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.
Not only more export, but less export competition for business that only supply the domestic market. For example, Canadian and Mexican ag is less a factor for US farmers now.
What? Do you mean they'll turn to the world's remaining superpower and strongest economy for their investments? Shocking.
Let's see what all the doom and gloomers have to say. Good article.
That savings rate does not include 401k plans, other employer sponsored plans. If you factored that into the national savings rate, you’d see a different picture altogether.
It is good news! A stronger manufacturing base will strengthen our Nation. And here’s some related news for a grin.
Why Wait? More Stores Open for Thanksgiving Shoppers
http://www.freerepublic.com/focus/f-news/1929467/posts
Yes, when the get rich quick schemes fail, we’ll more than likely see some renewed interest in companies that have real earnings, with decent valuations. You can’t blame investors overseas for avoiding the US market, despite valuations that are at buying levels, the currency factor has pretty much kept them out of here. Eventually the US dollar will strengthen, and a very sudden up move should ensue?
I've read that enough times to believe it to be true, but what is the rationale? Can you explain the underlying methodology?
Nor does it include premium products such as life insurance cash values and annuities does it? How about people who make regular payments into mutual funds?
Seems as stupid as not including food and energy in the inflation number.
I’m going to guess, that the reason why it is not counted, is the limited ability to access the funds. So, yes, the money can’t be used as savings for near term emergencies/needs/desires, but it certainly goes a long way to fund retirement? Since most Americans will live longer as retirees, than as productive workers, it seems only logical that Americans do save a significant amount of discretionary income for this cause. Also, the tax advantages and corporate matches make the decision pretty easy too.
A large 401k balance, also creates consumer confidence. Obviously if you feel financially secure for retirement, then the idea of spending some money on luxury items, entertainment seems normal.
Maybe. That market is so vast and liquid that sudden, gap moves of immense proportion are rare. It will, IMHO, be a prolonged upward move that could last for years.
I didn’t know about insurance, but that’s pretty interesting. Are you sure about mutual funds? I also don’t think they include investment into r/e, the equity that is created within that holding.
Frankly, who wants a developed economy, only putting money into bank products? That is hardly good for economic growth is it?
The USD move down sure has been a big one! Looking at a long term chart, the USD took a massive plunge back in the very early 80s, coincides with the Reagan bull market. Just a hunch, but when the dollar does turn, it will be very sharp, last a long time. I base this on the amount of money that is at the disposal of speculators, and their stated intentions of doing a complete trade reversal, going from short to long. Either way, I can’t see this current economic connundrum lasting much longer, something’s got to give, and very soon. Will be very interesting to see what consumer spending forecasts are like after this holiday w/e?
Hey, if you owe money, does not a discounted dollar mean a discounted payment, principal?
Ask Airbus how they feel about their “strong” currency. You can already hear the foreign govts screaming unfair/foul at the fed policy that is creating this weak dollar...
Yes, there are some drawbacks, but the big one, spiking costs of borrowing, are not in the mix right now.
Hey Air bus is hurting. But you know what. So is every American that actually has savings. The day may come soon when it costs $1000.00 for a loaf of bread. Just ask other country’s that have gone down this road.
Dollars are ounces. if you make them smaller, you just count out more to make your pie.
Many people are making periodic payments into variable and fixed annuities also. These are purely retirement products.
As for mutual funds, I can't tell you how many times I have had mutual funds wired into accounts that I am taking over that have a history of periodic payments. I know because we have a hell of a time figuring out the basis for possible future sale.
Bank products are eaten up by inflation and taxes. There are many products out there that are sold as alternatives explicity to taxable CD's. And, no I don't think home equity is included. Even though a lot of seniors downsize and take out equity to retire on.
Oh, yes. And even better, outsourcing or even relocating to foreign countries (something that many FReepers go ballistic over) becomes more and more unattractive to American companies as the dollar falls. In fact, companies in other countries will outsource their work to the US as being more economical for them. So a falling dollar means more American jobs.
Even worse for our trading partner China - a falling dollar means that their products are therefore less desirable.
I got wind of a Goldman Sachs report to its clients about a month ago. They said the same thing. Currency RSI's show extremely overbought. Sell.
They were a month early SO FAR but probably right on the major direction very soon.
The third traditional reason to save was for a big purchase, but today we just put it on a credit card.
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