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Dollar disorientation (or why the sky is not falling)
Washington Times ^ | December 5, 2004 | Alan Reynolds

Posted on 12/05/2004 1:16:34 PM PST by baseball_fan

Proponents of good and bad policy changes are once again trying to hitch their wagons to the dollar. The editor of ConservativeBattleline, Don Devine, writes that "entitlements [Social Security and Medicare] must be restrained if confidence is to be restored in the dollar." Does he think the euro is up because Europe is shrinking the welfare state? Conservative columnist Bruce Bartlett likewise found the dollar a handy new rationale for his year-old prediction of "a significant tax increase." Mr. Devine was impressed that Japan's prime minister "bluntly told Bush he must deal with American twin deficits in government spending and trade to stabilize the currency." He failed to notice the irony of a Japanese official lecturing an American about budget deficits. The U.S. budget deficit is 3.7 percent of gross domestic product, the same as Germany's and France's. Japan's budget deficit exceeded 6 percent of GDP for the past five years and is now above 7 percent. If budget deficits explained trade deficits or interest rates, Japan would have the largest trade deficit and highest interest rates. Mr. Bartlett's thesis that a smaller budget deficit would strengthen the dollar by shrinking the current account deficit is false. The U.S. dollar has declined as much against the Australian dollar as against the euro, yet Australia's current account deficit is larger than ours. Besides, current account deficits are unrelated to budget deficits here or there. The U.S. current account deficit was 0.8 percent of GDP in 1992, when the budget deficit was 4.7 percent of GDP. After the budget moved into surplus, the current account ballooned to 2.3 percent of GDP in1998, 3.1 percent in 1999 and 4.2 percent in 2000.

(Excerpt) Read more at washingtontimes.com ...


TOPICS: Business/Economy; Government; News/Current Events
KEYWORDS: currency; dollar
One often gets quite a different picture from Alan Reynolds than a Stephen Roach of Morgan Stanley for instance who comments at: http://www.morganstanley.com/GEFdata/digests/latest-digest.html. When things get too complacent, read Stephen Roach to stiffen resolve; when things get too scary, read Alan before stepping off the ledge. As to the correct answer, that is what markets are for I suppose.

Famed investor Benjamin Graham's advice about maintaining a margin of safety in the event things go against expectations is an invaluable first principle given what seems like the inherently unknowable future. That, ...and of course prayer. ;-)

1 posted on 12/05/2004 1:16:34 PM PST by baseball_fan
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To: baseball_fan

bump


2 posted on 12/05/2004 1:19:44 PM PST by woofie
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To: baseball_fan
"Famed investor Benjamin Graham's advice about maintaining a margin of safety in the event things go against expectations..."

I wonder if he used that explanation to justify his philandering to his wife.

3 posted on 12/05/2004 1:19:44 PM PST by billorites (freepo ergo sum)
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To: baseball_fan
the inherently unknowable future

I thought Nostradamus had it figured out

4 posted on 12/05/2004 1:21:32 PM PST by woofie
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To: billorites

What marital advisor recommends diversification as a relationship management strategy?


5 posted on 12/05/2004 1:22:00 PM PST by AZLiberty ("Insurgence" is futile.)
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To: AZLiberty
"What marital advisor recommends diversification as a relationship management strategy?"

I shudder to think what a Graham and Dodds value approach to dating would yield.

Unless you happen to be attracted to underperforming dowagers with fat assets.

6 posted on 12/05/2004 1:34:52 PM PST by billorites (freepo ergo sum)
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To: baseball_fan
Finally some common sense and data to back them up.

The simple fact of the matter si that the Chinese or Japanese cannot just "dump" their dollars without beggaring themselves as well.

If they tried to switch them all to Euros, not only would they beggar themselves but the Europeans would become the wealthiest unemployed people in the world and Europe would bleed capital like a stuck hog.

7 posted on 12/05/2004 1:39:34 PM PST by pierrem15
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To: AZLiberty

What marital advisor recommends diversification as a relationship management strategy?



The esteemed investor Peter Lynch often referred to diversification as "diworseification". His financial point being that spreading money around could actually have the effect of diluting a portfolio. I supposed that diversifcation as a realtionshop management strategy could also lead to diworseification. :)


8 posted on 12/05/2004 1:42:34 PM PST by Starboard
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To: baseball_fan

Thanks for posting this, as well as the Morgan Stanley link. For all of the otherwise good topics here on FR, there seems to be a surprising lack of educated and informed threads on the subject of economics -- most people speak from the heart, without a solid understanding of the science. Your thread fills the mind, as well as the heart. Thanks again, friend


9 posted on 12/05/2004 1:48:17 PM PST by Mudcat
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To: AZLiberty
What marital advisor recommends diversification as a relationship management strategy?

J. Lo's?

10 posted on 12/05/2004 1:49:26 PM PST by Always Right
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To: baseball_fan

Now don't you go and try to convince us the sky ain't falling.


11 posted on 12/05/2004 1:50:35 PM PST by Always Right
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To: Mudcat

You are very kind, thank you. As Mark Twain once said, "I can live two weeks on a complement."


12 posted on 12/05/2004 2:03:12 PM PST by baseball_fan (Thank you Vets)
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To: baseball_fan

"The U.S. budget deficit is 3.7 percent of gross domestic product, the same as Germany's and France's."

I didn't know that.
Maybe, it'll shut up my French teacher who keeps a deficit count posted in his room.


13 posted on 12/05/2004 3:00:33 PM PST by prayerwarriorJK (espresso saves my grades)
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To: prayerwarriorJK
"The U.S. budget deficit is 3.7 percent of gross domestic product, the same as Germany's and France's."

Since when is being as good as the french, good enough?

14 posted on 12/05/2004 3:23:40 PM PST by Moonman62 (Federal Creed: If it moves tax it. If it keeps moving regulate it. If it stops moving subsidize it.)
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To: AZLiberty
What marital advisor recommends diversification as a relationship management strategy?

My Mom wanted me to know about
the Birds and the Bees and
my Dad wanted me to know about
the Bulls and the Bears.

So What did you do?

The only thing I could. I started writing
covered calls on my sexual futures.

Huh?

I married a stockbroker.

15 posted on 12/05/2004 3:25:54 PM PST by grey_whiskers (The opinions are solely those of the author and are subject to change without notice.)
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To: baseball_fan
The difference between Japan or Germany and the US is that you need to borrow your money from foreign countries. People here and in Japan safe too much money. The domestic demand is too weak for any economical growth. so the state borrows the money the citizens safe and spends it.

In the US however people do not safe any money, so your government needs to borrow it from China and Japan. That means that on the long run you either have to transfer part of the wealth of your country to those countries or 'inflation' your way out of the debt (that only works because you have the worlds first reserve currency and your debt is in dollar, not in the currency these countries use, but it certainly wont do any good to restore the faith in the dollar). Given the economical situation there wasn't anything else that bush could have done in the last years.

Overall your debt-level isn't too bad. 4-5% of the GDP are not that bad and can be managed, if it's not caused by a longterm, structural problem (like it is in Germany and France). however you have those baby-boomers who will stop working in a few years and thats going to cost a lot of money, meaning you need to borrow even more money.

Your overall-debt level is between 60 and 70%, that also isn't much of a problem. Germany officially has the same level (we kind of messed up that whole reunion thing, i want that wall back!!) if you add the liabilities for pensions for state employees you can easily add another 10-15%. so, for now, not much to worry about, but if bush tax-cut plan doesn't work out you are going to get into serious budget-trouble in the next years.

to get to the point of this whole thread: of course the budget deficit and the trade deficit are not directly related, but both can damage the faith in a currency if they are too big.
16 posted on 12/06/2004 3:22:41 AM PST by wu_trax
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To: pierrem15

or the ECB could just buy their dollar for euro and it would have no influence at all on the currency market. under the current circumstances i dont think they would have much of a choice.

its not that bad just yet. back in 1996 the dollar was worth 1.35 DM, which would equal 1.45$ per euro today.


17 posted on 12/06/2004 4:42:59 AM PST by wu_trax
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To: wu_trax
Yes. a lot of the scare mongering is also forgetting that the Euro debuted at $1.17, so the rise to $1.35 from %1.17 does not look so bad.

The fact is that both France and Germany were hoping to boost exports via an undervalued Euro while practicing the usual mercantilist protectionism in the European markets.

Bush is just quietly giving them a big middle finger.

18 posted on 12/06/2004 7:31:36 AM PST by pierrem15
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To: Starboard
I supposed that diversifcation as a realtionshop management strategy could also lead to diworseification.

I believe it would lead to divorceification.

19 posted on 12/06/2004 7:53:24 AM PST by tnlibertarian
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To: pierrem15
Yes. a lot of the scare mongering is also forgetting that the Euro debuted at $1.17, so the rise to $1.35 from %1.17 does not look so bad.

no, it doesn't. as i already said in a few other threads on this subject, I'm not really worried about the value of the euro itself, just about the speed of the change. if the dollar falls too fast it will push the whole world into a recession, and noone could possibly want that.

The fact is that both France and Germany were hoping to boost exports via an undervalued Euro while practicing the usual mercantilist protectionism in the European markets.

what are you talking about? as far as i know the market is pretty much open. sure there are a lot of regulations within the EU, but they also apply to companies within the EU.
(and then there is ofc that stupid CAP which is a giant waste of money, but its not like agricultural goods are of any real significance for either the EU or the US)

we would not have set up the ECB the way we did if all we wanted is a low value-currency that would help us boost the exports. the ECB's only direct responsibilitsy is to keep the inflation within the target-area between 1 and 2%, thats its job and that is what they do (thats why there was no action on the dollar yet, i mean, if we really wanted we could do the same thing as the Chinese, its not like it would cost the ECB anything to buy as many dollars as they want).

If you look at Germany and Japan in the last 50 years, you will see that both countries managed to almost constantly increase their exports, even with their relatively strong currencies. its not that bad to have a strong currency, you get cheap imports, cheap capital, low inflation and cheap raw material (like oil for example) and products you use to build the things you want to export, that takes some of the pressure off the companies that try to export. if you then also manage to improve your productivity the exchange rates wont hurt you so much.
20 posted on 12/06/2004 8:09:58 AM PST by wu_trax
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To: wu_trax
what are you talking about? as far as i know the market is pretty much open.

I'm sorry but you are naive.

a) It is almost impossible for any American company to set-up a business that just imports stuff into France (even boutiques). There is no "law" against it, but you will simply not receive the required permits unless there is French co-ownership, employment guarantees and/or guarantees of using French suppliers.

b) Germany is easier, but I suspect any large importer of manufactured goods competitive with German products will face a lot of similar pressures as in France;

c) EU countries offer enormous subsidies to attract certain manufacturing sectors (like chip production) that are in danger of going extinct in Europe or because they figure it's better for the government to pay 50% of someone's employment cost than 100% of their unemployment benefits;

d) The Japanese and the Chinese play the same games;

There is virtually no other industrialized country that as as open a market as the US.

21 posted on 12/06/2004 9:02:11 AM PST by pierrem15
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To: pierrem15

"has as"


22 posted on 12/06/2004 9:02:59 AM PST by pierrem15
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To: pierrem15
if you want to complain about subsidies you should also take into account the whole taxation.
governments here like to tax a lot and then give back the money. that makes them look like they do something for the economy. so if you take real costs + taxation + social security madness + general bureaucratic madness - subsidiaries you still end up with costs that are a lot higher than in any sane economy.

sure there are some more subsidiaries for eastern Germany, but if the us should ever unite with a country full of insane socialists who think the state should solve absolutely every problem they could possibly run into, that is about 50 years behind in industrial development and that is about 1/3 - 1/2 of the size of the current us, i promise you, we wont complain.

also, there were quite a few cases about us-subsideries in the last years that you lost at the WTO, like those tax-free exports for example.
23 posted on 12/06/2004 9:18:37 AM PST by wu_trax
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To: pierrem15
just wondering:
do you have no support at all for the structurally weaker regions in the US? i would imagine that there are poorer and richer states in the US, even if the differences are not as dramatic as within the EU-25
24 posted on 12/06/2004 9:22:30 AM PST by wu_trax
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To: pierrem15
The fact is that both France and Germany were hoping to boost exports via an undervalued Euro while practicing the usual mercantilist protectionism in the European markets.

Bush is just quietly giving them a big middle finger.

And he is doing it to the Chinese as well.

25 posted on 12/06/2004 9:36:23 AM PST by Centurion2000 (Truth, Justice and the Texan Way)
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To: wu_trax
Some of what you say about subsidies via tax-breaks for certain corporations goes on here as well. But I suspect because the overall tax burden is less, it goes on to a lesser degree in terms of dollar amounts here.

Structural subsidies: this is hard to answer, but generally I would say no, we don't have structural transfers in the sense that a whole region of the US or state is given tax preferences or direct subsidies by the federal government. We do have some tax breaks for economically depressed areas, but these are usually limited to very specific areas (like inner cities) and are tax reductions made by state and local governmenst that don't amount to more than a few percent of operating costs. There are also (of course) specific projects that individual congressmen or senators can get funded if they have sufficient clout.

The US has been found guilty of impermissible subsidies by the WTO, but that's because we are so open about them. We don't go the route of the informal harassment of foreign businesses by using claims about permits/quality/hygiene/GMO etc. that you find elsewhere. If we have a ban or tariff or export subsidy, it's usually called something like a "ban" or "tariff" or "subsidy" right there in the legislation.

Contrast this with Europe, where Airbus does not have a formal export subsidy, but receives billions of Euros in tax breaks, an endless (and never to be repaid) line of low-interest credit, bribes paid for by the French government to other governments, and "defense" contracts that cost stupendous amounts of money for very little output (like the European airlifter).

26 posted on 12/06/2004 9:56:28 AM PST by pierrem15
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To: Centurion2000

And Japan and Korea :-).


27 posted on 12/06/2004 9:58:31 AM PST by pierrem15
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To: pierrem15
Some of what you say about subsidies via tax-breaks for certain corporations goes on here as well. But I suspect because the overall tax burden is less, it goes on to a lesser degree in terms of dollar amounts here.

in the end it doesn't make much of a difference. as long as the companies don't get more money than they pay as taxation i don't have much of a problem with the whole idea (except that it obviously would be cheaper not to take away the people's money in the first place, but thats another story).

Structural subsidies: this is hard to answer, but generally I would say no, we don't have structural transfers in the sense that a whole region of the US or state is given tax preferences or direct subsidies by the federal government. We do have some tax breaks for economically depressed areas, but these are usually limited to very specific areas (like inner cities) and are tax reductions made by state and local governments that don't amount to more than a few percent of operating costs. There are also (of course) specific projects that individual congressmen or senators can get funded if they have sufficient clout.

well, we have them, but ofc, we need them to compensate for the whole social security network. otherwise, if a city here once would reach a certain level of unemployment, it would be impossible for them to invest in infrastructure or whatever to attract new business. they would be simply bankrupted just by paying for the social security system.

The US has been found guilty of impermissible subsidies by the WTO, but that's because we are so open about them. We don't go the route of the informal harassment of foreign businesses by using claims about permits/quality/hygiene/GMO etc. that you find elsewhere. If we have a ban or tariff or export subsidy, it's usually called something like a "ban" or "tariff" or "subsidy" right there in the legislation.

again, if there are any standards within the EU they apply for everyone, probably even more, because for European companies that also includes all those regulations and general bureaucratic madness for the whole production process.

Contrast this with Europe, where Airbus does not have a formal export subsidy, but receives billions of Euros in tax breaks, an endless (and never to be repaid) line of low-interest credit, bribes paid for by the French government to other governments, and "defense" contracts that cost stupendous amounts of money for very little output (like the European airlifter).

i don't know enough about the whole airbus-situation to comment on it, but i got the impression they did pretty good in the last years.
28 posted on 12/06/2004 10:43:54 AM PST by wu_trax
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To: pierrem15

at what costs? if these countries only threaten to dumb the dollar the whole world economy, including the us, is going to be in serious trouble.


29 posted on 12/06/2004 10:47:14 AM PST by wu_trax
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