and this guys want to balance us.
Posted on 11/16/2004 2:56:08 PM PST by RWR8189
It rises, it falls, it's bought, it's sold. On how much of our fate does the dollar's height have hold?
"DOWN AND DOWN I go, . . . loving the spin I'm in" might have been written by Harold Arlen and Johnny Mercer as an anthem for the dollar. As it spins down, cries of both glee and anguish are heard in the land, and economists scramble to offer explanations.
Some of these experts are confessing confusion, as all--well, almost all--signs point to dollar strength. The latest jobs report shows that the economy is steaming ahead. The Fed has again raised interest rates. Investors are pouring cash into shares, consumer confidence and spending are up, oil prices are down, and retailers are rubbing their hands in anticipation as the Christmas season approaches. Meanwhile, business confidence in euroland is declining, reports show that the E.U.-U.S. productivity gap is widening as the European Union refuses to implement the reforms promised four years ago in Lisbon, and domestic demand in Europe remains flat at best. In short, everything seems to be in place for a dollar rally. Yet we see a $1.30 euro and hear talk of a $2 pound.
And down and down the greenback goes, dropping some 8 percent against the euro and 7 percent against the yen since Election Day. Exporters couldn't be happier, as their goods become cheaper in foreign markets. Bush's Treasury, which continues to say it supports a "strong dollar," is quietly celebrating in the belief that the cheaper dollar will begin not only to stimulate exports, but will also make imports more expensive, reducing the $600 billion trade deficit that most economists say is approaching an unsustainable 6 percent of GDP.
BUT THE LOSERS are also being heard from. Oil producers, who trade barrels for dollars, are grumbling that their cartel-inflated prices are declining in real terms. Jean-Claude Trichet, head of the European Central Bank, calls the dollar's fall, and the consequent rise in the euro, "brutal." And the president's home-grown critics have taken to the editorial pages of the Wall Street Journal to announce that "the great American middle class didn't re-elect President Bush so he could debase the currency." It is not the trade deficit, they argue, but excessively loose monetary policy that is fanning a flight from the dollar by investors who see an inflationary surge on the horizon.
There is, in fact, both more and less to the dollar's slide than most news stories would lead you to believe. The "more" is that if investors stampede out of a falling dollar, the U.S. economy might be in trouble. A depreciated dollar makes imports more expensive, and eases the competitive pressure that imported goods create for the made-in-USA variety. That means higher inflation, which would force the Fed to raise interest rates sharply, curtailing business investment, driving down the house prices that, when rising, add so much to Americans' wealth and optimism, and forcing consumers to retrench to meet the higher payments on their credit card debt.
The possibility of such an unpleasant drop is far from zero. The Chinese authorities must find work for their nation's rapidly urbanizing masses, and so are eager to keep their export industries operating at full tilt. To prevent the renminbi from rising, China has been buying dollars, and using those dollars to buy Treasury IOUs. That keeps U.S. interest rates low and stimulates growth in the American market, which then can continue to suck in all those low-priced T-shirts and sneakers that fill the shelves at Wal-Mart. Indeed, a lot more than apparel: on a recent visit to a Wal-Mart my wife and I were astonished to see stacks of shiny made-in-China GE and Sunbeam microwave ovens on sale for $29.99.
BUT THERE ARE INDICATIONS that the Chinese have had enough of this game. Rumor has it that China has been selling dollars and buying Asian currencies. If China indeed decides to end or moderate its support for the dollar, the dollar's slide will accelerate, with all of the consequences described above.
That's the "more." Here's the "less": When Ronald Reagan was in the White House, the economy was booming, the twin budget and trade deficits were rising, and the dollar was strong. In 1986, the finance ministers of the leading trading nations met at the Plaza Hotel and agreed to help the already falling dollar to move lower--by 40 percent, as it turned out. And lo and behold, the world did not end.
So a further decline in the dollar might prove a tonic rather than bad medicine. Think of it this way: A consumer who finds that the $1.30 euro makes a winter break in Spain a bit too expensive, will head for Florida, stimulating growth there.
The "less" that there is to this story also includes the possibility that the large trade deficit will in the end prove more sustainable, and for longer, than economists steeped in academic theory may think. The Chinese are riding a tiger, and can't easily get off. If they stop supporting the dollar, the value of all those bonds, notes and other dollar-denominated assets they hold will fall, with some experts guessing that a further 20 percent decline in the dollar will wipe as much as 3 percent off China's GDP. The Japanese authorities, too, are worried. Their economy's renewed growth is heavily dependent on exports, and they are not likely to sit idly by if the yen continues to rise relative to a falling dollar. So the Ministry of Finance is poised to resume intervention to shore up the dollar.
In short, the good news is that supporters of the dollar can't easily beak their habit, and that even if the dollar does continue to dance to the Arlen-Mercer tune, the enormously resilient American economy will adapt without a major hiccup, as it has in the past.
Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.
We may find that Bush actually holds spending somehow...something about his "legacy." We shall soon see.
The only thing that worries me is if we cut back on R & D funding. We need some sort of consensus that raises that substantially over time. This means, of course, going after entitlements. We will see. With Bush I am beginning to think that anything is possible.
Thought this was going to be about strip clubs.
I'm just a pedestrian in this stuff, but I've been amused by it ever since planning an Italy trip last Spring. Turns out we timed our euro buy as best as possible over the last year.
So here we are again, and the euro can't bust either nut or a screw or a buck-thirty. It's like Bill Clinton on an intern: desperately wants it both ways, but'll have to settle for the cheap thrill. The dollar's decline has paid in anti-Bush rhetoric more than anything else. Sure, quick bucks have been made a-plenty, but only with good timing, which, as ever, is nine-tenths of wisdom. Like the 1970s gold hoarders, the dollar-shorts that bank on American political doom will spend their lives watching the clock.
Anyway, it's all quite something to watch. I doubt a Chinese sell-off. As China's growth stabilizes, they'll need to throw those bucks back into a market with real value. Look for over-valued, high-end real estate deals and the like. America has a long, long history of ripping off ferners. Any bets on how the Chinese-R-Gonna-Pay? (Heh, didn't we buy Taiwan time through the '08 Beijing Olympics?)
The biggest sign that the dollar's fall is over: the MSM has turned it into news. Selling the greenback short was a profit game a year ago. Now that everyone knows it, it's over.
The EU was stung very hard in 2000 when the US dollar based equities and markets took a plung, along with their investments, which in turn hurt budget planning which need those returns to fund the socialist economies of EUroland. The EU will not easily be re-attracted into US markets or stocks, but this weakness in the dollar has the political and economic potential to hurt our greatest detractors, e.g., Herr Schroeder and Comrade Chiraq, and to a bigger extent but of lessor import the Kings of Beligum and Lexumbourg.
A weak dollar will reverse out flows of dollars, inflows of imports which coupled with all the rising indactors int eh economy - plus the revamped tax code which will stimulate TAX RECEPIPTS as a dividend.... the US Economy will be back in everyone's Eyes and the US Government's debt wiped out. Regean-nomics is real given the time and Bush got things rolling 10-months ago - he now has four years to watch the economic hopes of democrats sink with prosperity!
and this guys want to balance us.
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