify the Fed 's super-loose monetary policy: when central banks buy dollars to hold d own their currencies, they print local money to do so. This gush of glob al liquidity has not pushed up inflation. Instead it has flowed into sha re prices and houses around the world, inflating a series of asset-price bubbles. Optimists argue that foreigners will keep financing the def icit because American assets offer high returns and a haven from risk. And can a currency that has been slidin g against the world's next two biggest currencies for 30 years be regard ed as safe? In a free market, without the massive support of Asian central banks, the dollar would be far weaker. In any case, such support has its limits, a nd the dollar now seems likely to fall further. Will it really undermine the dollar's reserve-cur rency status? Periods of dollar decline have often been unhappy for the world economy. The breakdown of Bretton Woods that led to a weaker dollar in the early 1970s was painful for all, contributing to rising inflation and recessio n In the late 1980s, the falling dollar had few ill-effects on America' s economy, but it played a big role in inflating a bubble in Japan by fo rcing Japanese authorities to slash interest rates. This time round, it is a bad sign that everybody is trying to point the f inger of blame at somebody else. America says its external deficit is ma inly due to sluggish growth in Europe and Japan, and to the fact that Ch ina is pegging its exchange rate too low. Europe, alarmed at the brutal rise in the euro, says that America's high public borrowing and low ho usehold saving are the real culprits. China and other Asian economies should indeed let their currencies rise, relieving pressure on the euro. It is also true that Asia is partly to blame for America's consumer bin ge: its central banks' large purchases of Treasury bonds have depressed bond yields, encouraging households in the United States to take out big ger mortgages and spend the cash. And Europe needs to accept, as it is u nwilling to, that a weaker dollar will be a good thing if it helps to sh rink America's deficit and curb the risk of a future crisis. At the same time, Europe is also right: most of the blame for America's deficit lie s at home. It is not a question of either do this or do that: a cheaper dollar and higher American savi ng are both needed if a crunch is to be avoided. Simple but harsh Many American policymakers talk as though it is better to rely entirely o n a falling dollar to solve, somehow, all their problems. Conceivably, i t could happenbut such a one-sided remedy would most likely be far more painful than they imagine. America's challenge is not just to reduce it s current-account deficit to a level which foreigners are happy to finan ce by buying more dollar assets, but also to persuade existing foreign c reditors to hang on to their vast stock of dollar assets, estimated at a lmost $11 trillion. A fall in the dollar sufficient to close the current -account deficit might destroy its safe-haven status. If the dollar fall s by another 30%, as some predict, it would amount to the biggest defaul t in history: not a conventional default on debt service, but default by stealth, wiping trillions off the value of foreigners' dollar assets. The dollar's loss of reserve-currency status would lead America's credito rs to start cashing those chequesand what an awful lot of cheques there are to cash. As that process gathered pace, the dollar could tumble fur ther and further. American bond yields (long-term interest rates) would soar, quite likely causing a deep recession. Americans who favour a weak dollar should be careful what they wish for. |