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.
Also, when the currency weakens, the business climate improves, a strong economy making a stronger paycheck. Later, the only thing that appears lower, is the debts you owe.
Again, I don’t want to totally dismiss the risk/threats of a weak currency, but they should not be overstated either. Frankly, a very strong, unusually strong currency is far more dangerous. See Japan as an example of that, and give it time, China will make Japan look like a very healthy robust economy...
Um... no.
Basis...
2 yrs ago, my partner and I took on the task of trying to reconstruct the entire history of our book. Our current CF is quite good, with good technology. In 6 weeks we’d accounted for nearly all the dollars in our 1200 hhld book. Frankly, I’m very proud of that project, and my colleagues can’t beleive we pulled it off.
The secret/trick of mutual fund recreation of basis? Hysales hypos, accurate as heck, and very quick. You do need to have the purchase date, initial investment, current value, at least two of those three numbers. Then, you need to obviously know if they were reinvesting divs/cg, and whether they were sys inv in, or w/d.
BTW, we’re totally on the same boat on ins products...
Great points.
Any idea GS outlook on oil? Do they think that has reached the end of the line too? You do have to give them credit, they called the number, 100 for oil, when that number looked ridiculous.
What is so hard to understand here. You have $100,000 in the bank. You spent many years saving it. The dollar tanks and in a couple of years your savings only buys $50,000 worth of stuff. If things get really bad then it can be anything down to near Zero. It does not matter what people get paid. This is money that took years to save. To top it off the fed lowers, and the bank pays no interest on money that is already losing value. It is not good for anyone who played the game in an honest way. And yes you might be able to pay off your debt easier- If you still have a job under those conditions. But you will not be able to charge anymore because credit will dry up- and even if you could then the new prices of things will be out of reach for you. But anyone with savings invested in USD will see the value of there savings destroyed. Why? So that those with Credit can get a free lunch?
It is not only Democrats that are seeing tough economic times right now. Any business related to home sales and home construction are definately feeling a slow down. And that is plenty of businesses. It is not just griping. Don’t bury your head in the sand.
List of exporting companies please.
Actually I believe that the latest economic numbers on this showed that both imports and exports were down. So much for the theory that we would sell more to other country’s.
All auto makers (GM, Ford, Chrysler).
All electronics makers (those we have left).
All our aerospace companies (like Boeing).
Our agricultural exports (yes, even our family farmers, much less ADM.)
Our wineries (Napa Valley is very, very happy about this).
Our manufacturing-for-export sector (Federal-Mogul, Bridgeport, Caterpillar).
Basically, anyone who sells goods made in the US to overseas markets.
Pick up a Thomas Directory. Chances are that everyone in that book save for US offices of foreign companies is VERY happy about this.
Conversely, those import competitors become much less desirable because of their escalating prices. As I recall, you have been a staunch defender of the Big Three automakers. Well, this is a BIG help to their recovery efforts.
Hey, you could do a great job promoting me! Go see pro, to protect your hard earned savings. If you don’t NEED 100k in cash, why not invest it prudently, in a responsibly invested portfolio of investments, or real estate?
Revel, that is exactly why people should invest, protect against loss of purchase power. Fortunately, most people get that, and don’t put their life savings into savings accoutns, bank cds, or only fixed rate investments.
A good investment advisor typically will suggest a person to have at least 6 months worth of living expenses in cash, and enough money to cover the known capital expenditures they will have for the next 2-3 years. After that, some asset allocation of investments is the right thing to do.
You were incorrect. Search FR, imports were down slightly, manufacturing and exports were up.
They need doom and gloom so we will elect them to save us.
But it is bigger than that too. Even a business that does not export benefits, especially when one of their competitors is say Canadian or Mexican. Take an apple farmer for example, that does zero export, they see less domestic competition from say Canada? Tomatoes, less comp from Mexico. Loss of foreign intervention, is great for these domestic producers.
And how about shopping malls by the borders? Mexicans and Canadians right now are flooding into our country every day, waiting in lines for HOURS just to spend their money here. And when they are here, they stay in hotels, use our stores, entertainment, etc. Things are now so cheap, it warrants flying to our country even, from Europe or Asia.
Well what I read..I read on an economic forum. The fact is that as the dollar falls then the price to import energy goes up. That kind of offsets any benefit’s of increased exports anyways.
Hmm. Never thought of hypos. Thanks. I'll look into it.
Yup, and let’s not forget those service providers in the US.
Call centers will start moving back to the US because it’s cheaper to hire US citizens to provide support than it is to hire Indians and train them up (even if you do not count in the cost of angry customers who have had to deal with Indian phone support). Canadian and UK companies will move their support centers here, along with other countries’ companies’ English-language support centers.
US Information Technology will see a nice big benefit from this as well - US programmers are pretty much the best, and now they’re some of the cheapest.
I do know that Buffet can't pick tops and bottoms. (Only monkeys pick bottoms, lol.). But he sure as hell comes closer to it than anyone I've ever seen.
Any idea GS outlook on oil
No clue, but if they're keying off of RSI's got to believe they think there's a top near here.
This assumes that there are no domestic energy supplies and/or that the foreign energy suppliers decline to price compete with the domestic ones; a case which is not true.
I don’t think that you are going to see good gains in those funds in this environment. We are heading into a recession. And a large one at that. You would have to risk foreign equities. But we are pulling the rest of the word down too. But you stand a really good chance of losing money that way too. stocks are high risk. If you go for a high return then you also put your neck out for a high loss. Probably one of the best things you could do is to just convert your money into another currency. If you had put that $100.000 into euros about a year ago then what would it be worth now? If the Euro had only gained 10 cents then you could convert back to USD now and have $110,000. And that is not counting any interest you may have earned. So it might be more like $115,000. If the Euro went up 20 cents then you are talking $130,000+. How many funds are you going to get a return like that?
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.