The Dollar Continues To Decline
A New Leg Downward, as we continue to export inflation
By blackhedd Posted in Dollar | Economy | federal reserve | inflation — Comments (50) / Email this page » / Leave a comment »
Back in November, I wrote about the fall of the US dollar (here and here). The decline was just getting under way at that point, as cuts in US policy interest-rates started having their effect.
Since then, the Federal Reserve has cut still farther. In November, the dollar had fallen to $1.47 against the euro before recovering somewhat. The trend was intact, however, and now the dollar is all the way down to $1.53. The betting is that the Fed funds rate will fall to 2.5% this month, so the dollar probably has farther to fall.
Is this really bad news? Or more like neutral?
Read on...
The United States is in a remarkable position with respect to the management of our currency. The dollar is still the primary reserve currency. (Even after recent gains by the euro, some 63% of world central-bank assets are dollar-denominated). Many global commodities are priced in dollars, including oil, industrial metals, and staple foodstuffs. And some key industries (like airliners) and even whole economies (like China) are closely tied to the greenback.
We have thus been able to pursue an extremely loose monetary policy in recent months without suffering tremendously from the resulting inflationary effects. Instead, we have been able to simply export our inflation to other countries, who are feeling the pinch much more than we are. (Our economy is much less affected by commodity-price inflation, including higher oil prices, than others are.)
In addition, we continue to benefit from one of the most unusual phenomena in financial history: a continuing "savings glut," in which banking and government authorities in many developing countries choose to store huge amounts of money in the form of US government debt.
So there appears to be both a structural basis as well as a policy basis for the continuation of low US interest rates, across the yield curve. And that suggests that the ingredients are in place for long-term dollar weakness.
Given a choice, why would everyone else in the world continue their exposure to the US economy (and suffer the effects of our currency weakness, including ragingly high commodity prices)?
Intertia is one reason. (And don't underestimate it. Look at the huge capital losses that central banks are taking on their dollar reserves. If you don't sell under these circumstances, it's hard to imagine when you would ever sell.)
Another is the fact that it's generally quite easy to do business in the US. (Free markets really are a good idea, after all.)
Most importantly, however, the US continues to be a demand driver for the rest of the world. We're completely willing to buy stuff from other people. And they're completely willing to keep selling stuff to us, as long as one of two things remains true: either we have stuff to sell them that they want, or they continue to be willing to hold our currency.
For decades now, the substance of countless scare-stories has been that, indeed, the rest of the world will someday decide to stop holding our dollars. And then, the sky will fall.
But it hasn't. It's quite true that certain traditional buyers have considerably reduced their demand for US debt over the past year. The Chinese barely show up at our long-term Treasury debt auctions anymore. But still the auctions succeed, and long-term interest rates continue to be very low.
And strong demand for US capital assets continues. Ultimately, the people who manage sovereign wealth have to invest somewhere. And they've been buying stock in American companies (especially distressed financials) and hedging against dollar inflation by buying stock in commodity producers around the world.
Another scare story is that the rest of the world will start generating its own final demand and then no one will need us. While the first part of this has definitely been happening, the second has not happened, and won't happen. Our economy is just too big and too tightly integrated with everyone else's.
Why would readers of a conservative political blog care about all this? Because it's up to us to promote government economic policies that preserve the basis for continued high living standards in the US.
The weak dollar doesn't concern me per se. What does concern me a great deal is that the productive capacity of the US will increasingly be diverted into areas that generate relatively little tradable value.
And this in fact is a political issue. Because one of the largest growth industries in the United States is government.
Regardless of who is elected President in the fall, there will be continued political pressure to increase the commitments of all levels of government as a proportion of the total economy. And although I would welcome discussion on this point, it's probably inevitable that this will continue.
That's a problem because the government business doesn't operate so as to maximize economic utility, as private business does. Like any large business enterprise, the government seeks primarily to entrench and extend its power. But, the people who fund the government generally do not counteract its desire to maximize power at the expense of utility, as is the case with private businesses.
And who are the people that fund the government? Well, there's us taxpayers, but we don't really count because we have no free choice in the matter. But there are all those people around the world who are holding our dollars, and decide (by their actions) on a daily basis whether to continue to do so.
So far, inertia and American-generated demand are working in our favor. In addition, the accumulation of American capital assets by foreigners will continue. European companies like Airbus will respond to the weaker dollar by transitioning more of their cost-base from euros to dollars, especially as their currency hedges start to run off. (Translated from geek-speak, that means they'll start building things in the US, just as the Japanese have been doing for twenty-five years.)
So the sky isn't falling. Yet.
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Yeah. Been there, but that was just before the Gulf War, in 1990. We thought the exchange rate was not great back then, but I'm sure it was nothing like what you have now. I didn't even bother with the VAT form unless it was a purchase of some size. IIRC, it was about a German Mark and a half to a buck, and about 1.8 Dutch Guilders.
Boy, I wouldn't want to do it today. I probably couldn't even afford to go out to eat.
of our soldier son's finances. He's currently in Germany, off to Kosovo tomorrow. The costs are astounding! Then the credit card companies scam you with exchange charges to make it worse.
In Vino Veritas
...goods in dollars, think about what it's like for airlines when they buy Airbuses (which are priced in dollars but made by people who are paid in euros).
That's why it's possible you'll start seeing some Airbus operations moving to the US. Or China, which monetarily is nearly the same thing.
(That's assuming Airbus management can pull it off. It's not very easy to just cut costs for a European business. Why don't airlines do the smart thing and just buy from Boeing, you ask? Because Boeing can't make them fast enough.)
There's only so much a 21 year old soldier with time on his hands can do or at least can pay for in a transaction that his mother can see. I suspect some of his cash transactions might be interesting but that sort of purchase is relatively cheap in Europe.
If anybody here in Alaska had a brain, we'd be trying to make airplanes here: low land costs, low energy prices, relatively low labor costs, very low taxes. But we're trust fund babies and just let the bankers and investment officers earn money for us then we fight over who gets what part of the pie.
In Vino Veritas
I never thought about it, but you're right! You're describing the exact thing that countries with too much mineral wealth often go through.
The state of Alaska needs a sovereign wealth fund. And your first investment should be to acquire Citigroup.
;-)
All subsurface mineral rights are owned by the State. If oil starts spouting out of your back yard, the State might send you a thank you letter, but it's the State's oil and the State's money. 25% of all revenue from non-renewable resource extraction goes to the Alaska Permanent Fund, sold in the beginning as a "Rainy Day" account to support the State when Prudhoe Bay played out. Part of the way it was sold was that it was required to pay a dividend to the citizens. It was actually pretty well thought out; each year when the earnings are posted, the fund is "inflation proofed" from those earnings by puting some amount back in the corpus to account for inflation. Of the remaining earnings, half are distributed per capita and the other half are available for appropriation by the Legislature. Mostly the second half has gone to the corpus but in the lean years some of it has been spent. The Fund is worth about $40BB these days and is invested in all sorts of property and equities.
The "sorta" part comes from two things: the Fund is very risk averse because that damned dividend has become the be all and end all of life here, and, it has never been willing to just outright buy companies and have them run for the benefit of the State. It owns a lot of some publicly traded companies, but it isn't a player. Were it under my control, I would outright buy some companies that could be of use to us. A financial might be good, but my interests would run to things that fit us well; an oil company, oil field services, machine tools, heavy equipment, mining machinery, and, yes, maybe an aircraft manufacturer and a ship builder. It's kind of Third World, but so are we.
In Vino Veritas
A very interesting concept that I've never heard called that before (but that was discussed in its essentials quite a bit during the recent Australian elections, Australia being another sufferer in recent years).
...and, as I meant to say above, thanks for the tidbit, and a very interesting diary!
operation to Mobile.
Alabama has cheap labor and is giving huge tax incentives to corps. relocating there.
with crude over $100 per bbl and a jet crack spread of around $20 on top of that.
There's a question buzzing around the industry - does this industry actually WORK at $100 per bbl?
....COLA for living in the UK?
vary by grade, time in service, living quarters, and number of dependents.
For this pay period in Germany, our COLA rate is 52.32 per day. Mildenhall is at 58.48 per day.
You have to remember that hubby is an 0-5 with over 16 years, and 4 dependents, so our rate is pretty high.
An airman first class (two stripes) with no dependents living in the barracks at Mildenhall is getting about $10.00 extra a day. About $7-8 here in Germany.
Gas is 3.26 at the exchange this week and we are the cheapest place in Europe. My friends in Holland are paying 3.78.
We are going to London over Memorial Day and I am currently searching for hotels. Oy! That is even worse than finding one in Paris for a decent rate.
We are headed to Garmisch this weekend and will stay at Edelweiss, buy our lift tickets at the Hausberg and take our own bottled water to La Baitta when we go eat. Still water (no gas) is more expensive than beer at a restaurant. Too bad I can't just let the kids drink beer.
Certainly well off topic, but re. hotels, I've found some great deals of late via wotif.com.
I wasn't aware of it, but I'm always looking for something new down there.
from Garmisch awhile back. Seems my son and a couple of his redneck buddies went there and along the way disassembled a bar and several of its patrons. The authorities and the Army hit them in the one place where they could be sure they'd feel pain, the wallet. Cost him a stripe, again. I'm starting to think that if that kid stayed in for the whole twenty years, he'd retire as a private.
In Vino Veritas
for R&R when the troops come in from Iraq, Afghanistan, and other places.
It is in Bavaria and I imagine they have very little tolerance for out of control young men.
Sorry he is having to learn the hard way.
the hard way. The trouble is, he isn't learning and keeps doing stuff. He's starting to remind me of the Pollo character in HBO's Rome series. The only time he's happy is when they're in the field or in a combat zone. He was happy as the proverbial pig in you know what in Afghanistan or when he was exercising with the Poles and even in the prolonged field exercises they do - he's in the training OPFOR unit. But sentence him to any quiet time at the post and he finds a way to get in trouble. I just got off the phone with him and he's off to Kosovo. Maybe there'll be enough adventure there to keep him out of trouble.
In Vino Veritas
a good data point for the theory that we need to keep 'em busy because they cause too much trouble when they aren't.
My son has these tendencies at 8. Hubby and I are trying like crazy to make sure he channels that energy in a positive way.
I'm guessing from the other thread, he possibly had a little help with this from mom. We do love our boys and it is SO hard to not be an enabler.
None the less, he is a soldier and we are still proud of him. :>)
and his commanders really do seem to like him and put him in responsible positions. He's been promoted twice - and busted twice now for stupid stuff in town. He's ambivalent about whether he's going to re-up, but I'm thinking he'd better because he's going to have one Helluva time adapting to humdrum civilian life especially if he comes home to this town which has NO tolerance for rowdies. And you're right about the busy part; he's living proof that an idle mind is the Devil's workshop.
In Vino Veritas
old guys to take him under a wing. Or kick his a**.
Hubby sees this all the time.
Hopefully he will re-up, mature a little and continue to make a difference for his country. :>)
he's had a revolving door of SGTs, LTs, and Captains, no real stability in command and not the sort of relationship with command that I think would be good. The "old boys" are the privates and specialists. As the OPFOR, they're kind of a hot work unit, so NCOs and officers cycle through, enhance their resumes and move on. God knows I've seen enough of that in private life and in government, but somehow I really didn't expect so much of it in the military. He has the same attitude about officers that I used to have about elected officials and high-level appointees: I knew they'd make me happy at least once since I knew I was going to their going away party.
In Vino Veritas
More so in the officer ranks than enlisted, or at least I thought.
And we are a weaker force because of it. These kids, and I do mean kids, need that guidance, leadership, and yes, even nurturing.
Hubby spends lots of time "lovin' on his kids" as he calls it. And he is a better leader for it. He's also a hard*ss when it comes to discipline. He will command a younster to remain on base in a New York minute. Sometimes they just need it.
c17,
I know we're way off topic but we're all just unable to NOT be nice to you. :-)
When I've been to Garmisch, I've always stayed at a very nice little family-run B&B in Oberau, which is a few miles back up the road and is thus less expensive and less annoying. Oberau is the first spot you come to after the autobahn four-lane fades down to a two lane. Hotel Garni, right in the center of the village, on the left as you head south.
I hope it's still there.
We have never stayed there but have friends that do often.
If we can't get in at Edelweiss http://www.edelweisslodgeandresort.com/home.html
we usually head to Oberammergau and stay at the NATO lodge.
Garmisch is my retreat. I love, love, love it. We go down about every 4-6 weeks.
I'm kinda neutral to blah on this whole Rheinland Pflaz, German living experience so far, but...
Ich liebe Bavaria! I could live there forever.
They make a big fuss there about being more relaxed - not like the uptight "Prussians" up north. Methinks they still resent the stunt that mad King Ludwig pulled on them.
Anyway, turns out the Garni does have a web page:
http://www.hotel-garni-oberau.de/
So it's still there....
Holiday theme for you and Mr C17: a bottle of wine, a loaf of bread, and thee! To quote a phrase.
:>)
For a certain subset of US consumers, this is certainly a hard kick in the crotch. For European countries that have chosen to subsidize their corporations, it's sauce for the gander. Take that you proctectionist [blog edited for viewing by family-oriented individuals]!
"I believe we must adjourn this meeting to some other place." - The last recorded words of Adam Smith.
Part of my point is that American consumers on the whole can weather the burst of inflation we've been having, which is partly the result of low interest rates in the US.
I know there's a lot of yelling and screaming out there about the prices of gasoline and milk and bread. But that's all it is, yelling and screaming. There's at least a chance that in China (for one example), the pain caused by inflation on low-end consumers will result in riots.
European protectionism cuts both ways. Yes, certain companies (Airbus for one, since we're on the subject) benefit from subsidies. But that just comes out of the hides of taxpayers in France and Germany. There's no free lunch. The weak dollar sharply and unavoidably cuts demand for European products, no matter how you spread the pain around.
Or did I completely misunderstand you?
Also, I think you'll see an ironic appreciation among the Europeans for a stronger dollar and more free and open trade. Americans can always find substitute goods of reasonable quality from either Canada or Mexico. Especially since Barack told the Canadians that he wasn't really serious about renegotiating NAFTA. (snarky, I do admit.)
"I believe we must adjourn this meeting to some other place." - The last recorded words of Adam Smith.
...for a higher dollar, for months now. It's the first thing Hank Paulson hears wherever he goes.
Jean-Claude Trichet, the ECB governor (Europe's equivalent of Ben Bernanke) is stuck in a tight little box. He needs to cut interest rates as we did, for a whole raft of reasons. But he can't because the Germans will howl about high inflation.
If the dollar came up on its own, Trichet's job would be one heck of a lot easier.
SOmething along the lines of "We tighten credit, if you open lots of markets."
"I believe we must adjourn this meeting to some other place." - The last recorded words of Adam Smith.
So please, no more talk of tighter credit!
I mean, this guy had a huge reputation when he signed on. As far as I can tell, the only thing they have come up with so far is this silly tax rebate that gets paid for with a higher deficit. I had hoped he might bring something far more substantive forward.
I believe your original post gets it exactly right. We are doing exactly the wrong thing by growing the size of government. The long term solution for the United States is to significantly reduce the size of government. $3.1 Trillion budget? That turns my stomach.
...our economic relationship with China. So far he's come up snake eyes on that. In fact, every time he goes over there, it seems like those tiny older women who run their banking system kick his backside worse than ever. "Ah, so, Mr. Secretary!"
Also, there was that creative SIV rescue plan late last year. You remember the "M-LEC"? (Master Liquidity Enhancement Conduit. Who else but Wall Street can come up with such silly names.) And of course it fizzled out and made Paulson look kind of silly.
But he started as an investment banker and he'll be one again. Or, he'll be running one of the top PE firms next year. Probably one with a lot of China exposure.
...to always overdo whatever move is underway, be it up or down.
Oil and the dollar are just the most recent examples.
Even the Great Depression, without Hoover's and Roosevelt's respective tax increases further deflating the economy would have been just a minor blip on the historical economic graph, instead of what it turned out to be.
"If you can keep your head about you, when all others are losing theirs..."
...in nearly all markets reflects structural changes in financial markets that weren't even a gleam in Eugene Fama's eye during the Depression.
However, there's a problem. Margin calls.
You can easily argue that wild swings in asset values are overdone and will tend to revert to trend, and you'd be completely right. But not before an awful lot of people get forcibly removed from their positions. And that's very disruptive.
Who knows, maybe this is the way the world should work (in addition to being the way it does work). Maybe financial markets are just great big evolution incubators. Every now and then they throw all the marbles up in the air. When the marbles come back down, they're all owned by whoever happens to catch them rather than their original owners.
What reasons are there for the rest of the world to keep commodities denominated in US dollars? I would imagine the oil producing countries don't like this situation as it makes their oil less valuable (although I suppose the demand would increase in places where the currency is appreciating relative to the dollar).
Second, what reasons do foreign countries have to keep buying and holding our currency/debt if the dollar continues to dive? And what is to prevent a massive selloff?
“.....women and minorities hardest hit”
When things are going south, it's time to start bottom feeding. With all the talk about the economy heading into the dark depths of the proverbial tank, I see real opportunities in my business, real estate. Prices are coming down. Foreclosures are really exacting their toll on prices. What great opportunities this creates.
So while things are bad for some, the market nearly always corrects itself and creates new millionares.
Slightly off topic I know, but wanted to get a positive word in.
"To believe in nothing is to believe in everything. To believe in everything is to believe in nothing"
And by "times like this" I mean the credit freeze and recession that I think you're talking about, not the dollar weakness that is the point of this discussion.
The current disorders in the financial world are certainly going to end up creating a lot of new centi-millionaires and billionaires. They'll be the people snapping up the impaired-but-not-worthless assets that everyone else is being forced to unload.
Dollar weakness itself is adding to the wealth of boatloads of people with high exposure to commodities.
Is real estate going to benefit long-term? Darned good question. Maybe not, since the current revaluation is actually a reversion to trend.
There is always money to be made in real estate if you know when, how, and at what price to buy. The key is knowing when and where to purchase.
My point was only that there is always opportunities. Who'll take the risk and capitalize is the unknown.
Lastly, this is reality! We're in it so why not look for glimmers of gold in a big pile of horse c**p.
"To believe in nothing is to believe in everything. To believe in everything is to believe in nothing"
Well, one thing I would hope would come out of this bout is the end of the shopworn "conventional wisdom" that "a weaker dollar is good for exports."
This line is usually sourced from journalists and policymakers who don't actually have any real international front-line business experience.
Some of us do. :-O Maybe that old wisdom was true 50 years ago, when most "products" were lumps like refrigerators and washing machines - and you just basically carted them off the boat and sold them.
In those good old days, everything involved with "making stuff" was very localized. Nowadays, though, supply chains and personnel clouds are global, so there is no clear-cut "domestic" vs. "foreign" sourcing of either tangible or intangible resources. E.g., for say Dell to "export" PCs, they first have to "import" a lot of stuff to put them together, and those imported components come at higher costs due to the deflated dollar.
The other change is that nowadays marketing and distribution are MUCH larger cost fractions for most businesses - and all of that is paid in the local currency, so your "more competitive" dollar is a big negative.
And don't even get me started on the difficult peculiarities of the US tax code on foreign earnings - both corporate and personal....
...export-growth being led by a lower dollar. If anything, I'm saying that a lower dollar doesn't hurt us as much as one might expect, for reasons having very little to do with trade.
Although, for what it's worth, supply chains are just as sensitive to currency pressures as finished goods are. As far as I'm concerned, in fact, supply chains are even more important than finished goods.
Nothing you said - it was just a good spot to drop a few Skanderbeg gems of wisdom. :-)
I'm continually amazed by how many fossils we still have from the 1950s (if not in temporal reality, certainly in spirit). Everything is so global and intertwined now that it's impossible to even parse "origins" - let alone to "control" them.
The currency carnival is just one piece of that reality....
What's a good way to hedge around this dollar weakness?
I was thinking of seeing if I can get a paid internship for my semester in Australia. If I can I might try to get a short term loan in Aussie dollars against my internships pay. Try to do it so I don't spend any US Dollars there and maybe even bring a few Aussie dollars home.
Sound like a way to do it?
Their tax year runs from July 1 to June 30. That wreaks havoc on your USA taxes and it is damn hard to find a CPA who has a clue how to do your tax return. Plus you incur the expense and effort of filing in two countries.
It took me 3 years to straighten out the mess.
Here is a simple way to hedge. This bank allows you to make FDIC insured deposits in currency denominations of your choice. It pays interest and as the dollar declines you get capital gains.
http://www.everbank.com/001WorldCurrency.aspx
It is as simple as opening a savings account.
Regards,
Jack
of us living in Europe.
We are trying to travel and enjoy the culture, but man is it expensive!!! Needless to say, we buy NOTHING on the economy that we absolutely do not have to have. And I carry VAT forms with me everywhere in case I do have to make a purchase.
Thankfully they adjust our COLA according to the rate. Even though it is a bit behind the curve, it does help, or we would be really screwed!