Posted on 11/22/2007 6:59:12 PM PST by PotatoHeadMick
Americans paused at Thanksgiving yesterday for the traditional annual audit of their blessings. If they'd been listening at all closely to the morose lucubrations of their opinion leaders, however, it would have been pretty slim pickings.
The pundits have finally run out of bad news to report from Iraq, where, unmolested by the morbid fascination of misery-seeking reporters, the locals actually seem to be belatedly enjoying the first fruits of their liberation. So attention has turned again, as it has tended to do from time to time these past 50 years, to the inevitable collapse of the American economy.
The declining dollar is for many an ominous indication that the long period of US economic supremacy is at an end. In the past month especially, a nation that usually remains in blissful ignorance of the daily fluctuations of the foreign exchange markets has been repeatedly reminded that the dollar now buys a fraction of what it used to — down 35 per cent against the pound in the past six years and 40 per cent against that fledgeling monetary superpower, the euro.
Much has been written about the eschatological symbolism of the dollar's fall and the financial problems that have accompanied it. The apparent consensus among commentators here in America and especially in Europe is that the US has become a kind of Third World country, awash in debt and sinking fast because of a collapsing housing market and a banking system in meltdown. And all this is supposed to reflect in turn a seismic shift in the balance of global economic power away from the US and towards Mighty Europe and Emerging Asia.
Let me take a moment in this season of cheer to raise a few objections. The first and most obvious point is that there are many reasons why currencies move against each other, often in quite dramatic fashion. Seismic, epochal, geopolitical shifts are not usually the best explanation.
Rather, more prosaic facts such as differentials in countries' short-term interest rates, the rebalancing of temporary financial and economic imbalances and sudden changes in demand for and prices of commodities such as oil produced by particular countries — all of these help explain the dollar's recent decline.
US interest rates are on a downward trend, while European rates are steady and might even rise. The US still has a vast trade deficit, which is being reduced by a continuing fall in the value of the dollar. Countries such as Canada, which has seen the largest increase in its currency against the dollar, have been beneficiaries of the steep increase in the energy products they export. Another factor behind the current movements is the sensible shift by the world's central banks to a more balanced portfolio of foreign exchange reserves.
For the historically short-sighted, let's remember we have been here before. Between 1985 and 1995, the dollar declined by 43 per cent against the world's big currencies — somewhat more than it has in the past six years. That period was also marked by dire proclamations of the end of US economic power. But it turned out that in those years the foundations were laid for the strongest period of US economic growth in the past 35 years.
If you're still sceptical, ask yourself this: is it probable that the shift in the relative value of the dollar and the euro represents a bet by the world's investors that Europe — strike-torn, productivity-challenged, demographically doomed Europe — is the world's economic future, rather than the US, or, let's say, China? All right, but this is different, say the Cassandras. The US has been living on borrowing for years now. The world has finally woken up to America's addiction to debt — all that growth has been bought on the never-never and now, at last, the bill has come due.
The first thing to be said is that the level of public sector borrowing in the US is very small. The fiscal deficit, at just over 1 per cent of national income, is smaller than in most major European countries. It's true that America faces a large long-term fiscal challenge from an ageing population. But it's a smaller challenge than that faced by most of Europe, Japan or even China.
So if government borrowing isn't the problem, it must be the private sector that's neck-deep in debt, right? The general view is that Americans have irresponsibly fattened themselves up on widescreen televisions and gas-guzzling four-wheel drives, all paid for with easy credit.
If you look at a simple measure such as the savings rate — the proportion of income that is saved rather than spent — Americans do look pretty spendthrift. It is close to zero in the US, compared with 10 per cent in Europe and much higher in Asia. But focusing on this one measure distorts the full picture of America's household balance sheets. The reality is this: why save when the value of the investments you own is increasing at rapid rates? The total value of mortgage and consumer debt is indeed up by a massive $5 trillion since 2001, according to the latest figures published by the Federal Reserve.
But consider the increases in the wealth of Americans during that period. The aggregate value of houses alone is up $8 trillion. The increase in the value of stocks held either directly or through pension funds and other investment instruments is higher by another $8 trillion. That's an increase in net wealth of American households of $11 trillion in less than six years. That's about $90,000 for every household in the country. As someone once said, 11 trillion dollars here and 11 trillion dollars there and pretty soon you're talking serious money.
All right, but isn't the US going into recession, you say? Maybe, but so what? The US is overdue a recession by the standards of the business cycle in the past 60 years. It's possible the housing market and related problems will tip America into another one. Provided the people responsible get policy right, it doesn't have to be a depression.
So the dollar is falling for good, sound reasons that do not require a millenarian view of the global economy. It is yet another thing Americans should be thankful for.
Our cheaper dollars are financing less of China’s military right now, which I’m happy about.
Perhaps the falling dollar isn’t such a bad idea for awhile. It does increase exports and brings more money here from oversees. Prices of goods will rise and consumers could feel the pinch.
IOW, the sky isn’t falling. :)
“Their bluff will be called”
Interesting piece, but I tend to agree with you. I think there will be significant consequences for China to that strategy. Their military has to eat, also.
I also think the Iranian leadership is extremely tenuous and subject to being overthrown. The cost of fighting and feeding troops in other countries is expensive no matter who is doing it.
As far as Chavez goes, push comes to shove, who would protect him from an invasion? He’s the ultimate big mouth with no backup.
Interesting. Their experiment with capitalism has left them with a non-Party middle class that might prove troublesome over the long term.
Perhaps they have decided that the time has come to "harvest" their prosperity, eliminate the middle class, and return to a situation where only the Party enjoys a non-peasant standard of living
Thanks. I stand corrected.
Agreed. I sell automotive diagnostic & tuning equipment online and our exports have doubled in the past couple of months. Very good for US exports.
So what’s happening to the dollar that Illegals are sending to Mexico? With slumping home-building starts, maybe things will improve our “border-crossers” issues?
Going back further. On December 6th 1941 our post Great War (WW I) military was atrophied, skeletonized. Our industrial base was in ruin from the New Deal policies of stand-in-line hand-outism -- also known as the "Great Depression". The Japanese had marvelous weapons and training, fight airplanes years ahead of ours.
We were doomed. Yep.
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The Chinese also overestimate their current ability to withstand hardship. They have NONE.
---all that's reported about the US economy is a bunch of doom'n'gloom lies,
---the last time the dollar fell this much we had the best economic boom in 35 years,
---Americans are not in debt, we're richer than ever.
You are talking about restaurants? are you serious? In order to get a belly full in Europe you have to pay a fortune in a restaurant and no they do not have more food variety than the US. How about their little micro cars that they drive, do want to drive this crap? Do you want to pay 8 dollars for a gallon of gas. About clothing? Nope Europeans do not dress better than Americans, in fact if you go to the streets you notice that the vast majority of them dress with American style cloth, jeans and shirts, the US have more influence on the way they dress than they have influence on the way we dress here. How about all the others things that make our lives better, bigger homes, electronics, computers, TV's, etc... they are all much more expensive in Europe than here. Even their own products are cheaper to buy here in the US than in Europe.
Now what other social services are you talking about? scrweed up healthcare service? Do you want this type of services? Or do you want to live on welfare with 400 dollars a week? Our standards of living is much better than Europe because our purchasing power in the US is much stronger, and that is a fact as 1+1=2, and if you do not see it then you are delusional.
We don't have any companies that export anymore. Our $1 trillion plus in exports last year somehow exported themselves.
The last time I looked, Germany, with 84 million people (1/5 of the US and 1/12 of China), was the world's largest exporter. Just thought I might point that out.
Don't blame Germany for France - the British and Americans put a stop to that and now you are complaining?
That's not as true as it once was. Things changed with the '06 election when too many freepers said we should stay home to "teach the Republicans a lesson". Check out "As Europe Cuts Corporate Tax, Pressure Rises on U.S. to Follow ...", America Can No Longer Stand Pat As Corporate Taxes Fall Elsewhere, German Corporate Tax Cut.
Custormer service is what separates the men from the boys.
Thanks for the correction.
Great, now I’ve read both...
And upon even further reading....It does not include gains, nor does it include pension contributions.
If for years upon years, we have had the lowest savings rate of any developed nation, then how come we are not a poor nation?
I’d love to do a more indepth study of the National Savings Rate, but need to find the places I can get more reliable and accurate information?
All our exports are first imported? That's funny. How many of our imports are first exported?
And in other news, the chocolate ration has been raised to 25 grams per week.
Do you ever stop whining?
In the US, savings is defined as income minus consumption. Stuff like retirement payments, social security taxes, and capital gains on investments are not included as income, but buying stocks and real estate are considered consumption.
That's a "savings rate" that only hard core America bashers could love. They cry that we have $6 trillion more debt than we had five years ago, not mentioning that over that same time we picked up an extra $26 trillion in assets.
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