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The Declining US Dollar ... What is Happening?
Bamelin
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Registered User regular
I'll start this off with a sad article but one that sorta sets the mood of the thread:
http://news.independent.co.uk/world/americas/article3169653.ece
There have been similar articles in major Canadian papers as well, talking about the end of the US dollar hegemony, the end of the US dollar as the world's defacto currency. Many economists are starting to talk about the Euro as potentially replacing the dollar as the "world currency".
Like most Canadians I'm pleased I can now go shopping across the border for cheap, but lately I've been feeling abit unsettled. What exactly does all this mean?
I mean it can't be good ... unstability in the world economy is never a good thing. But even moreso I'm more than abit worried about what a collapsing American Dollar might mean to the world economy ... as well as what the US government might do to maintain it's Dollar's dominance.
I'm no econominist ... should I be worried?
Rappers join models in insisting on euros as greenbacks fall further out of fashion
David Usborne in New York
Published: 17 November 2007
Pay attention as you watch the catchy new music video from the mega-star rapster Jay-Z, "Blue Magic", and see if you can't spot the product placement. It is not a fancy car that he is endorsing – although both his rides, a Rolls- Royce and soft-top Bentley, are plenty spiffy – but rather a currency – and it is not the dollar.
Like so many in the hip-hop genre, the song is a celebration of ostentatious wealth. But capturing the attention of commentators in this clip, shot in the glimmering, neon-lit canyons of New York City, are the repeated glimpses of flickering wads of €500 notes. Jay-Z has thus performed a currency defection: the dollar is not just down, it is out. The euro is the new bling.
It is only a music video, but Jay-Z, whose influence on pop culture is immense, may, wittingly or otherwise, be bringing America to what some pundits call the "point of recognition" – the moment when the droop of the dollar against other currencies ceases to be the preoccupation only of economists and American tourists in Paris, and enters the popular zeitgeist as a new and unsettling reality.
He is not, as it happens, the only celebrity imparting the new currency wisdom. Chatter about his video comes on the heels of reports that Gisele Bundchen, the world's richest model, is asking that payment for her numerous advertising gigs be in euros. While her manager has since denied any such stipulation exists in Bundchen's contracts, the message is nonetheless compounded: the dollar is out of fashion.
Even the Wu-Tang Clan, another power on the rapping scene, is daring to diss the dollar. Never mind that they coined the catchphrase of conspicuous consumption, "dolla dolla bill, y'all"' - click on their official website and inquire about buying their new album. It is priced not in greenbacks, but in euros.
The downward spiral of the dollar is hardly new, even if its plight was accelerated by the start of the housing credit crunch over the summer. It has lost 44 per cent of its value against the euro since 2002. The Canadian dollar reached parity with its American cousin in September and has since shot above it. But awareness on Main Street America may be lagging behind. Listen to presidential candidates take questions on the stump in Iowa and New Hampshire and still you will hear nary a question about it. Americans have been accustomed for so long to thinking of the dollar as reigning supreme and unassailable, that the reality will take time to sink in.
"It's ignorance and arrogance," commented Clyde Prestowitz, of the Economic Strategy Institute. "The candidates, the voters, the country's elite – they all take it for granted that the US currency is always going to be the world's currency. It hasn't hit them yet."
But Jay-Z has given the dollar's slow demise visuals and a soundtrack, while Bundchen has given it a sexy face. Now Americans, reluctant as they may be, might start to pay attention.
James Cramer, a financial commentator and television host, even blamed Bundchen. He has since back-tracked, but not entirely. "Is Gisele really to blame? No," he said. "But when things have gotten to the point that even people like Gisele and Jay-Z realise the dollar is too weak, things have gotten out of control."
http://news.independent.co.uk/world/americas/article3169653.ece
There have been similar articles in major Canadian papers as well, talking about the end of the US dollar hegemony, the end of the US dollar as the world's defacto currency. Many economists are starting to talk about the Euro as potentially replacing the dollar as the "world currency".
Like most Canadians I'm pleased I can now go shopping across the border for cheap, but lately I've been feeling abit unsettled. What exactly does all this mean?
I mean it can't be good ... unstability in the world economy is never a good thing. But even moreso I'm more than abit worried about what a collapsing American Dollar might mean to the world economy ... as well as what the US government might do to maintain it's Dollar's dominance.
I'm no econominist ... should I be worried?
Bamelin on
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Yes, i blame the US failing dollar on the current administration and its waste of resources on poorly thought out economic endeavors. Iraq was the most phenomenal waste of money, and lives (lets not forget those), in the US since Vietnam.
It is something of a concern that the current global power is slipping economically, especially with how interdependent economies are today. However, economies are innately dynamic, and the US has not always been on top, even in the last century. Really its a matter of waiting to see who the next batch of beauracrats will be, what their plans are to rebound the US economy, and whether they actually do it.
Also, from a Canadian perspective it might be good if economic power shifts away from US hands to say.... Canadian ones. Although, that seems unlikely, and my guess would be a shift to Asian markets.
The declining dollar means different things to different people.
On the one hand, it is reducing the amount foreigners are paying for the goods they buy from the US, reducing your standard of living.
On the other hand, it is increasing the demand for goods produced in the US by increasing exports and thus aggregate demand, increasing output, and therefore reducing unemployment.
It is slightly more complicated than this, but at the end of the day it is not worth the panic.
This is the part that tickles me. There are going to be (or rather, already are) a bunch of Euro-intellectual types going "lol the end of US hegemony lol" while underneath their noses people are going to be importing more of our music, movies, cigarettes and clothes than ever before.
Do they have berets and goatees? Pince-nez and top-hats?
I'm expecting there to be a fair bit of lag time, if only because so much of the manufacturing has moved out of America that we don't have the capacity to make up our trade deficit with what we can produce.
Actually, when this kind of thing happens, most of the people I talk to say 'Oh no, our currency is weaker!' but I have no idea whether it's a good or bad thing for me and the other Joe (Taro?) Publics.
China is the massive X factor on this, because they have their currency pegged to the dollar and have been buying up tons and tons of the federal deficit over the past years. It will be interesting to see if they respond to the US effectively sinking their currency as well, or bask in the increased opportunity for exports.
But the US is going to have to start bringing its trade back towards being balanced one way or another, because the dollar will keep falling with how out of whack it is.
ege summed it up pretty well. It's not great, but it's not a disaster so long as we don't go the way of the lira or the peso. Weak currency is a lot harder on nations that have to import all their necessities. We can feed ourselves, at least, and we don't have to spend so much on foreign energy, and as the dollar drops further sane energy policy will become an increasingly attractive option.
Cocktease.
Thats about all I know on the situation.
I am totally convincing my sister to let me use her credit card to buy all sorts of shit.
You're missing out the importing side of things, as the profits for imported goods starts declining to precipitous levels eventually companies are going to start going "screw this" and stop eating the loss. British companies were feeling the pinch at $1.8 to the pound, at over $2 to the pound it's getting calamitous. Soon America won't need protectionist trade tariffs to make foreign goods more expensive.
I made a game, it has penguins in it. It's pay what you like on Gumroad.
Currently Ebaying Nothing at all but I might do in the future.
Well, my brother pays attention to the fine alcohol market and he's pointed out how prices on things like imported cognac and liqueur have been steadily rising. Whether manufacturing is going to start heading back stateside heavily depends upon China at least as much as other western countries.
Before multinationals of course you would still have trouble if you wanted say, Cadburies Choclate, or a Ferrari but nowadays the multinationals can produce whatever good you might want locally either by opening a plant (Cars, Playstations), or by contracting a partner to produce it (Chocolate Bars, Beer)
Anyway, the US dollar is just leading a worldwide issue of balances of trade and so forth, you are just going ahead of the curve because the US economy was the most 'modern' economy. The others will soon follow along and their currencies will rebalance as well.
edit - Also, theres an election coming up. A new government is just what things need to stimulate them
I was just going to make a thread on this same topic. Basically, I want to learn about this sort of stuff. Economics, but very large scale stuff. Frankly, I have no idea where to start. I started looking into this stuff when the subprime mortgage market started to melt down, however I never really got anywhere. I discovered a few things though:
There doesn't seem to be a consensus about these things. There are a few economic models, with the followers of different models talking about different factors having different effects. My lack of knowledge in the area prevents me from being able to tell which is more accurate, even for a limited number of cases.
Meanwhile, I hear stuff like : Saudi foreign minister overheard warning of a "collapse" of the greenback if oil is no longer priced in dollars
Then I go to this economic commentary site that my dad gave me the link to, and I read
Pricing oil in something other than dollars absolutely 100% guaranteed will not cause the dollar to collapse. Nor would it accelerate long-term diversification out of dollars.
It doesn't seem like they can both be right. The commentary site seems to be an advocate of a non-"mainstream" economic theory, which raises further questions. It seems foolish of me to jump on an economic bandwagon with only a few people on it when I have no way of verifying for myself if its actually the correct choice. On the other hand, my dad follows some of these alternative models, and has been buying lots of gold over the past 5 years or so, and has made a lot of money doing so. Making money seems to be a good predictor of accuracy, while it seems like the mainstream guys caused the mortgage market to melt down with their "borrow borrow borrow!" policies. But again, I have basically zero perspective in all of this.
So, D&D, I request your help. I want to know a bit about how the global economy as a whole works. How it is affected by things like how much the US dollar (and other currencies) are worth, and likewise how the economy affects the currencies. I want to understand how the price of commodities like oil and gold play roles. I want to understand what really happend with the subprime mortgage market meltdown, and what its long term effects will be. I know these are not simple questions. I'm not actually looking for answers here though, answers I can find on the net. I want to get to a point where I can tell for myself if an answer makes sense.
But where the hell do I start? I need book recommendations, or point me to a forum that discusses these topics, or something, anything!
But I guess I'm happy for the people here who will get jobs out of this.
Jerks.
Yeah, but it isn't like no manufacturing goes on in the United States. We won't be getting back factories that manufacture plastic combs, but more sophisticated equipment, like the construction machinery produced by Caterpillar, will probably see an expansion in demand.
There is also the fact that at a macro level, self fulfilling prophecies are a powerful force. For instance, research in the Netherlands indicated, that just through the government proclaiming over and over "Our economic situation is dire, we need to do more budget cuts / pay cuts / lessen inflation" for about 3 years, estimated loss in GDP due to consumer and business caution was in the order of 1%. (Not due to actual policy, just fearmongering, our policies were largely the same as adjacent countries who did not make such a huge deal of it).
It's also more and more obvious that the stockmarkets are played by large parties. The DOW in particular always seems to to turn any small loss into an insignificant positive, without any real economic motivator on the relevant stocks themselves. This of course from a casual view promotes a view that the economy is doing pretty well. After all, the stockmarkets seem to be up most of the time.
The fall of the dollar is in the end due to reasons already mentioned: The US trade-deficit, budget-deficit, and the appearance of a competing currency. Before the Euro, the biggest competing currencies viewed as stable were the Pound and Deutschmark, both supported by a 60-70M people economy. Now the Eurozone is like 350M people, with a big diversity, regonial difference in leadership and economic systems meaning overall change is more likely to be slow. And, euro countries are restricted to keep their deficit under a percentage of GDP, and and never have more then 3% annual deficit. The euro has become a safer bet then the dollar.
That doesn't mean at all the dollar will keep on sliding. The US economy continues to grow at an impressive rate, with low unemployment. There are definitive worries, like the housing problems, the credit issue that's related to it (The US has more personal debt and more government debt per person then any EU country, although i think Japan is worse then both). So it all depends, how much more will Iraq cost, how long will the housing crisis go on, and how much of a change in the US credit system will follow. Will the fast growth of economy outpace the deficits? How much will big parties interfere if the dollar does slide more? Will the sliding dollar automaticly take care of the trade deficit?
Even the best macro-economists cannot be sure about any of this, and even if they are, they are often still at the whim of politicians. The recent memoirs of Greenspan suggests strongly that he was not at all happy with some of the policies he defended under Bush, but he did it anyway, and with a strong enough conviction that many believed him.
EDIT: About the Jay-Z thing, it could be that he just choice Euro bills because they are more distinct and colorful. Euro bills change in color and size (quite significantly) based on their value. A E5 note is half the size of a E500 note.
The second link you provide is perfectly valid an accurate in it's own special way. And by special I mean completely ignoring larkge chunks or reality. He discusses the dollar's loss of value as if it's a recent thing rather than something that started happening years ago now. He siezes upon the information that a small fraction of the world's oil trades are done in Euro's as if he's discovered the holy grail whilst ignoring the fact that the vast majority of trades are still transacted in dollars. And he fails to acknowledge that for you to be able to easily transact a trade in `temporary' dollars there needs to be a large number of liquid dollars out there. To be able to buy dollars there must be someone out there wanting to sell dollars. That means there are a large number of dollar sellers around and about. If the OPEC coutnries start making the vast majority of trades in Euros rather than dollars then their will be a large number of dollar sellers and not many dollar buyers. Now, what happens when there's a large surplus of a commodity that not many people want to buy?
I made a game, it has penguins in it. It's pay what you like on Gumroad.
Currently Ebaying Nothing at all but I might do in the future.
What Alistair said. I was going to touch on that, but he did a good enough job of it.
Essentially, when Oil barrels are sold/bought, it was decided that it would be done in USD, regardless of seller and buyer. If France wanted to buy Oil from Uzbekistan, they'd do it in dollars. What does that mean? That means that everyone needs dollars to buy and sell oil. That means that the US can print a shit ton of dollars, and barely keep up with the demand.
For those that don't understand, if a lot of people want something, and you're the only one that can effectively give it to them, you're golden. Imagine this: you want to buy a car? alright, the car consortium decides that every car sold is going to be a Subaru. Well, everyone wants a car, and so, Subaru can now make a shit ton of cars to try and meet demand. Because everyone wants them, and Subaru is the only one that can make them, they're going to be making mad money + the value of the car does not decrease.
Now, if the trend continues, and countries start switching all those USD into Euros for Oil purchases, well, they have to sell all those dollars. All that money you printed years ago? well, all of a sudden, it's back in the market, but nobody wants it.
To follow with the limited car analogy, there are suddenly way more Subarus than people want . You want to get rid of yours, so you mark it 10% off. Other people catch on, and follow suit - pretty soon, the cars are declining very rapidly in value, because everyone now wants Mazdas. So, you get a dual-effect. One company is inflating rapidly (probably more than it should) while the other is declining rapidly (again, more than it should).
What that means is that at some point it'll hit critical mass, the Euro will be too expensive and the USD will be too cheap and they'll find equilibrium. Meanwhile, if you live in the US, don't go traveling abroad, and expect a shit ton of tourists to come over and enjoy the (now) cheap-as-chips goods in your country.
they don't it be like it is but it do
You know the bridges on the money, symbolizing unity and crossing barriers? They wanted to use real bridges from around europe, but noone would agree to use another countries bridges on their money so they had to design fake bridges.
Not really a financial argument, but still, the euro is hideous.
Another strength of the stored and unspent dollar is that every dollar bill and coin ever produced is perfectly valid currency which can be spent wherever dollars are accepted. The same is not true for the pound, nor will it be true for the euro in the future. Euopean economies love to cancel our money, so you then have to take the old coins and notes in and change them.
Hmm, I had actually just finished sending an email to my dad ripping up that particular article, but for different reasons than the one you described. I hadn't thought about the dollar before in terms of supply and demand. Or perhaps more accurately, I hadn't understood it. Thanks.
(The part that bugged me was when the guy was saying that pricing oil in Euro's wouldn't have any effect, when clearly it would spook a lot of people, regardless of if it was a good reason or not).
Exports don't have to be made of steel. Microsoft and Apple, to name a couple of companies at random, export rather a lot of dollars worth of goods.
Information is an export. The falling dollar will probably be a huge boon in the intermediate to long term to the software industry.
Of course, OPEC will never switch to Euros as long as the US maintains a strong military presence in the Middle East.
I thought China was slowly unpegging their currency to stand on its own? I think this is probably the beginning of the end of U.S. economic dominance in the world; it sucks, but with China and India industrializing, it's just not possible for us to keep up (300 million people versus 1 billion people apiece). It's gonna suck, but not being at the top of the charts for every measurement is something we're just going to have to get used to; in the long-term, I think it'll probably be a good thing, since maybe it'll make us knock it off with this head-up-our-collective-asses xenophobic nationalism we seem to have going.
I do know as a daytrading FOREX trader that I am doing quite well following the trend shorting USD. It has recovered slightly the last week, but there is nothing indicating that the longer term trend is going to slow down any time soon. The US has some serious economic problems right now and they're not doing much to fix them. An interest rate adjustment or weasel-worded announcement does not an economy make.
Actually, it is.
The thing with population numbers is that, while at the beginning of a country's economic development they give a great advantage, eventually their effect on output lessens. There are, after all, diminishing returns from labor on output; a population of 1 billion vs. 300 million doesn't mean they have a 3 vs. 1 advantage on the US.
At the end of the day what matters is technology and its contribution to efficiency. And I don't see either China or India surpassing the US in that area anytime soon. Sure, right now they can produce things incredibly cheaply and this gives them an edge, but it that is unlikely to last forever.
Some people have speculated that one of the big "behind the scenes" reasons that the US invaded Iraq was because Saddam started taking Euros in exchange for oil.
The Chinese are not just making offhand statements, they are making very clear threats:
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/07/bcnchina107a.xml