Posted on 11/26/2004 6:17:16 AM PST by JoeV1
"Consumer demand in the United States grew at an average of 3.9 percent (in real terms) from 1995 to 2003, nearly double the 2.2 percent average elsewhere in the industrial world."
- While the details of these statistics are not included in the article, numbers such as these tend to be measured in the unit "dollars". Assuming this was the unit used in this case, this should hardly be a surprise to anyone as the dollar has declined in value by far more than 3.9% and the correction made in order to say "(in real terms) " is not provided here. This "3.9 percent" over an 8 year period may well be a completely meaningless number.
"Moreover, large federal budget deficits mean the government's savings rate is negative."
- The secret no one talks about in economic circles is that in any country where Keynesian economic policies are enforced by law (most of the world now), budget deficits at the national level are absolutely required except where a significant trade surplus can absorb the automatic drain on capital created by reserve banking and the fact that "new" money can only enter the system by way of a loan. This is a very important key to understand about macro-economics and one that no politician will ever admit.
This is an interesting mix of a typical NYT hit piece, but written by a real economist who could not help but end on a positive note: "If the world can manage the dollar's decline wisely, there is more reason for hope than despair."
I believe that dollar is at abnormally high levels and I feel that it is good for US that it is being corrected. The strongest layman evidence that it is good for US is that foreign governments from Japan and Germany to Russia are spending billions and billions trying to prop this artificially high level.
Would anybody in his right mind think that Japanese government spent $330 bln to prop the dollar from Jan 2003 to Mar 2004 because it is trying to make it good for US?
"As long as companies can have a TV set (or anything else made overseas for $2.00 per hour they won't pay a union worker 25$ per hour. That is a simple economic fact. Besides, if you were honest I believe that given the choice to buy a 25" TV made in China (or where ever over seas) for $189.00 and one made in America for $359.00 you would choose the lesser expensive one. Besides that the American mfg could not compete in world markets charging the price he must get to cover expenses and adding a profit."
Yuan is artificially set at below 50% of its real purchasing power, once it is corrected US TV will cost less. And, hey, this may be the least profitable thing to make in America. Just think about what reasonable dollar will do for aircraft engines, aircrafts, soybeans, insurance and advertising.
So, by your reasoning, we should debase dollar towards prosperity.
......and recession.
Canadian Loonie is close to >84 cents.
In general, increasing interest rates cool the economy.
If we are forced to raise interest rates significantly, expect the GDP growth rate to drop from its current 3.7%.
Anyone that argues otherwise is full of BS. Now if you think that raising the prices for everything is a good idea, and believe it or not sometimes it is a good idea, then you are ok with dollars buying less. Personally I would prefer a balanced budget and tarrifs, but a worthless dollar will get the job done too.
"Imports from China are not affected since their currency is tied to ours and my buying power hear [sic] in America has not been effected [sic] either." Wrong. China is in the process of decoupling as we speak; your buying power in the US has only been affected if you buy any gasoline, diesel, coffee, raw material goods such as steel, copper, cement (etc.); and a host of other products.
"Inflation is a pretty tame 2.5%."
Well CPI price increase number is up at an annual rate of 7.2% as of last month; may not bother you but certainly does bother me. Although the CPI does not reflect in fact inflation-deflation numbers, I buy a lot of the stuff that goes into the BLS market basket so I don't like seeing those numbers going up at a rate in excess of 7%.
Although crude oil and natural gas prices are in fact in a secular supply-demand driven up trend, offshore producer prices are increasingly driven by decline in the value of the dollar.
"I don't believe anyone seriously believes the dollar is any trouble that can't and won't be corrected at a time and to a level that is deemed reasonable." Wrong again. I do--you may want to discount me but I am in good company with Steven Roach and Doug Noland to name but two of a developing consensus.
"The problem is not that we are consuming to [sic] much but that other nations are consuming to [sic] little. There is a point made about savings but one can argue that home ownership is a form of savings, and a good one. I believe around 80% of Americans own their own homes and this is considerably higher then in other nations whose cash savings rates are higher."
Users don't own these homes--lending institutions do. Incomes are falling way behind debt service for debt incurred on residences as well as debt incurred for consumption and other consumer items. Historically when that happens, we get a correction where most of this debt defaults--the money advanced (credits) then disappears for the most part. The value of pledged security (like mortgaged houses) then drops like a rock in the hands of the lending institution.
Home ownership is not a form of savings either, at least in the technical economic capital formation sense. Utility of homes is as a place to live, not as a store of ready capital formation liquidity.
We are in fact consuming way too much more than we are producing by any test. That can't continue in any world. The question of the proper quantum of consumption by SE Asian producers is an open issue in which I don't have much of a direct interest. But off the cuff, if they are taking junk paper in exchange for what they produce, their production can't be worth much more than subsistance in the first place.
True at present that most offshore producers settle (get paid) in US dollars. False that the price is not affected by the decline in purchasing power of the dollar. Offshore purchasers (China, India, Japan and others) have excess paper dollars and thus are able to bid more and pay more for their crude imports, driving the price up.
Further, the Russians and the Venezulians are moving to sell in Euros; other OPEC countries are looking at the mechanics of selling for gold, euros, or other currency.
And about your #23: The more likely scenero for a short squeeze is as the result of a significant rise in interest rates which appears to be ahead in the immediate future. That will likely drive an increase in the value of the dollar but will have unwelcome side affects in virtually every segment of our economy.
Estimated by whom? I have seen nothing about this and I follow the markets closely. I agree with your premise that the impact on demand by high prices might make a difference but you haven't made clear what your claim of 1/3 of the increase represents. What is the baseline price from which you are starting? The 'terror factor' is also said to be adding a premium but the majority of the increase can be attributed to high demand from China and India.
These are good questions -- the answer to both are: the banks will take a bath. If people find themselves with mortgages on $500,000 homes worth $300,000 -- the prudent thing to do would be to walk away. Likewise from credit card debt. It's not moral, but it does make economic sense.
And for the record, to say the dollar is "weak" is kinda, sorta misleading. It's actually weakening. The fall is still in progress.
I always buy gold when I go to the Dentist ...I am trying to borrow money using my mouth as collateral. Can I sell my teeth on ebay?
True at present that most offshore producers settle (get paid) in US dollars. False that the price is not affected by the decline in purchasing power of the dollar. Offshore purchasers (China, India, Japan and others) have excess paper dollars and thus are able to bid more and pay more for their crude imports, driving the price up.
You seem to be saying that the buyer sets the price and he does not. Oil is not a luxury item for the Chinese or any other purchaser. It is a commodity that they buy because they MUST and they pay what the price is at the time they contract for it. The demand supply equation is limited in this commodity due to its being as necessary to the world economy as the air we breathe. Since they are paying in the same currency the contract is settled in the fluctuation of the dollar does not effect their cost. The cost of a bbl of oil does not rise in tandem with the dollar. If the purchaser had Euro reserves, purchased when the dollar was stronger, that he could sell to buy dollars to pay for the oil then he would come out ahead because his Euros buy more dollars at this time.
Further, the Russians and the Venezulians are moving to sell in Euros; other OPEC countries are looking at the mechanics of selling for gold, euros, or other currency.
But they have not done so as yet.
And about your #23: The more likely scenario for a short squeeze is as the result of a significant rise in interest rates which appears to be ahead in the immediate future.
Define 'significant'? Interest rates will rise when the Fed tightens the money supply or when trades now settled in dollars instead settle in a currency at a disparately higher value then the dollar.
That will likely drive an increase in the value of the dollar but will have unwelcome side affects in virtually every segment of our economy.
It has always been this way. High interest rates attract foreigners to our debt markets but hurt consumers at home. Low interest rates keep foreigners away and help consumers here. But low interest rates are partly offset by the underlying strength of the economy and so while 2 yr treasuries may only bring a yield of 2.6% or so here in America and the same maturity in Argentina, Chile, Mexico or Russia may bring a yield of 3 or 4 times that, most serious investors realize that a high yield is worthless if you run a serious risk of losing your original investment.
'In the process of' doesn't mean anything now. I know we have been after them to do this but have nothing to indicate they will comply. perhaps you can direct me to your source? How is my buying power affected when what we purchase in the international markets is settled in dollars. WE pay $50.00 for a barrel of oil today. If the dollar drops 3% tomorrow we will still pay $50.00 dollars for the same barrel. It is the seller that takes the hit as long as contracts are settled in dollars.
"Inflation is a pretty tame 2.5%."
Well CPI price increase number is up at an annual rate of 7.2% as of last month; may not bother you but certainly does bother me. Although the CPI does not reflect in fact inflation-deflation numbers, I buy a lot of the stuff that goes into the BLS market basket so I don't like seeing those numbers going up at a rate in excess of 7%.
One month does not a trend make. These numbers are almost entirely due to energy and food both of which are highly volatile and are extracted from the reported figures to arrive at the core rate of inflation, which has been, over the years are more accurate means of forecasting.
Although crude oil and natural gas prices are in fact in a secular supply-demand driven up trend, offshore producer prices are increasingly driven by decline in the value of the dollar.
"I don't believe anyone seriously believes the dollar is any trouble that can't and won't be corrected at a time and to a level that is deemed reasonable." Wrong again. I do--you may want to discount me but I am in good company with Steven Roach and Doug Noland to name but two of a developing consensus.
And if the central banks suddenly step in and buy dollars in a huge way, the decline of the dollar may very well be reversed to the same extent it has declined. The underlying strength of this economy and the nation as a whole is undeniable and it will be a long time before any other currency will be a safe haven for other nations reserves to the extent ours is. The decline is mostly driven by speculators who move quickly in and out of commodities and in this case use fear to drive the dollar down, a commodity they have shorted. I clearly recall in 1974 that the dollar was in a far, far worse situation then today and in fact our friends the French actually refused to accept dollars in payment for anything, stranding tourists there until the situation was resolved after about 3 days or so.
"The problem is not that we are consuming to [sic] much but that other nations are consuming to [sic] little. There is a point made about savings but one can argue that home ownership is a form of savings, and a good one. I believe around 80% of Americans own their own homes and this is considerably higher then in other nations whose cash savings rates are higher."
Users don't own these homes--lending institutions do. Incomes are falling way behind debt service for debt incurred on residences as well as debt incurred for consumption and other consumer items. Historically when that happens, we get a correction where most of this debt defaults--the money advanced (credits) then disappears for the most part. The value of pledged security (like mortgaged houses) then drops like a rock in the hands of the lending institution.
Please, you are claiming banks own 100% of the value of homes mortgaged and that is not even close. A home appreciates at about 5-7% on average nationwide longterm) and that is about 3-4% above current inflation. I don't believe moist people have floating rate mortgages and equity is built on fixed rates which increases as interest rates decline and refinance occurs. Even fixed rate mortgages are capped in the amount the rate can rise in a 1 or 2 year period and over the life of the loan.
Home ownership is not a form of savings either, at least in the technical economic capital formation sense. Utility of homes is as a place to live, not as a store of ready capital formation liquidity.
I just couldn't disagree with you more that home ownership is not a form of savings. I bought a home in 1968 for 21,500 and took a 16,500 mortgage at 6% (20 years). I sold the home in 1995 for $220,000 owing nothing on it. I then purchased land on Cape Cod in MA and built a home on it for a total cost of $242,000. Today, about 10 years later the home is valued at about $800,000. I realize using this area distorts the value a bit but still, even adjusting for inflation the return on the first homeis healthy. Most people who own homes while they are raising their family's will sell those homes, move to a less expensive area or into a smaller home, Town-home or condo and pocket the difference. Sounds like savings to me.
We are in fact consuming way too much more than we are producing by any test. That can't continue in any world. The question of the proper quantum of consumption by SE Asian producers is an open issue in which I don't have much of a direct interest. But off the cuff, if they are taking junk paper in exchange for what they produce, their production can't be worth much more than subsistance in the first place.
Probably we need to save more, which would cause us to spend less. But the problem is also that other country's save to much and need to be coaxed into spending a bit more. Nothing drives an economy like consumption. I fact it is all that does drive the economy. Maybe we can get the euro nations to cut taxes? (a joke)
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