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The Economist: Let the Dollar Fall

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  • The Economist: Let the Dollar Fall

    Let the Dollar Fall

    Some think the dollar has fallen too far. On the contrary, it has not fallen by enough

    THE dollar is the world's dominant currency. Should the world therefore be worried by its recent plunge against other currencies? Plenty of people seem to think so. When central bank governors and finance ministers of the G7 economies meet this weekend in Boca Raton, Florida, the fate of the dollar will be high on their agenda. Since 2001 the dollar has fallen by 33% against the euro and by 15% against the Japanese yen. Currency traders around the globe will scrutinise every word from Boca Raton, looking for a signal that governments might act together to stem the dollar's decline. Many businessmen will be holding their breath as well.

    This is understandable. Any shift in currencies produces winners and losers. And yet the real problem facing the world economy is not a suddenly weak dollar, but a dollar which remains, even after its recent decline, too strong. The drop in the greenback was inevitable and should benefit both America and other countries, because it will help to reduce America's vast current-account deficit, which is arguably one of the biggest threats to the global recovery. For the same reason the dollar should, and almost certainly will, fall further. But some countries are not prepared to allow the dollar to fall by enough to complete the necessary adjustment to America's finances.

    America's current-account deficit stands at 5% of GDP, and most economists reckon that this percentage needs to be reduced by at least half. That would stabilise the ratio of America's foreign liabilities to GDP, which has surged in recent years. So far the dollar has fallen by 15% in trade-weighted terms against a broad basket of currencies. Nevertheless, after adjusting for inflation, its value is still close to its 30-year average. It may need to fall by another 20% over the next few years if the current-account deficit is to be halved (see article).

    American policymakers seem happy to let the dollar slide. Europeans, however, complain that the burden of adjustment has fallen disproportionately on their currency, the euro. As the euro has soared against the dollar, central banks in Japan, China and other Asian countries have bought dollars to hold down the value of their own currencies. By doing so, they financed over half of America's current-account deficit in 2003. Without that money the dollar would have fallen further.



    Missing signals
    In the short term, Asia might thus be seen as America's saviour. But in the longer term Asian governments are delaying a necessary adjustment by allowing America's deficit to loom large for longer. This is likely to lead to an even bigger and more dangerous build-up of American foreign debt.

    The behaviour of Asia's central banks has also blunted the necessary market signals to which even America must, eventually, pay heed. The current-account deficit is a direct, arithmetical reflection of insufficient domestic saving. In particular, America needs to prune its government budget deficit. However, it feels even less reason than usual to do so. Normally, when a government's budget deficit swells so fast (to 4.6% of GDP this year, from a surplus of 2.4% of GDP in 2000) and its currency is falling, investors would demand higher bond yields to compensate them for the increased risk. That penalty gives governments both a warning and an incentive to borrow less. But Asian governments are devouring American Treasury bonds with little regard for the usual risk-return characteristics. As a result, bond yields are being held artificially low, subsidising America's borrowing spree.

    This has allowed the Bush administration to point misleadingly to low bond yields as evidence that its budget deficit is not harming the economy, and to think that cutting the deficit is less urgent. President George Bush's plan, set out this week in his budget, to halve the deficit over five years is based on unrealistic assumptions and fantasy accounting (see article). A fiscal stimulus was justified when the American economy was on the brink of a deep recession in 2001, but now that the economy is booming again, borrowing needs to be cut.



    Asia's game
    In essence, Asian governments are buying American Treasury bonds in order to ensure that Americans can afford to keep spending money on Asian goods. This cannot go on forever. Despite their mercantilist instincts, sooner or later Asia's central banks will have to face the fact that they are holding far too many risky, low-yielding dollars. If they stop buying, it could trigger a sharp fall in the dollar and a jump in bond yields. Delaying the natural adjustment in the dollar and bond yields is likely to mean that, when the inevitable correction comes, it will be much more painful.

    If financial markets do turn nasty, then everybody will carry some of the blame. Japan and China will be guilty of trying to block market forces and hence an earlier adjustment in America's trade deficit. With Japan's economy now growing faster than the euro area and its firms' profits surging, Japan can probably afford a stronger yen. Its continuing worry about deflation can be better addressed by printing more money. And China needs to allow its currency to move upwards, not just to help the rest of the world, but also to rebalance its own overheating economy. Without such a rebalancing, inflation or a property boom and bust could destroy growth. The Chinese might find it easier to accept such advice if they are given a seat at the G7 table, where they clearly belong.

    The euro area is also far from blameless. Policymakers wring their hands about the “brutal” rise in the euro, yet the euro is still close to fair value against a basket of currencies. If Europeans are worried that a stronger euro will hurt their economies, then the solution is simple: the European Central Bank should cut interest rates to boost demand.

    However, America must bear much of the blame for its failure to do anything to curb household and government borrowing and so boost saving. Its easy monetary and fiscal policies are now beginning to look reckless. The dollar's slide has rightly shifted some of the burden of economic adjustment on to other economies. Sooner or later, though, America will have to face up to its own responsibilities, too.
    I think this is interesting. People here at Poly seem to be in two camps. The conservative camp believes in a stronger dollar and a balanced budget for the US. The other camp wants fiscal stimulus and a weaker dollar. The Economist calls for a weaker dollar and a balanced budget though. They also suggest that the Bank of Japan stop buying dollars, and that the Chinese revalue the Yuan higher. I disagree. One, the US needs more stimulus to prevent another recession. Two, if investors lose confidence that the Asian central banks will stop buying dollars it could spell disaster.
    I drank beer. I like beer. I still like beer. ... Do you like beer Senator?
    - Justice Brett Kavanaugh

  • #2
    I have a better idea. Stop printing dollars, and cut down on consumption. Even the tax burden and nationalize important industries.

    Comment


    • #3
      Re: The Economist: Let the Dollar Fall

      Originally posted by Kidicious
      The Economist calls for a weaker dollar and a balanced budget though. They also suggest that the Bank of Japan stop buying dollars, and that the Chinese revalue the Yuan higher.
      Let it float freely, and value itself where it needs to be, where there is an equilibrium. This isn't sustainable, and will only fall sharper if they keep trying to keep it artificially high.

      Balanced budget, weaker dollar
      Smile
      For though he was master of the world, he was not quite sure what to do next
      But he would think of something

      "Hm. I suppose I should get my waffle a santa hat." - Kuciwalker

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      • #4
        Originally posted by Tripledoc
        I have a better idea. Stop printing dollars, and cut down on consumption. Even the tax burden and nationalize important industries.
        Let the other industries fall by the waste side.
        I drank beer. I like beer. I still like beer. ... Do you like beer Senator?
        - Justice Brett Kavanaugh

        Comment


        • #5
          I'm not sure where I stand on that issue... however, I want to see a balanced budget.
          To us, it is the BEAST.

          Comment


          • #6
            I have the best idea of all, how about they take their surplusses and buy American goods with them?

            then their debt/dollar hoards don't become worthless.

            Or we could just impose tariffs.

            Comment


            • #7
              I like strong dollars. I like getting more pesos when I go to Cancun.
              Christianity: The belief that a cosmic Jewish Zombie who was his own father can make you live forever if you symbolically eat his flesh and telepathically tell him you accept him as your master, so he can remove an evil force from your soul that is present in humanity because a rib-woman was convinced by a talking snake to eat from a magical tree...

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              • #8
                Obviously, currency valuation creates issues no matter which direction the US dollar floats.


                IN Canada we were facing slowing growth as our dollar skyrocketed to new highs against the US greenback. Resource companies with expenses paid in Canadian money and income in US dollars were feeling a profit pinch.

                Conversely, NHL teams with expenses ( salaries) usually in US dollars and revenues in Canadian funds, are laughing all the way to the bank. I think this example was in the minority however

                The Canadian dollar has cooled off a bit but I believe that a number of years at lower levels allowed the Canadian economy to grow to its current reasonably strong levels. For the US, a weaker dollar could have the same types of impacts and if the US economy strengthens, the dollar rebound would follow. people holding dollars will be happy to keep them if they believe their value will rise.
                You don't get to 300 losses without being a pretty exceptional goaltender.-- Ben Kenobi speaking of Roberto Luongo

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                • #9
                  Originally posted by Whoha
                  I have the best idea of all, how about they take their surplusses and buy American goods with them?

                  then their debt/dollar hoards don't become worthless.

                  Or we could just impose tariffs.
                  Everyones economy seems to be on the edge of colapse. No one can afford our goods, because it costs more than dollars to imports goods. It costs jobs, as we well know here in the US. It appears that globalization isn't working. Protectionism isn't the answer either. We are probably just screwed.
                  I drank beer. I like beer. I still like beer. ... Do you like beer Senator?
                  - Justice Brett Kavanaugh

                  Comment


                  • #10
                    it's all the fault of the multinationals

                    Jon Miller
                    Jon Miller-
                    I AM.CANADIAN
                    GENERATION 35: The first time you see this, copy it into your sig on any forum and add 1 to the generation. Social experiment.

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                    • #11
                      I'd like to see a weaker dollar, I think it may be nessecary due to our large trade deficit.
                      "I'm moving to the Left" - Lancer

                      "I imagine the neighbors on your right are estatic." - Slowwhand

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                      • #12
                        The falling dollar is a problem only for those who do not wish to see the world Capitalists go into bankruptcy, like the Economist. The world faces a much larger problem.

                        Rising consumption, but less happiness, and much more polution. Again the Capitalist enterprise must be nationalized, fiscal expansionism halted, and consumption severely taxed, or restrained by a planned economy. This report from Worldwatch institute explains the dire situation.

                        State of the World 2004: Richer, Fatter, and Not Much Happier
                        RICHER, FATTER, AND NOT MUCH HAPPIER

                        Consumer appetite erodes quality of life for rich and poor, reports State of the World 2004


                        Washington, D.C.—The world is consuming goods and services at an unsustainable pace, with serious consequences for the well-being of people and the planet, reports the Worldwatch Institute in its annual report, State of the World 2004.

                        Around 1.7 billion people worldwide—more than a quarter of humanity—have entered the "consumer class," adopting the diets, transportation systems, and lifestyles that were limited to the rich nations of Europe, North America, and Japan during most of the last century. In China alone, 240 million people have joined the ranks of consumers—a number that will soon surpass that in the United States.

                        "Rising consumption has helped meet basic needs and create jobs," says Worldwatch Institute President Christopher Flavin. "But as we enter a new century, this unprecedented consumer appetite is undermining the natural systems we all depend on, and making it even harder for the world's poor to meet their basic needs."

                        "Higher levels of obesity and personal debt, chronic time shortages, and a degraded environment are all signs that excessive consumption is diminishing the quality of life for many people. The challenge now is to mobilize governments, businesses, and citizens to shift their focus away from the unrestrained accumulation of goods and toward finding ways to ensure a better life for all."

                        Private consumption expenditures—the amount spent on goods and services at the household level—have increased fourfold since 1960, topping more than $20 trillion in 2000, reports State of the World 2004. The 12 percent of the world's people living in North America and Western Europe account for 60 percent of this consumption, while the one-third living in South Asia and sub-Saharan Africa account for only 3.2 percent.

                        Consumption among the world's wealthy elites, and increasingly among the middle class, has in recent decades gone beyond satiating needs or fulfilling dreams to become an end in its own right, note State of the World 2004 project directors Lisa Mastny and Brian Halweil. At the same time, consumption is rising rapidly in the developing world, as globalization has introduced millions of people to consumer goods, while providing the technology and capital to produce and disseminate them.

                        "Nearly half of all global consumers now live in the developing world," says Mastny. "While the average Chinese or Indian consumes much less than the average North American or European, China and India alone now boast a combined consumer class larger than that in all of Western Europe."

                        Consumption is not in itself a bad thing, adds Halweil. "The almost three billion people worldwide who barely survive on less than $2 per day will need to ramp up their consumption in order to satisfy basic needs for food, clean water, and sanitation. And in China, the rush to meet surging consumer demand is stimulating the economy, creating jobs, and attracting foreign investment."

                        There is little evidence that the consumption locomotive is braking—particularly in the United States, where most people are amply supplied with the goods and services needed to lead a good life.

                        In the United States today, there are more private vehicles on the road than people licensed to drive them, the Worldwatch report points out. The average size of refrigerators in U.S. households increased by 10 percent between 1972 and 2001, and the number per home rose as well. New houses in the U.S. were 38 percent bigger in 2000 than in 1975, despite having fewer people in each household on average. As a result of these consumption patterns, the United States, with just 4.5 percent of the world's population, releases 25 percent of global carbon dioxide emissions.

                        Yet increased consumption has not brought Americans happiness. About a third of Americans report being "very happy," the same share as in 1957, when Americans were only half as wealthy. Americans are also some of the most overworked people in the industrial world, putting in the equivalent of nine more weeks on the job each year than the average European.

                        This rising consumption in the U.S., other rich nations, and many developing ones is more than the planet can bear, reports State of the World 2004. Forests, wetlands, and other natural places are shrinking to make way for people and their homes, farms, malls, and factories. Despite the existence of alternative sources, more than 90 percent of paper still comes from trees—eating up about one fifth of the total wood harvest worldwide. An estimated 75 percent of global fish stocks are now fished at or beyond their sustainable limit. And even though technology allows for greater fuel efficiency than ever before, cars and other forms of transportation account for nearly 30 percent of world energy use and 95 percent of global oil consumption.

                        At the same time, however, growing dissatisfaction with current consumption trends has led consumer advocates, economists, policymakers, and environmentalists to develop creative options for meeting people's needs while dampening the environmental and social costs of mass consumption.

                        State of the World 2004 points to a range of opportunities that are already available to governments, businesses, and consumers to curb and redirect consumption:

                        ECOLOGICAL TAX REFORM. By shifting taxes so that manufacturers have to pay for the harm they do to the environment, and by introducing production standards and other regulatory tools, governments can help minimize negative impacts on natural resources.
                        TAKE-BACK LAWS. Now being adopted by a growing number of governments around the world, these laws require companies to "take back" products at the end of their useful lives, and typically ban the landfilling and incineration of products.
                        DURABILITY. Industries can take shared responsibility for their ecological impacts by finding ways to reduce the amount of raw material needed to create products and by making goods more durable and easy to repair and upgrade.
                        PERSONAL RESPONSIBILITY. Changes in consumption practices will also require millions of individual decisions that start at the grassroots—about everything from our use of energy and water to our consumption of food.
                        "It would be foolish to underestimate the challenge of checking the consumption juggernaut," concludes Flavin. "But as the costs of unbridled appetites grow, the need for innovative responses becomes clearer. In the long run, meeting basic human needs, improving human health, and supporting a natural world that can sustain us will require that we control consumption, rather than allow consumption to control us."

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                        • #13
                          This is basically a plea to make sure the overborrowing in the uS does not become a super-argentina
                          If you don't like reality, change it! me
                          "Oh no! I am bested!" Drake
                          "it is dangerous to be right when the government is wrong" Voltaire
                          "Patriotism is a pernecious, psychopathic form of idiocy" George Bernard Shaw

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                          • #14
                            Balanced budget, weaker dollar


                            Indeed! China and Japan should stop buying dollars. Let it float.
                            “I give you a new commandment, that you love one another. Just as I have loved you, you also should love one another. By this everyone will know that you are my disciples, if you have love for one another.”
                            - John 13:34-35 (NRSV)

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                            • #15
                              A weaker dollar will only mean that the production of consumer goods will switch from one part of the world to another part of the world. It does not solve the basic problem.

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