I can't see one single indicator to suggest that the USD isn't in a long term decline.
The only reason this isn't yet glaringly obvious to everyone, is that the Euro and GBP are also stuck on a downward trend.
Speculatively, I believe the Euro and GBP will 'save' themselves out of trouble within the next 5-7 years, whereas the US will practically have to reinvent the earnings foundation of it's entire economy before it can break out of this current downward spiral of excessive debt.
Why does the US have to reinvent its earnings foundation and the EU and the UK don't?
I believe the US dollar is in a long term downward trend because it is slowly slowly losing its reserve currency status as the US is losing its economic predominance. That's not a bad thing. It's just a reflection of Asia becoming less bad economically, which is neither difficult nor surprising considering how bad they used to be.
The USA is not going to lose its reserve currency status because it will continue being the world's sole superpower for the for the next 30 - 100 years, at least. For an in-depth analysis, see: http://www.singularity2050.com/2008/06/why-the-us-will-still...
I don't doubt the strength of the US economy or its military power, but in relative terms the US is slowly getting less important. The article doesn't dispute that. It just says that it will take a long time until anyone will surpass the US. Also, the article works on the assumption of linear development, which is kind of questionable, but that's a different story.
The US used to be the biggest user of commodities, so it was pretty logical that the dollar should be the currency in which commodities are priced. Today China is the biggest user of commodities and it is only logical that countries like Brazil are going to take a little more RMB in exchange for their iron ore than they used to. And considering they import a lot of stuff from China as well, why should they sell their RMB for USD immediately? They won't.
Exchange rates are not based on absolutes but on relative strength. So the question is not wether the USD will or will not lose its reserve currency status. The question is how fast. My totally scientific characterization of that pace was "slowly slowly".
The USA, however, isn't exactly "declining". As the article I linked to above noted, the USA is continuing to grow across a broad spectrum of measures. Yes, China and the EU may be growing at a faster rate in some of those categories, but the USA has such a great initial advantage that it will be a long, long time until another country catches or surpases the USA in even one of those categories.
So, let us take your simplified example and expand it a little to see a broader macroeconomic picture that illustrates why Brazil and China would want to do that trade in dollars. Let's say that Brazil wants to use the cash from that commodity sale to improve the living conditions of their citizens and purchase some Catepillar brand forest-clearing bulldozers and some crude oil to refine into gasoline for those bulldozers because their local sugar-cane ethanol would wear-out the engines too quickly. Well, Catepillar is a American company so it makes sense for them to bill Brazil in USD instead RMB. The middle east oil exporter also charges Brazil in USD because the US Navy protects their shipping lanes and the CIA and State Dept maintains (or doesn't) the internal stability of that country. Last, China has USD coming out of its ears and is more than happy to trade pieces of paper for real assets like Brazillian ore.
Now, why would the Chinese want Brazil to pay them in USD for some Chinese goods? The Chinese are smart and recognize that if the USD sank too far in value that the manufacturing jobs in China would return to the USA. This is a problem for the Communists because they do not have a sufficient internal economy to continue employing hundreds of millions of peasants. And, that would be a dangerous political problem for the Communist leadership in China.
Now, I will agree that this assumes linear development, but it would take a situation like WWII to knock the USA out of reserve currency status, and I don't think that is very likely.
In conclusion, welcome to Pax Americana; you should learn to love it.
First of all, Brazil is a major oil producer itself and doesn't need middle eastern oil, but that's beside the point. I don't disagree with a lot of the things you say. I'm not saying the US will decline in absolute terms nor do I think that the dollar will necessarily go down further in the short term. It's true that the Chinese don't want that.
What I'm saying is that over the coming decades, the importance of the US is declining in relative terms and that trend is affecting the reserve currency status of the USD. Countries are diversifying out of the dollar. It makes sense for China and Brazil to hold some of their foreign currency reserves in each others currency instead of dollars, now that they are such close trading partners.
What you describe is the status quo. What matters is the trend and the rate of change.
1) The USA's economy is "financialized" to a much greater extent than Europe's.
2) Lots of "phantom" GDP in USA which makes US "productivity" and per-capita GDP look higher than corresponding Europe figures (it's not an "apples to apples comparison"), thereby hiding US economy's weaknesses (e.g., high college tuition costs, health insurance costs, high healthcare costs (paid out by insurance companies to hospitals), doctor liability insurance etc all inflate the GDP but the corresponding figures for Europe are smaller).
People saying America is broke are looking at future obligations. Doing this, the 12T figure presented by the Credit Suisse link is a joke. The obligations that become current will rise so fast that GDP and household wealth have no chance in catching up and alleviating them. Add in our current run rate, and it is the straw that broke the camels back.
"Government deficit spending and tax collection should be maintained at a rate that does not impose financial hardship on the private sector. Because the Federal government is not a state or household it should not manage its balance sheet for its own benefit. Rather, taxes and government spending should be managed in a way that most benefits the private sector and encourages private sector prosperity."
"The key takeaway here is that the government balance sheet is not like a household or a state. It does not finance spending via revenues or debt issuance. The US government, as a monopoly supplier of currency in a floating exchange rate system never really has nor doesn’t have money."
To understand what's going on, make sure you read the last sentence on the first page, continue on to the second page, and then watch this Charlie Rose interview with Gordon Brown (http://en.wikipedia.org/wiki/Gordon_Brown) where he also talks about the US/China "currency wars" and the "race to the bottom" (http://www.charlierose.com/view/interview/11343).
China artificially lowers its currency so its goods are relatively cheaper ("it's pegged to the dollar"), which keeps its foreign trade prices down and therefore boosts its exports. So how does the US "compete" with an artificially-lowered foreign currency to discount its debt and keep its exports up? Or, in other words, how does the US devalue its own currency in a "race to the bottom"...?
Currency devaluation is a way for governments to tax their populations surreptitiously. All governments that have control of the money devalue it to some extent, but generally not too much for the same reason they don't directly overtax or over-regulate: too much state looting discourages production and investment.
If China is over-looting (relative to other countries), then investors should be leaving China, not queuing to get in.
Currency devaluation is a tax on savers and a tax cut for debtors. So there is one group of people that is surreptitiously taxed and another one that is surreptitiously bailed out. Since the US is a net debtor nation, the Fed and the government creating inflation amounts to a net tax relief for the US population.
To clarify: that only goes for the inflation beyond the expected inflation. The expected inflation is priced into the interest rates. The current level of inflation of the dollar does not amount to a tax on savers.
it does because many of them are holding fixed rate notes at very low interest rates. For those with resetting interest rates it is no big deal, but grandma holding CD's or bonds bought in the last few years is going to get killed.
The price of the US Dollar is decided by international markets. The US does not manipulate its currency prices. Most economists in the US are very happy with this situation.
The only governmental force which might change the value of the dollar on purpose, by increasing or decreasing the amount of dollars available, is the Fed. The Fed's primary goal right now is to prevent deflation. All of its actions have been entirely consistent with its goal of preventing deflation, and just about every economist in the universe agrees qualitatively with the Fed's behavior, though there's wide disagreements on just how much they should print.
Deliberately printing money for the purposes of a trade war would be inflationary stupidity and would be a shocking move from an institution that had, in the past, actually prolonged a recession in order to maintain a stable currency. (Inflation doves like Paul Krugman would suggest that the Fed is doing that a second time, right now.)
REP. HENRY WAXMAN: Do you feel that your ideology pushed you to make decisions that you wish you had not made?
ALAN GREENSPAN: Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to — to exist, you need an ideology. The question is whether it is accurate or not.
And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact.
REP. HENRY WAXMAN: You found a flaw in the reality…
ALAN GREENSPAN: Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.
REP. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working?
ALAN GREENSPAN: That is — precisely. No, that’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.
That's an interesting quote, but I'd like you to clarify what it has to do with what I'm saying. Judging by the actions and commentary of just about everyone, neither Greenspan nor anybody else seems willing to throw out monetary policy entirely, and I caution you not to misread Greenspan's words that way.
Like the conventional wisdom that house prices can only go up? Or there's no more boom and bust? There is no conventional wisdom, it's all speculation, especially as it tends to play out over generations and not political terms.
We've got a strong communist partially planned economy in a capitalist market, which has a currency that's got a weird valuation from a centrally planned bank fighting a currency war.
And that bank is deliberately manipulating the price of the dollar.
When has it happened before? So what wisdom can there be?
To say that it's FUD and that the Fed isn't going to at least consider what to do about that and they are going to always stick to a particular course regardless of the actions of the Chinese seems premature.
How the hell can anyone know what's going to happen? Or how the Chinese are going to act in the next 5-10 years?
Much of "conventional wisdom" is political meme. There has been a shift in perspective (an "ideological change") among many economists (though Krugman is not necessarily one of them). MMT goes against "conventional wisdom" -- I am saying read the link for an overview of MMT.
I agree with your assessment of the Fed's influence on the dollar, but I think it's wrong to say that it's the "only governmental force." For example, if Congress decides to cut spending by 50% (hypothetical obviously :P), assuming the anti-bias government provisioning system, some of the cuts will come from goods abroad. That reduces the demand for, say, the Euro relative to the Dollar, and thus causes the Dollar to rise relative to the Euro.
This is another component of the emerging "economic/currency wars"...
"Oil Not Priced in Dollars by 2018?: Some oil producing countries and big buyers are hatching a plan to move away from pricing oil in dollars—a potential blow to the greenback's prestige" (http://www.businessweek.com/globalbiz/content/oct2009/gb2009...)
So, are you saying that this is a good thing? I don't quite follow. Care to give a TL;DR explanation for those of us with more programming sense than fiscal sense?
I'm saying it's the reality of an emerging "economic war" between China and the US. In the article, Kenneth Rogoff (http://www.economics.harvard.edu/faculty/rogoff/), a Harvard economics professor and former chief economist at the International Monetary Fund, says "A weak dollar isn’t necessarily a bad thing -- it can make the United States more competitive, bolster exports and help domestic companies that are vying against imported goods here in the United States."
The article goes on to say, "[Devaluing the dollar] effectively would be playing the China card against China in a battle for manufacturing jobs...Many fund managers say the only way out of that box is a weaker dollar, reducing the value of the massive amount of U.S. debt held by foreigners and increasing the value of American investments abroad, such as Buffett’s.
"'Countries like the United States do race to the bottom,' said Gross (http://en.wikipedia.org/wiki/William_H._Gross), though he added that Treasury Secretary Timothy F. Geithner would never say so. A weaker currency 'makes them more competitive and reduces the burden of debt,' Gross added. Americans own about half of the outstanding federal debt, but Gross said the rest is owed 'as Tennessee Williams would say, to strangers, outside the U.S. If the United States can devalue the value of those dollars that they owe, then all the better.'"
What makes it a "race" if the US can just halve it's dollar value tomorrow by simply printing money? Isn't the value arbitrarily set by the feds using inflation and supply?
Too much state looting (and printing money is a way to loot) discourages production and investment besides causing political trouble. So there's a limit to how much any state can devalue.
To illustrate, your employer could make itself more competitive by cutting wages. But if it cuts wages too much you would stop working for it and find other employment. So there's a limit to how competitive you employer can be by cutting wages. The better, easier way to competitiveness is to increase productivity by enticing more productive workers with higher compensation.
By devaluing money, a government effectively cuts wages for the entire population, thus making the country as a whole more "competitive," i.e., foreigners can afford to buy more of the country's goods and services. But, just like cutting wages in a single firm is not generally effective, so inflation is not the best way to become nationally competitive.
The better, easier way to competitiveness is to increase productivity by enticing more productive workers with higher compensation.
It's a great time for startups because it looks like investors are encouraging another Internet "bubble" -- the US economy boomed in the last one, and it was a significant contributor to the record economic surpluses we had under Clinton (http://pragcap.com/visualizing-the-destruction-of-the-clinto...).
"Races to the bottom can be described in game theory by the prisoner's dilemma game. This is an exercise where the optimal outcome for the entire group of participants results from cooperation of the participants, but is put in danger by the fact that the optimal outcome for each individual is to not cooperate while the others do cooperate.
An economic example of racing to the bottom is tax competition between governments. Each government may benefit from higher tax revenues by having a high tax on corporate profits.
However, governments can benefit individually with a lower corporate tax rate relative to the other governments in order to attract businesses away from the jurisdictions of other governments. This action would hurt all governments except the one that undercut the others. In order to maintain the equilibrium, each of the other governments would have to lower their corporate tax rates to match the "defector" (the government that first lowered the tax rate). The end result is that each government adopts a lower corporate tax rate and thus collects less revenue overall. The optimal option for all governments would be an agreement to maintain tax harmonization" (http://en.wikipedia.org/wiki/Race_to_the_bottom).
As an aside, Robert Axelrod's famous and fascinating book "The Evolution of Cooperation" (http://en.wikipedia.org/wiki/The_Evolution_of_Cooperation) on game theory and the "prisoner's dilemma" presents an algorithm called "Tit for Tat" (http://en.wikipedia.org/wiki/Tit_for_tat) that describes an approach to interaction that promotes generosity and forgiveness while not to being exploitable, and it so simple that it can be understood by everyone (which is to say, it's easy for others to understand your actions and adapt theirs to yours so that you both get the most benefits).
Reducing the value of the dollar overseas to sell more sounds like madman logic to me - it only makes the wealthy, more weathy, not the average consumer.
We don't reduce the subsidies to those exporting more, so they will do fine.
But for the average person it will just make all your goods and services more expensive.
So, give the wealthy the opportunity to ship twice the number of widgets at half the profit and they'll just have to give someone a job, regardless if it's the lowest possible paying jobs that will only be temporary anyway until the cost to make the widget also increases because of the supplies they need will now also cost twice as much.
Then when China out-deflates us to make the widgets even cheaper, all that temporary labor will be on unemployment and need taxpayer provided benefits and health care. Win-win for the factory owner.
A key point, as discussed in the Charlie Rose/Gordon Brown interview (above), is in the next 10-20 years when China's emerging middle class becomes consumers.
If the US is still in a position where its technology is superior and China's ~600 million new consumers demand and buy US technology, then it will result it massive US exports, windfall profits, and the perceived debt problem goes away.
Part of the US strategy is to make sure it's in a position where China's new middle class demand and buy US technology.
The average consumer is in a huge amount of dollar debt, and those dollars will become weaker too. It's people who are owed money (the wealthy) who are generally the inflation fighters.
Sounds good on the face of it, except that the evidence points in a completely different direction.
Have you ever seen any of these wealthy people you mention go to Washington to champion a strong dollar policy? I haven't. Have you ever seen Hu Jintao go to Washington to call for a stronger dollar? I have. We all have.
Perhaps the truth is closer to this: The US is in a huge amount of dollar debt, and those dollars will become weaker. It's the countries who are owed money (China) who are generally the inflation fighters.
A weaker dollar is marketed as a bad thing in the USA. But many don't realize that a strong dollar benefits the rich and a weak dollar benefits entrepreneurs and companies who don't yet have large dollar reserves they need to protect, but are exporting services and competing in a global market place.
The majority of the population aren't the rich people with tons of money in the bank or entrepreneurs starting companies. The price of gas and basic food items increasing rapidly is devastating to many people.
Then you have to consider what is more devastating: Being unemployed because your job was shipped to a country with a weaker currency, or being employed but paying more for imported goods because our currency is weakened.
A weak dollar will create more jobs in the USA as it becomes more expensive for companies to outsource to other countries. In the short term, imported goods will increase in price, but longer term they will readjust to levels that reflect their real value as production moves back on-shore.
Exactly, and the weakening dollar is making food, gas, etc more expensive to the poor in the US. The strong dollar is especially beneficial to the consumers.
A strong dollar doesn't necessarily benefit the rich because the rich have very mobile assets, and it's likely diversified/spread over many regions like Britain, Russia, China, etc. Additionally, most of their assets are in equities whose values depend heavily on whether they're on the importer or exporter side of things. So unless the "rich" you're talking about hold exclusively cash or in export-oriented businesses in the US, no, the rich don't necessarily benefit from a strong dollar.
But a strong dollar for sure benefits consumers (in their consumer roles) because they have access to cheaper goods. It also benefits businesses that import more goods from abroad than they export--so Walmart, for instance.
"Consumer" means all of us in the US. A strong dollar is good for my pockets.
"... Japanese regulators and executives of the Tokyo Electric Power Company are asking questions about a seemingly coordinated series of stock purchases two weeks ago that led to an undisclosed buyer or buyers acquiring a large block of the utility, which owns Japan’s dangerously damaged nuclear power plant. ..."
Reading through the comments, I found that some HNers suggest that a weaker currency will boost exports. But I have a question that is looping in my mind: If currency weakness is due to inflation, won't the product price inflates? If I have a product that is worth $100 and tomorrow there is a USD inflation of 10%, won't the product be worth $110?
From my vague memories of an intro economics class I took two years ago, inflation devalues the inflated currency relative to others. It would cost someone in the US more, but a yen or a euro would buy more.
Yes, but someone who is paying in euros doesn't care what the price in dollars is, only what the cost in euros is. If yesterday $100 == 100 euros, but today $110 == 95 euros, then your $110 exported good now looks more attractive to people paying in euros, even though it's now more expensive at home.
If currencies were perfectly elastic then yes, the price of the exports would increase exactly to match the inflation. But they're not, if a currency falls it takes years for that change to be reflected in the prices. For example the Canadian dollar has been hovering near par for years and is now 5% higher but the prices of US imports are still higher than they should be.
An entire article about the dollar losing value, but not a word about how this relates to US monetary policy? The article was singularly uninformative and misleading.
Exactly. I suppose printing (or digitally creating without physically printing) trillions of dollars of credit to bail out fundamentally insolvent banks might have had something to do with it?
I think it has to do with a reduced credit rating if they don't raise the limit (because they could then default on existing loans) which makes the interest on the debt higher, which makes US currency worth less?
As I understand it, the US dollar's status as the human race's reserve currency is based on the fact that the US is perceived as always paying it's debts. If they default, countries and banks around the world will suddenly change their reserves into euros, plunging the value of the dollar.
It's not quite that simple. If you're holding dollar denominated assets and you want to 'suddenly' switch to Euros you'd better be happy to sell/exchange those assets for pennies on the dollar. Flight from an asset causes prices to crater. Sudden flight and causes crises and panic.
Any investment ideas stem from this? Where's a safe place for one's money? It seems as though the price of gold has more or less adjusted for this already. Right now I've got a bunch stashed in Inflation Protected T-Bills...
Bond prices should always contain the market's inflation expectations. If you think markets can usually anticipate inflation correctly then investing in bonds should be an effective inflation-neutral store of value.
I don't know about safe, but investing in some kind of Asian development fund doesn't sound too crazy right now. Things are definitely booming over here.
I get foreign exposure with a combination of ADRs and ETFs. Approx 55% of my portfolio is non North American at the moment. About 2/3 of the foreign portion is in ADRs, but I am fairly risk tolerant. They aren't for everyone.
Within a few years I expect to see legislation which mandates a minimum level of participation in U.S. government debt for all retirement accounts and pension funds.
You should indeed. A couple of possibilities are http://www.gsfsystem.ch/ and http://goldnowbanc.com/ . Or just delivery in person for local business. Go ahead and quote a rate in silver while you're at it.
The only reason this isn't yet glaringly obvious to everyone, is that the Euro and GBP are also stuck on a downward trend.
Speculatively, I believe the Euro and GBP will 'save' themselves out of trouble within the next 5-7 years, whereas the US will practically have to reinvent the earnings foundation of it's entire economy before it can break out of this current downward spiral of excessive debt.