December 07, 2004
It's Your Money
You are the proud owner of any assets you have been able to accumulate in a lifetime. They are already worth less, maybe a lot less in most other currencies than our own. This is one of the real impacts of the long term decline of the dollar which has just begun dropping. This massive loss in asset value is also a completely predictable byproduct of the Bush tax reduction policy. The deficits caused by this policy and the energy policies of the current and past administrations are becoming mammoth drags on your personal asset base.
Of course any real property you might own will almost certainly also decline in its already weakened dollar value as the world-wide buying power of the dollar depreciates. Read, your home, into that decline in asset value, which is the only asset most of the Middle Class in the USA own. That decline will certainly happen if this lower value for the dollar lasts long enough to help our balance of payments deficit. The dollar's decline will not help us finance our government deficits. Nor will it impact our balance of payment deficits as significantly as Mr. Greenspan and others in this Administration believe that it may.
The average Chinese hourly wage is 64 cents according to an article in this week's Business Week Magazine. It will be a long time before devaluation of the dollar will affect that clear benefit of relocating factory jobs in China. There read never! The double deficits are hurting us already but things can and probably will get a lot worse. A deliberately weakened dollar is eloquently argued against in the December 7th edition of the NY Times by Jeffrey E Garten, titled Don't Let The Dollar Take The Fall.
The Economist in its December 4th edition titled its editorial, The Disappearing Dollar. Now of course the Economist might be a wildly liberal rag because it did not endorse Mr. Bush for reelection, but it is not. It is the most prestigious of Europe's popular economic journals. It is published in Britain, our staunch ally. I do not always like what I read in this weekly magazine, but I can always count on it to be well thought out and reflective of conservative European economic values.
The point of reading this article would be to help us think about our extraordinary vulnerabilities as the printer of the world's reserve currency. The article points out that we in the USA are living high on the power that a reserve currency holds in the world market. That is the power to write checks that are never cashed because the currency is stable. Because of the dollar's stability people have long held their currency reserves in dollars. For a very long time the dollar has remained stable, in part, because it is the world's most powerful reserve currency. The Economist rightly warns that the dollar's current rising instability threatens that status.
The world outside our borders holds around 11 trillion in dollar based assets. The Europeans holding dollar based assets have already absorbed a loss of nearly forty percent in those valuations. That loss is in respect to the same assets if they were held in Europe and denominated in their own currency, the Euro. That is a huge loss of value in a very short period of time and will not encourage investment in the USA by Europeans in the future.
The worst case scenario is, if instead of buying US assets the people who hold those eleven trillion dollars in bonds, stocks and other property start selling. If that does happen the value of the dollar could go into freefall. Then we would see a time when our bonds reach interest rates equal to those we have charged third world countries in the past. We will be unable to fund the projected governmental and balance of payments deficits without paying those rates. That would mean a huge rise in the cost of servicing private and government debt. A subsequent massive drop in the value of dollar denominated assets like homes and retirement investments will follow here at home.
How likely is that outcome? It is certain to happen if we do not change the reckless fiscal course we are on as a nation. That is not an easy task with new political capital in the hands of our President. He is the man who has possibly unwittingly, but certainly single-handedly done more to bring us to this impasse than any other single person in our history. I will continue to blow my little trumpet and hope against hope that it is not the Trump of Doom.
Speaking of the Trump of Doom, only our nation's media could make a popular financial Icon of Trump. This is a man who at the same time as he is celebrated for his fiscal acumen is using Bankruptcy court to protect his control of his greatest assets, his Casinos. He is trying to protect his control of those assets from his investors and creditors, read there your bank and your pension fund. If the world fires us as the keeper of the world's most powerful reserve currency it will be a fate well deserved. The rest of the world will lose greatly too if that happens. It will be painful in the extreme for everyone involved. That is the biggest reason why it has not already happened.
There is no bankruptcy court to protect nations against their fiscal irresponsibility. The term You're fired, will take on a whole new meaning. It will go beyond anything contemplated by The Donald if we are fired as the keeper of the world's greatest reserve currency. He and other moguls will lose along with the rest of us. That will be cold comfort indeed for the Middle Class of this nation. Trump's blind-to-awareness apprentices in the economics of short-term-thinking will have too much ugly reality to worry about to care what Trump thinks when that happens. God bless and keep you all safe in these amazing economic times.
A few things that you’ve got wrong. First, if you shift your assets to an export area — tourism, manufacturing, et cetera — you’ll do fine, as a weakened dollar makes it easier to export (or, import tourists, which is essentially exporting tourism). There is a bankruptcy-stopping system to protect nations, and it’s called the IMF, which regularly bails out nations that have depleted their currency reserves. Hell, Bush would probably enjoy getting IMF money, because it comes with strings that force the government to cut extraneous spending. The only way people would stop buying US bonds is if the US stopped importing as much as it did. If the US economy collapses, the world economy collapses, so lots of people will pay for us not to do so. In that way, to a certain extent, the trade deficit is good (though, agreeably, not at the level that it stands today).
A good argument, and in the extreme long-term, after China becomes more self-reliant economically and third-world markets open more, I can see it being viable. However, if the dollar recoups within the next few years, then I’m less concerned.
Posted by: Nick Mason at December 7, 2004 02:56 PMGood article Henri. Because of the way the Bush administration has made the US hated, I’m seeing a lot of influential people in Asia call for selling off US assets out of spite.
China and Japan have already cooled their dollar-based acquisitions. In fact, the last bond issue was significantly spurned by central banks, and only raised target revenues by relying on foreign private investors.
In other words, Asia is starting to rethink its support for the United States. China has recently started working hard to create Asian, EU, and South American trade treaties in an attempt to wean itself from the United States.
Experts expect the dollar to have a mini-rally before the end of the year, then continue its slide.
Hey, I have an idea! Lets borrow another two trillion dollars to “save” Social Security, and throw a couple more tax cuts into the mix just to keep it interesting.
There is a bankruptcy-stopping system to protect nations, and it’s called the IMF
Haha! Nick, the IMF is primarily financed by the US. We’d be bailing ourselves out. :)
BTW, the IMF has been sending Bush sternly worded warnings since last January about the borrowing and the decline of the dollar. It doesn’t seem to have had any effect.
Actually, we’ve got something like a 15% stake in the IMF. It’s significant, but it’s not everything. Also, I’m fairly sure Bush would like that, too. And, I’m aware of the IMF warnings. I just don’t believe the situation to be as precipitous as you seem to suggest.
Posted by: Nick Mason at December 8, 2004 01:14 PMNick, what makes Henri’s scenario potentially precipitous, is the private debt load of Americans. Long gone are the days when Americans owned their homes and businesses outright - giving them the ability to ride out a severe economic downturn which throws millions out of work. The next economic downturn (and there will be one because of the cyclical nature of economics) all those Americans who refinanced their mortgages and spent the proceeds or invested them, and run up (if I recall correctly) and average $8K on credit cards, will make bankruptcy court waiting lines look like the Civil Rights March on Washington.
The trend of the trade deficit is far more worrisome than the amount at any particular point in time. For years, it has been increasing year after year. The National Debt is doing the same. And now, add personal debt to that scenario. Then there are margin buys and holdings in the investment arena. In essence, this scenario leaves no cushion or safe havens in the event of a sharp economic jolt, like sustained attacks on world wide oil rigs, especially those off shore rigs and in the Middle East and S. America.
Henri:
The problem I have with your article is what I call the “error of extrapolation.” The error of extrapolation is simply assuming a trend will continue instead of stepping back and seeing that in the big picture the currency fluctuations are normal. The dollar has been valued both higher and lower at times. The dollar has been below 100 yen before. These are record “highs” for the euro verses dollar only because the currency is relatively new.
If you will check back and look at the cycle of dollar fluctuations, you will see that this is normal and predictable.
Craig’s prediction for 2005? Dollar stablizing, and maybe starting to rise a bit by the end of the year, depending on interest rates in US verses Europe.
Exports should increase!! That should help manufacturing.
Although the Bush tax cuts had a small part in the fall of the dollar, low interest rates to ostimulate the economy had a big impact as well. Not to mention that our economy is growing faster than Europe and we are buying foreign goods to quench our appetite.
Cheap money plus cheap imports equals a lower dollar.
Expensive imports and higher US interest rates mean a higher dollar.
Hmmmm I wonder what the future holds??
Craig
Craig, you are leaving out the confluence of ever deepening trade deficits, national debt, interest payments on that debt (40% of which is going overseas), American personal debt, AND the dropping value of the dollar. All of these are at or approaching historical records between now and the end of the decade. And there so far, is nothing in the works to reverse these trends.
One has to look at the big picture, which is why Greenspan is critical - and why he point blank states none of these stats are troublesome in and of themeselves, it is the trendlines that are of immense concern.
Posted by: David R. Remer at December 9, 2004 12:38 AMCraig, the fall of the dollar is predictable because it’s the policy of this administration to let it fall. As you say, exports should increase. But so far, there hasn’t been a significant increase, and the trade deficit isn’t getting any less worrisome.
There’s an interesting piece in the NYT today that sinks your (and the Pfresident’s) argument,
The problem with the administration’s devaluation policy is that it doesn’t treat the root causes of America’s economic imbalances. Our need to borrow so much from abroad is caused by our enormous consumption and our anemic savings. Today, Americans save just 0.2 percent of their disposable income, practically the lowest level in 45 years. Since we have so little savings to finance capital investment, we borrow from savings pools abroad. Our government, too, needs foreign creditors to invest in Treasury securities, to finance its escalating budget deficits.Another trade issue not addressed by dollar devaluation: the need to sharpen our global competitiveness. In an advanced economy like ours, price should be less of a selling point than the quality and sophistication of a product. This isn’t going to happen unless we improve the fundamentals underlying competitiveness - our education system and labor-force skills. A devalued dollar also does not lower health-care costs - costs so high that they encourage American employers to move operations to countries where governments often pick up the insurance tab.
Traders churning $2 trillion daily in currency markets know that if the United States relies on a cheap dollar alone to correct its trade imbalance it will push the currency down fast and for a long time - because the benefits will never quite match the predicted expectations.
The whole article is worth a read.
American Pundit:
It makes exactly my point. American consumption is not Bush’s fault. The dollar has been lower than this before. I will be happy to admit the problem is complex.
Another factor that I did not mention above is the influence of China. China marks their currency to the dollar in such a way that makes makes their imports cheap. This drives down the dollar by their actions. They then are forced to buy dollars, at any cost.
I heard an economist from a major investment firm this week state that China needs to add one million jobs a month just to stay current in unemployment.
So in summary, the dollar has been this low and will be again. The lower dollar will help the trade imbalance. There is no need to panic. The trend will correct itself as we go into future stages of the economic expansion. At that time we will be arguing about some other indicator that is out of balance. The truth is that there are always some indicators out of balance.
It is not the US that is in trouble right now but the Europeans. The lower value of the dollar is far more likely to send Europe into recession than America. Notice where the article Henri cited is from (England).
I think a year from now you will be seeing improvement on each twin deficits.
In terms of not seeing much change in the trade numbers. It takes time for the numbers to change.
Craig
Posted by: Craig Holmes at December 9, 2004 02:43 PMHere is an interesting sourse on the Dollar. This is the Federal Reserves Dollar index of major currencies.
http://www.federalreserve.gov/releases/h10/summary/indexn_m.txt
The dollar reached a low very close to this one In April of 1995 (80.89). At that time, the budget surplus was in the future. It reached a high in February of 2002, (111.97). This high (111.97) was higher than the dollar was at any time during the Clinton presidency. Now it is at or near a low at 79.63.
So if the basic point is that Bush’s tax cuts are causing the lower dollar, then Bush also gets blamed for the higher dollar since it also happened on his watch.
So does Bush get blamed for the higher dollar which hurt manufacturing? Or does he get blamed for the lower dollar?
My basic point is that neither is the case. Prices are going to fluctuate. The low dollar of 1995 old news. The 2004 news of the lower dollar will be just the same.
Craig
Posted by: Craig Holmes at December 9, 2004 03:05 PMCraig
You need to re-calculate your numbers again.
Until you can blame Bush for everything bad, they are wrong.
And puleez, quit trying to find anything positive about Bush.
You need to wake up:
Only RICH people have health insurance.
Everyone in RED states are idiots.
The GOVT cares more about your family than you do.
Racism is rampant.
The past two elections were stolen.
The US is in a severe depression.
Nobody can find a job.
Nobody can breath anymore, to much pollution.
Bush had no plan before we invaded Iraq and has totally given up on making any more plans.
AND (don’t tell anyone about this)
I have heard that Bush was flying the planes on 9/11 by remote control. Shhhhh!
So get with it Craig.
Facts are useless!
Unless you can use them AGAINST Bush.
Craig
According to your chart, the dollar is only a little below its value through most of 1995 and until the month of December (not yet over) it has been higher than the 1995 levels. You may recall that 1995 was about the time the boom of the 1990s was starting. The other parallel is that the unemployment rate is about the same. A high dollar is not necessarily a good thing and a low dollar is not necessarily a sign of failure. Exports become much more competitive. The Europeans would dearly love a lower Euro and the Chinese are fighting like mad to keep their currency down. It is only a problem if it leads to panic selling, which there is no sign of it doing.
Posted by: Jack at December 9, 2004 04:04 PMThe world is complicated, and the financial world usually goes in cycles. I remember reading a book called “The great depression of 1990”. The error people make is the error of extrapolation, which assumes the road we are on will continue until ruin.
The truth is, that if you look back and study economic statistics over history that they go in cycles. The twin deficits are todays news. They will be addressed and corrected, and then we will be on to another indicator that is out of wack.
My best guess looking forward is that dooms day will not come. We will muck through like we always have. Presidents don’t control that much of the economy anyway. There is no data that indicates either the democrats or the republicans usher in financial utopia. Both parties unfortunately are run by people.
By the way, my pick for the stock market before the election was that no matter who was elected the stock market would go up. It is called a “relief rally”. Markets do not like uncertainty. Now that we have a president for the next four years, investors are moving back into the market.
I would have a hard time buying gold or real estate in California right now. (Since I believe trends are cyclical!!)
Craig
Posted by: Craig Holmes at December 9, 2004 05:04 PMCraig
It is good to take the long view in investments. Nevertheless, while markets are always rational in the long run, they can stay irrational longer than most people can stay solvent.
If you want to truer picture of relative living standards, you have to look at purchasing power parity. A good example is the Economist’s “Big Mac Index” http://www.economist.com/markets/bigmac/index.cfm
Craig, all I know is what Greenspan and a lot of economists tell me: There is a very real danger of global recession if we don’t get our act together.
I appreciate your “best guess”, but it sounds like you’re letting your “defend Bush at all costs” instincts crowd out any risk assessment.
Speaking of which, I read an interesting article this weekend,
Of course, the Chinese and Japanese central bankers holding hundreds of billions of dollar-denominated assets have no desire to see those assets plunge or the U.S. economy in a tailspin. The trick for them is finding a way to diversify without undermining what they have. No sudden moves are likely. But as long as America’s deficits keep growing, so does its economic vulnerability.These economic developments are occurring in a world unhappy with the United States. The benign gaze of much of the globe toward America has, in many instances, turned baleful. There are many who would like to see the United States get its comeuppance for its perceived swaggering.
American military dominance is overwhelming, but its economic situation is far more delicate. You do not have to be Tom Clancy to imagine that a few dark minds may have turned to the question of how, in the long run, to exploit this weakness.
Of all this, Bush seems oblivious.
Posted by: American Pundit at December 13, 2004 08:00 AM
American Pundit:
It has nothing to do with Bush or who is in power. It is dangerous to mix poltical loyalty and economics. It is what I call the “theory of extrapolation”. This theory people look at trendlines and assume they will go on for ever. Remember the optimism of the late nineties? The gloom and doom of the seventies because of the oil “crisis”?
The twin deficit problem can be plotted on a graph. The line on the graph is already turning. Budget deficit numbers are coming in lower than expexted. Look for a positive surpise with the trade deficit.
A few years from now we will all be looking at another crisis. Another economic indicator will be heading for the cliff. It might be a housing market collapse in California, or tumbling gold prices. Whatever the case, in a few years we will be on to something else.
Craig
Posted by: Craig Holmes at December 13, 2004 11:35 AM
This theory people look at trendlines and assume they will go on for ever.
That’s what I’m saying. You’re assuming the bottom will never drop out on the dollar because it never has before. You’re rosy picture is in direct opposition to what I’m hearing. You can blame that on the vast, mythical “liberal” economics establishment if you want, but they were right about the cost of Iraq.
All the forcasts I see predict a continued decline over the next couple years until the dollar is worth about 1.6 Euros. And that assumes everyone wants to keep the dollar alive and no one will willingly throw a monkey wrench in the works, or that panicky, herd mentality won’t spark a massive sell-off.
It must be nice to live in a world where you trust others to make sure everything works out fine and you never have to have a Plan B. Unfortunately, I only vacation there. :)
