A Dollar Warning

Wall Street Journal ^ | Sunday, November 28, 2004 | Wall Street Journal Editors

[Sarah]

A Dollar Warning America can't devalue its way to prosperity. Sunday, November 28, 2004 12:01 a.m. EST President Bush has let everyone know he intends to pursue an ambitious second-term agenda. But if he wants to know what could spoil his plans even before his second Inaugural, he might consider the market reaction to his Administration's weak dollar complacency.

[BJungNan]

Yes but how much of that lumber comes back to the US as furniture ?

It comes back as handles on your hammers. I know that much for sure.

[jb6]

When the Fed calculates inflation, they take out everything that is variable: fuel, oil, food, etc. The claim is that it is to unpredictable to calculate, thus there is the claim of only 1% inflation, hahahahaha.

[jb6]

You want to save America? 2 things: 1. balanced budgets from our kleptomaniacs in Congress. 2. get rid of Roosovelt's Banking Reform laws that guarenteed to back the banks with Tax Payer funds. That should put a quick break on run away credit card issuing, which will cut down on debt spending.

[Smokin' Joe]

Iraq may be part of it, but the hurricaine season has had some effect on building materials prices, too.

[jb6]

Hah, in 1916 Woodrow Wilson said "My God, what have I done. I have doomed this republic by putting all the power in the hands of only a few men." This was in reference to the Bank Reform laws he signed in 1913.

[Mamzelle]

We've been selling a lot of those raw mat'ls (it's been amazing to watch concrete prices!) to China, because China is on a frenzy of public works projects. I really don't know much about all this stuff, am no economist but like to read about it, but everything on your list is "raw" stuff.

[Splatter]

When you have E.L.F. lobbyists (hidden under other names)raw material of any kind is hard come by. These scumbags are getting very active lately and don't believe they are not in high places with more power than just spray paint and firebombs. These homegrown terrorists need to be hunted down. Craig Rosebraugh, This means you!

[RadioAstronomer]

bttt for later read

[Iris7]

The article requires registration. As a matter of principle I cannot access it.

As far as the value of dollars versus European and East Asian currencies, there are a number of political and economic situations at work here. The Democrats hope to develop the "devaluation" issue into a wedge issue, for instance. For another, the flood of dollars going to the Peoples Republic of China is being used for, amongst other things, attempts to dominate future oil production. Certainly those dollars are used to purchase oil in quantities directly leading to SOME of the recent oil price increases. There are many other reasons as well.

Perhaps you are interested in hard currencies, as in the old gold standard. Under the gold standard dollar devaluation would have progressed much farther by now. Attempts to maintain local currency values for domestic political reasons in the face of the foreign exchange markets have lead to bad ends generally in recent decades.

One hopes that current incremental devaluation policies may forestall a sudden drop in dollar values. Extreme and sudden unemployment is much in the Democrat Party's interest so long as George W. Bush can be blamed.

[durasell]

Holy crap, we'd have a run on the banks (or ATMs, which ever)!

[Iris7]

Very simple, really. Examine the velocity of M3 calculated in reference to GDP at economagic.com. You have to be familiar with the M3 time series first, of course. Notice the inflection points in 1993.

What you are seeing is a flood of dollars, a huge increase in "liquidity". Massive increase in quantity supplied leads to lowered price. You are also seeing the cause of the market blowoff and crash of 2000. Lots of other things as well.

[snopercod]

I think you're mistaken on the origins of steel and lumber.

Dimensional lumber mostly comes from Canada these days, although some (Yellow Pine) comes from the Southeastern U.S..

Kitchen cabinets are mostly made in Canada, I think...at least the doors are.

I'm not sure where most of our steel comes from, but:

Washington, D.C. –- Based on preliminary Census Bureau data, the American Iron and Steel Institute (AISI) reported today that the United States imported a total of 3,467,000 net tons (NT) of steel in September, including 2,714,000 NT of finished steel. Imports in both categories over the past two months have been the highest levels in four years and, year-to-date (YTD), are up 47 percent compared to the same period last year. The 47 percent gain in finished steel imports is nearly three times the 16.3 percent gain in steel consumption. As a result, steel import penetration in the United States in this period has jumped from 16 to 20 percent.

Almost 100% of electrical devices used in homes today are made elsewhere. Plumbing fixtures too. Even 500# Kohler cast-iron bathtubs are made in China and shipped over here.

[durasell]

Are you saying that more dollars lowers prices? If so, I would tend to think you're wrong. More dollars chasing goods equals inflation.

[Iris7]

M3 time series (sorry to not leave links earlier):

http://www.economagic.com/em-cgi/charter.exe/fedstl/m3sl

M3 velocity time series:

http://www.economagic.com/em-cgi/charter.exe/var/vel-gdp-per-m3

[Iris7]

Since we are discussing the "devaluation" of the dollar, we are discussing the value of the dollar in foreign currencies. More dollars mean lower prices for dollars.

A lower price for dollars means a higher price for imported goods, and feed through prices for domestic goods. Inflation, that is, unless "liquidity" is curbed. A crash in the house market would have dire political repercussions, naturally.

I am sorry I did not make all this explicit earlier.

As far as inflation goes, it is probably not escapable.

There are good arguments that the Urban Consumer Price Index has been largely bogus since at least LBJ's time. The Producer Price Index is a more accurate inflation index, seems to me.

[durasell]

I agree. And also believe a bust in housing market is somewhat inevitable. This, along with its long term economic consequences will annoy many people.

[embedded_rebel]

"They're too busy arguing over what Greenspan's latest fart smelled like."

Why argue over something that Andrea Mitchell is an expert at or should I say "connoisseur"?

[Iris7]

Nice talking with you.

A housing market problem would not only put the owners underwater in so many cases but bust Fannie Mae, maybe. (Now there is a house of cards!) Followed by a massive "liquidity injection." High inflation and a terrible job market is the Democrat Party's dearest hope, so long as it happens on the Republican's watch. Nasty scenario, Ugh.

Of course the Chinese hold a lot of mortgage collateralized securities, maybe they will take the loss!! (Fat chance.)

[Flavius]

Your lumber and steel is due to giant sucking sound of Big Red China gulping up all the raw commodities...

[durasell]

Good talking to you. Here's another scenario, though. The banks, unwilling to repo the homes, would go into massive "work-out" mode similar to what they did with South American debt. People get to stay in their homes and the banks keep the loans on the books as "performing." Of course, there will be a certain percentage of people who object to paying $500,000 for a piece of property and building only worth $150,000, but I believe that percentage will be relatively small.