Posted on 11/28/2004 4:30:08 AM PST by risk
America’s privilege, the world’s worry
Nov 10th 2004
From The Economist Global Agenda
The dollar plumbed new depths against the euro this week. The greenback’s fall has unnerved European policymakers. But it is their Asian counterparts who have most reason to worry
|
|
|
|
|
|
|
CHARLES DE GAULLE, founder of France’s fifth republic, famously resented America’s paramount position in the global economy of the 1960s. The United States, he complained, enjoyed an “exorbitant privilege”. Because its currency, the dollar, served as the world’s reserve asset, America could live beyond its means, unconstrained by the periodic shortages of foreign exchange that haunted other, less privileged nations. Nicolas Sarkozy, France’s spirited finance minister, wants to inherit de Gaulle’s mantle as president of the fifth republic. Though somewhat smaller in stature than the great general, both physically and politically, Mr Sarkozy seems to share his outsized resentment of America’s economic privileges.
Mr Sarkozy has more to envy than de Gaulle ever had. Today’s America lives beyond its means more flagrantly than ever before. Its government will spend about $427 billion more than it raises in taxes this year. The nation as a whole is running a deficit of $571.9 billion on its current account with the rest of the world. These twin deficits, Mr Sarkozy points out, weigh heavily on the dollar. The currency’s fall, interrupted in February, has resumed. On Monday November 8th, it plumbed a new low against the euro of close to $1.30. Only if America restrains its deficits will the markets regain confidence in the dollar, Mr Sarkozy warned. “This is a unanimous message from the Europeans and the International Monetary Fund that we send to the United States.” On Wednesday, the dollar dipped again, this time breaching the $1.30-per-euro mark.
Mr Sarkozy no doubt fears that his American counterparts are quite happy to watch the dollar fall. Their professed commitment to a “strong dollar policy” might disguise a policy of benign neglect. America’s net overseas liabilities amounted to 23% of GDP at the end of last year, close to the record debts it amassed in 1894, according to Ken Rogoff and Maurice Obstfeld of the National Bureau of Economic Research. Crucially, the bulk of these debts are denominated in dollars. Thus America may be sorely tempted to dishonour its dollar debts, not by defaulting on them, but by devaluing them.
The immediate casualties of such a policy would be America’s East Asian creditors. By the end of last year, Asian central banks held $1.89 trillion of foreign reserves, the vast bulk of them in dollars. If these reserves lost value, Asian economies would suffer an almighty capital loss in domestic-currency terms. A recent study by the New York Federal Reserve counted the costs. If the Chinese yuan were to appreciate by 10% against the dollar (and other reserve currencies), China would suffer a capital loss worth almost 3% of GDP, the study found. If the won rose by 10%, South Korea would suffer similarly. The toll would be even greater in Singapore (10% of GDP) and Taiwan (8%).
To avert such an appreciation, Asian central banks would have to amass ever greater holdings of dollars. But this would only expose them to greater capital losses down the road. Alternatively, they might seek to avoid the consequences of a dollar fall, by diversifying into other reserve currencies, such as the euro. But that would only bring the dollar crashing down all the more quickly. In other words, Asian central banks are caught in an awkward dilemma: either they try to break the dollar’s fall, or they try to escape from underneath its collapse.
Despite this dilemma, Asia’s central bankers created less of a fuss on Monday than Europe’s did. Jean-Claude Trichet, president of the European Central Bank (ECB), described the dollar’s fall against the euro as unwelcome and “brutal”, repeating the melodramatic language he adopted in January. But why all the worry? In some ways, the stronger euro will do Mr Trichet’s job for him. It will contain euro-area inflation, which has remained stubbornly above the ECB’s ceiling of 2%. It will offset the higher dollar price of oil—last month’s worry du jour. And if the euros in their pockets gain in value, European households might be more willing to spend them, overcoming the caution that has held the European recovery back for much of this year.
It is true that the dollar has never been weaker against Europe’s single currency since its birth in 1999. But as recently as 1997 it was weaker against a basket of the 12 currencies out of which the euro was fashioned. Back then, no one described the dollar’s movements as brutal. Indeed, at times it seems that European resentment of America’s privileges is a little exorbitant.
 |
|
| Copyright © 2004 The Economist Newspaper and The Economist Group. All rights reserved. |
What did he ever do to me?
Actually this is a pretty symmetric deal...the Germans and French COULD have assumed some of the cost of preserving access to and price of oil for the world by assisting in Iraq. Essentially our military expenses preserve stability in the MidEast thereby assuring the world of a stable oil supply at a relatively predictable price. We are the only ones who can do so. Our friends, accordingly will benefit more directly, the others can buy their oil in dollars. The costs of our doing so, I have noticed, are uniformly igored in articles such as this and in general in discussion of this issue. These costs are unique tio the US and IMHO always needs consideration when trying to assess our position financially relative to the world.
Ype, we are at about the same levels as 1998 and not as low as it was in 1994-5. All this talk of new lows is a lie.
The world used to have one currency: gold.
I fail to see how a single global currency would solve any current problem since fiat currency is also a commodity. If gold were to be the standard currency, the value of it would change as more effort would be put in by interested parties to secure more gold. Dittos with oil, grain or any other commodity. With fiat currency, the government just orders more to be printed. With oil OPEC decides. What is different is who is responsible/capable of adjusting the commodity's value. With a global currency it would seem to take the market out of the equation and put the matter directly in the hands of politicians. I am trying to see what benefit there is in in removing the market and permitting government to forever be unaccountable.
Exactly what kind of politician want to surrender control over the nation's money?
And how! This whole "worry du jour" about an alleged falling dollar crisis is the kind of crap that only Europeans, Democ
s, and protectionist freepers could love.
|
|
|
 |
|
|
|
Since 1973 the average real exchange index has slopped around between 78 and 131 and has averaged in the 90's. October's number 'collapsed to 90 --down from Sept's 92. BFD.
Back in 1995 it fell to78 for four months and the biased pundits praised it as some kind of economic miracle.
You can bet that if Kerry were elected, they'd be using these very same numbers to announce that the international markets are liberating us from the terrible Bush economy and taking us back to the our lost glory days of the wonderful '90's..
I knew that Tom Daschle was politically ambitious, but when did he lose sight in one of his eyes?
Democrats. It involves an unseen plan that contains a global test.
You got that right. The Congress does have to get the budget deficit under control. That goes without saying. But the rest of this is pure Barbra Streisand. The mercantalists in the far east have been playing the fools game of stimulating exports via currency manipulation. And guess what! These governments are now finding that their citizens are catching on to the game. The citizens of these countries are becoming more interested in raising their standards of living than they are in padding their nations aggregate export accounts.
The artificially low exchange rates promulgated by the central banks of these countries have been robbing their citizens of the true buying power generated by their labors. If the currency manipulation ends these citizens will become buyers on the world market thus increasing their imports and our exports. So if the governments quit manipulating their currencies the trade deficit goes away.
Well you and expat_panama get it. Now it is about time for all the Goldbugs to show up and tell us the world is ending so we need to have plenty of a shiny yellow metal...
I still say to my dying day, take us off of the free market system & put us back on the gold standard. Where every dollar is worth a dollars worth of gold or silver! What way our money is actulaay worth something, not just the scrap linen that is used today!
Europe's solution, of course, it for the U.S. government to raise taxes to the confiscatory levels they have over there.
Nothing. The rest of the world is whining because it benefitted from the dollar bubble which looks quite a bit like the NASDAQ bubble. When bubbles burst, those who had benefitted complain. Also the dollar bubble was a massive subsidy to Europe and people don't like having their subsidies removed.
Those Goldbugs are really something.
It's funny how they all seem to be saying that (1) they bought gold at $300 last year, and (2) they want to sell it to us for $500 this year.
Somebody let me know if there's some kind of "economic sanity" ping list I can get my name on.
Democrats. It involves an unseen plan that contains a global test.
Precisely. The Democrats are beginning to realize how badly they have lost at the State and Federal level in the last four elections. How do they regain power?
Their answer is International bodies and organizations that will band together to subjugate the US. These include, but are not limited to, The International Court, The World Bank, and the good ole United Nations (our buddies).
That is why the Oil-for-Food scandal is so strategically important right now. The Liberals know this has the potential to cut the hamstrings of the UN.
Great read here
http://www.epinet.org/briefingpapers/140/bp140.pdf
What does Jimmy Buffet think?
Thank goodness our debt is more in line with more financially stable nations. </sarcasm>
Oil. Barrels are priced in dollars. Rockefella forced arabs to accept payment in dollars deposited into American banks...owned by Rockefella. I believe that system is still in place much to the chagrin of the mid-east and Euro backers.
Great article. Thanks.
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.