Built to last: the US dollar
Posted on 07/13/2007 3:02:50 PM PDT by ScaniaBoy
Disregard all hysteria. The ailing Greenback will not collapse this year, not in ten years, not in twenty years, not in half a century. There is no credible currency against which it can collapse. (Unless you count gold). None of the world's rival power blocs have the economic and demographic depth to challenge American dominance.
Yes, we have a dollar rout on our hands. The markets have suddenly begun to discount a nasty crunch in the US as the subprime debacle spreads through the credit markets. The prospect of rate cuts by the Federal Reserve is drawing closer, knocking away the dollar's yield prop. Investors have switched reflexively to the euro as the default currency.
This cannot last. It assumes that Europe has "decoupled" from America and now has the umph to go it alone. German finance minister Peer Steinbrueck played to this illusion on Monday when he professed to "love the strong euro" - (directly contradicting testimony he gave to the European Parliament earlier this year).
Whether or not Germany is really that immune to an exchange rate of $1.38 to the dollar (Professor Peter Bofinger - one of the country's five "Wise Men" - insists adamantly that it is not), it is in any case a foolish error to treat Germany as if it were a proxy for the whole eurozone. In reality, it has become the nemesis of Euro-land. While the Teutonic Tiger is indeed springing back to life after a decade-long slump, it is doing so by conquering market share from the Club Med bloc in what amounts to a beggar-thy-neighbour shift within the euro-zone. This has a zero-sum flavour to it.
France, Spain, Italy, Portugal, Greece, and latterly Ireland are all facing very serious trouble. They are at or near the top of the cycle. Housing bubbles caused by ultra-low interest rates (geared for Germany, when Germany was down -- the dirty secret of EMU) are starting to burst. Club Med's share of global exports is collapsing.
Bernard Connolly, global strategist at Banque AIG and former head of economic research at the European Commission (the best informed euro-critic in the City, and the one most feared by Brussels), says Spain will face an outright "depression" by 2008-2009 and Italy will face an "Argentine crucifiction" until it is ejected, or chooses to escape, from the euro-zone.
How has this "divergence" happened? In a nutshell, Germany has gained 20pc in unit labour cost competitiveness against France, 30pc against Spain, and 40pc against Italy since the currencies were locked together in 1995 (EU data). It has done so by screwing down wages, while Club Med has done what it always does -- let rip on wages.
Or put another way, Europe's ancient nations have reverted to type, as they were always bound to do. The elapse of a decade has allowed this to go beyond the point of no return. How is Italy, for example, supposed to claw back lost competitiveness on this scale against low-inflation Germany? Yes, Italy did this in 1927 under the `lira forte' policy of Mussolini, but he was able to use Fascist powers to ram through a 20pc cut in wages. Try that in a democracy. It would take a severe recession to force down Italian wages enough to make a difference. The budget deficit would balloon. The national debt (108pc of GDP) would spiral upwards, setting off panic sales of Italian bonds. The policy would instantly defeat itself, even if it did not set off civil conflict - which it would. Italy cannot break out of this impasse unless Germany agrees to tolerate much higher inflation for the whole euro-zone. Berlin would sooner choke on Sauerkraut.
The longer the euro stays near $1.40, the more severe the coming crisis a year or eighteen months hence -- as the lagged effects of over-valuation turns boom to bust with even greater violence across Club Med. Sooner or later, the markets will twig in any case. The screams coming from southern Europe will be too loud to ignore. Worth noting that Goldman Sachs has begun to recommending "shorting" Italian and French bonds, expecting them to diverge further from German Bunds. This is exactly how the unravelling begins.
It will become obvious at some point that the euro-zone is just a glorified fixed-exchange rate system, not a sacred union. The euro is an orphan, stateless currency, lacking the mechanisms (a debt union, pension union, a shared treasury and fiscal transfers) that makes a currency union work over time.
Contrast that with the dollar, the currency of a nation forged by wars and the ancestral chords of memory (Lincoln's words) - all for one, and one for all. America is a country. (Again a Lincoln sentiment, but now a truism). That massive historical fact makes all the difference.
Ah, but there is the Japan, at last breathing again after its near-death brush with deflation. Now, I don't doubt that the yen will at some point snap back violently as interest rates (now 0.5pc) return to a semblance of normality. As soon as global risk appetite fades again, the yen carry trade will doubtless unwind - perhaps brutally as in 1998 - and some of that $500bn shipped overseas will come home.
That said, anybody who follows the rhythms of Tokyo's stock market must suspect that a sharp appreciation of the yen will cause the Nikkei index to plummet - bringing Japan's fragile expansion to a swift halt. The "Seven Samurai" exporters -Honda, for example, which earns 70pc of its revenues in America - will take a battering. As month after month of disappointing retail data this year keep showing, Japan lacks the demand growth to take the baton from America. Wages have fallen for the last five months in a row.
Japan is already the oldest society in the world, shrinking since 2005. The population peaked at 128m in 2005 and is expected to fall below 100m by the middle of the century. If - as expected - Japan's aging grannies and housewives raise the share of foreign assets in their portfolios from 3pc to 12pc over time, the yen must weaken further. It is the dying currency of a dying country -- albeit a most charming one.
Which brings me to China, a country that is growing old before it ever becomes rich. The working-age population peaks in 2015 - just eight years time. China then dives into the steepest demographic decline ever known by any nation in peace-time. As for China's current boom, you need only know three things so see where this is going: credit is being channelled for political purposes through Communist state banks that are not subject to market discipline; almost half of GDP is going on investment, leading to a glut of factories; return on that investment, measured by the incremental capital output ratio, is 4.4. Much of it is being wasted. Compare that to Japan (3.2), South Korea (3.2), and Taiwan (2.7) during their growth spurts. China is not going to take over the world economy, now or ever. The window will close shut before they get there.
No, the 21st Century will be the American century, just like the 20th Century. Americans may have to tighten their belts a bit after all the sins of Alan Greenspan and the Clinton-Bush debt generation. But the dollar will still be the world's reserve currency long after the euro has disappeared and the yen has been forgotten... Now, the Indian Rupee? Hhm. Another day.
Built to last: the US dollar
—bflr—
Which a lower USA dollar is going to massacre because European exports to the USA and else just can't compete against lower USA dollar produced export goods. A lower USA dollar is good for US industry exporting products worldwide against Euro competitors. Expect Europeon governments to try subsidize their exported goods, which is a no no.
“As for China’s current boom, you need only know three things so see where this is going: credit is being channelled for political purposes through Communist state banks that are not subject to market discipline; almost half of GDP is going on investment, leading to a glut of factories; return on that investment, measured by the incremental capital output ratio, is 4.4. Much of it is being wasted. Compare that to Japan (3.2), South Korea (3.2), and Taiwan (2.7) during their growth spurts. China is not going to take over the world economy, now or ever. The window will close shut before they get there.”
PING. What does the above mean? ie that “return on that investment, measured by the incremental capital output ratio, is 4.4”
Could Sarkozy get the Germany to leave the euro?
It was only a matter of time until the first German economic commentator, infuriated by Nicolas Sarkozy, would raise the subject of Germany's eventual withdrawal from the euro. This comment was made in Frankfurter Allgemeine by Hans D Barbier, now head of the Ludwig-Erhard Foundation. Barbier said that Sarkozy should be taken very seriously indeed. Barbier called on German leaders to oppose Sarkozy with politeness and with full vigour. The independence of the central bank has to be defended at all costs. Otherwise, he said, Germany would have no choice but to leave the euro.
The Italan journal Il Giornale reports on a meeting between Italian PM Prodi and French PM Fillon. The former says that the stability pact exists but it lacks certain mechanisms to help us use it so that it will not hamper our economies. (That's eurospeak for we want to thrash the stability pact and redo the whole thing - as long as we can have our subsidies....)
Also from Italy: PM Prodi could not present proposals for reforms of the ailing Italian social security system as planned. Negotiations among the coalition partners will continue.
Rank ... country ... account surplus or deficit ... date of estimate
Source: CIA: https://www.cia.gov/library/publications/the-world-factbook/rankorder/2187rank.txt
1 China $ 179,100,000,000 2006 est.
2 Japan $ 174,400,000,000 2006 est.
3 Germany $ 134,800,000,000 2006 est.
4 Russia $ 105,300,000,000 2006 est.
5 Saudi Arabia $ 103,800,000,000 2006 est.
6 Norway $ 63,330,000,000 2006 est.
7 Switzerland $ 50,440,000,000 2006 est.
8 Netherlands $ 50,170,000,000 2006 est.
9 Kuwait $ 40,750,000,000 2006 est.
10 Singapore $ 35,580,000,000 2006 est.
11 Venezuela $ 31,820,000,000 2006 est.
12 Sweden $ 28,610,000,000 2006 est.
13 United Arab Emirates $ 26,890,000,000 2006 est.
14 Algeria $ 25,800,000,000 2006 est.
15 Hong Kong $ 20,900,000,000 2006 est.
16 Canada $ 20,560,000,000 2006 est.
17 Malaysia $ 17,860,000,000 2006 est.
18 Libya $ 14,500,000,000 2006 est.
19 Brazil $ 13,500,000,000 2006 est.
20 Iran $ 13,130,000,000 2006 est.
21 Nigeria $ 12,590,000,000 2006 est.
22 Qatar $ 12,510,000,000 2006 est.
23 Taiwan $ 9,700,000,000 2006 est.
24 Finland $ 8,749,000,000 2006 est.
25 Iraq $ 8,134,000,000 2006 est.
26 Argentina $ 8,053,000,000 2006
27 Angola $ 7,700,000,000 2006 est.
28 Oman $ 7,097,000,000 2006 est.
29 Belgium $ 6,925,000,000 2006 est.
30 Austria $ 5,913,000,000 2006 est.
31 Chile $ 5,063,000,000 2006 est.
32 Denmark $ 4,941,000,000 2006 est.
33 Philippines $ 4,900,000,000 2006 est.
34 Luxembourg $ 4,630,000,000 2006 est.
35 Trinidad and Tobago $ 3,259,000,000 2006 est.
36 Azerbaijan $ 2,737,000,000 2006 est.
37 Egypt $ 2,697,000,000 2006 est.
38 Korea, South $ 2,000,000,000 2006 est.
39 Bahrain $ 1,999,000,000 2006 est.
40 Gabon $ 1,807,000,000 2006 est.
41 Botswana $ 1,698,000,000 2006 est.
42 Yemen $ 1,690,000,000 2006 est.
43 Indonesia $ 1,636,000,000 2006 est.
44 Peru $ 1,515,000,000 2006 est.
45 Israel $ 1,463,000,000 2006 est.
46 Uzbekistan $ 1,410,000,000 2006 est.
47 Burma $ 1,247,000,000 2006 est.
48 Congo, Republic of the $ 1,215,000,000 2006 est.
49 Vietnam $ 1,029,000,000 2006 est.
50 Ecuador $ 727,000,000 2006 est.
51 Bolivia $ 688,000,000 2006 est.
52 Papua New Guinea $ 661,000,000 2006 est.
53 Namibia $ 572,000,000 2006 est.
54 Cote d’Ivoire $ 460,000,000 2006 est.
55 Cameroon $ 419,000,000 2006 est.
56 Morocco $ 389,000,000 2006 est.
57 Bangladesh $ 339,000,000 2006 est.
58 Turkmenistan $ 321,200,000 2006 est.
59 Equatorial Guinea $ 175,000,000 2006 est.
60 British Virgin Islands $ 134,300,000 1999
61 Kazakhstan $ 133,000,000 2006 est.
62 Cook Islands $ 26,670,000 2005
63 Palau $ 15,090,000 FY03/04
64 Tuvalu $ 2,323,000 1998
65 Samoa $ -2,428,000 FY03/04
66 Tonga $ -4,321,000 FY04/05
67 Comoros $ -17,000,000 2005 est.
68 Kiribati $ -19,870,000 2004
69 Swaziland $ -23,130,000 2006 est.
70 Sao Tome and Principe $ -24,400,000 2006 est.
71 Vanuatu $ -28,350,000 2003
72 Micronesia, Federated States of $ -34,300,000 FY05 est.
73 Anguilla $ -42,870,000 2003 est.
74 Cape Verde $ -44,430,000 2006 est.
75 Gambia, The $ -54,610,000 2006 est.
76 Burundi $ -57,840,000 2006 est.
77 Haiti $ -58,720,000 2006 est.
78 Tajikistan $ -73,950,000 2006 est.
79 Lesotho $ -75,440,000 2006 est.
80 Seychelles $ -78,590,000 2006 est.
81 Antigua and Barbuda $ -83,400,000 2004
82 Guyana $ -84,300,000 2006 est.
83 Rwanda $ -104,100,000 2006 est.
84 Honduras $ -160,000,000 2006 est.
85 Zambia $ -165,400,000 2006 est.
86 Macedonia $ -167,000,000 2006 est.
87 Belize $ -173,400,000 2006 est.
88 Malawi $ -186,000,000 2006 est.
89 Ghana $ -219,000,000 2006 est.
90 Armenia $ -247,300,000 January-September 2006 est.
91 Togo $ -261,900,000 2006 est.
92 Zimbabwe $ -264,600,000 2006 est.
93 Kyrgyzstan $ -287,300,000 2006 est.
94 Paraguay $ -300,000,000 2006 est.
95 Chad $ -324,100,000 2006 est.
96 Benin $ -342,700,000 2006 est.
97 Guinea $ -344,000,000 2006 est.
98 Cambodia $ -369,000,000 2006 est.
99 Mexico $ -400,100,000 2006 est.
100 Uganda $ -423,000,000 2006 est.
101 Eritrea $ -440,500,000 2006 est.
102 Mozambique $ -444,400,000 2006 est.
103 Fiji $ -465,800,000 2006 est.
104 Panama $ -467,000,000 2006 est.
105 Madagascar $ -504,000,000 2006 est.
106 Laos $ -504,200,000 2006 est.
107 Belarus $ -511,800,000 2006 est.
108 Syria $ -529,000,000 2006 est.
109 Moldova $ -561,000,000 2006 est.
110 Uruguay $ -600,000,000 2006 est.
111 Burkina Faso $ -604,600,000 2006 est.
112 Mauritius $ -651,000,000 2006 est.
113 Albania $ -679,900,000 2006 est.
114 Georgia $ -735,000,000 2006 est.
115 Tunisia $ -760,000,000 2006 est.
116 Slovenia $ -789,200,000 2006 est.
117 Nicaragua $ -883,000,000 2006 est.
118 Senegal $ -895,200,000 2006 est.
119 Thailand $ -899,400,000 2006 est.
120 Tanzania $ -906,000,000 2006 est.
121 Malta $ -966,200,000 2006 est.
122 Jamaica $ -970,000,000 2006 est.
123 Cyprus $ -1,051,000,000 2006 est.
124 El Salvador $ -1,059,000,000 2006 est.
125 Sri Lanka $ -1,118,000,000 2006 est.
126 Kenya $ -1,119,000,000 2006 est.
127 Dominican Republic $ -1,124,000,000 2006 est.
128 Costa Rica $ -1,176,000,000 2006 est.
129 Cuba $ -1,218,000,000 2006 est.
130 Guatemala $ -1,533,000,000 2006 est.
131 Bosnia and Herzegovina $ -1,730,000,000 2006 est.
132 Estonia $ -1,919,000,000 2006 est.
133 Ukraine $ -1,933,000,000 2006 est.
134 Colombia $ -2,219,000,000 2006 est.
135 Serbia $ -2,451,000,000 2005 est.
136 Latvia $ -2,538,000,000 2006 est.
137 Lithuania $ -2,572,000,000 2006 est.
138 Jordan $ -2,834,000,000 2006 est.
139 Croatia $ -2,892,000,000 2006 est.
140 Iceland $ -2,932,000,000 2006 est.
141 Ethiopia $ -3,384,000,000 FY05/06 est.
142 Slovakia $ -3,781,000,000 2006 est.
143 Czech Republic $ -4,352,000,000 2006 est.
144 Sudan $ -4,510,000,000 2006 est.
145 Poland $ -4,548,000,000 2006 est.
146 Bulgaria $ -5,100,000,000 2006 est.
147 Lebanon $ -5,339,000,000 October 2006
148 Pakistan $ -5,486,000,000 2006 est.
149 New Zealand $ -7,944,000,000 2006 est.
150 Hungary $ -8,392,000,000 2006 est.
151 Ireland $ -9,450,000,000 2006 est.
152 Romania $ -12,450,000,000 2006 est.
153 South Africa $ -12,690,000,000 2006 est.
154 Portugal $ -16,750,000,000 2006 est.
155 Greece $ -21,370,000,000 2006 est.
156 Italy $ -23,730,000,000 2006 est.
157 Turkey $ -25,990,000,000 2006 est.
158 India $ -26,400,000,000 2006 est.
159 France $ -38,000,000,000 2006 est.
160 Australia $ -41,620,000,000 2006 est.
161 United Kingdom $ -57,680,000,000 2006 est.
162 Spain $ -98,600,000,000 2006 est.
163 United States $ -862,300,000,000 2006 est.
This file was last updated on 19 June, 2007
Capital output ratio is the ratio that shows the amount of capital that are needed to produce a certain level of output. A high capital output ratio means that a large amount of capital is needed for production.
China is just not using its capital efficently.
So, where are they going to spend all those dollars? Are they going to buy euros with them? lol
Note Spain on your list.
Thanks!
Sounds like China is using capital input ‘steroids’ to create their economic growth. Will end badly.
The fear of the USD adjusting internationally isn’t based on facts. We enrich other nations by importing from them, so they want more. Thus, their currencies go up in relation to ours. As currencies equalize, more manufacturing in the USA will happen. It should be a more widely accepted economic cause-and-effect occurrence.
We should be more afraid of an internationally high dollar. We need more American savings and less debt in order to own and control more of our own economy. Special interests should be stopped from trying to pressure the Fed. and mess with the dollar so much.
Note America on my list! Ten times more foreign deficit than the next worse country!
keep in mind that our GDP is the largest in the world, about 13 trillion dollars. If you compared other countries debts in comparison to their GDPs you’d get a vastly lineup.
“We need more American savings”
Americans are always being chided for not saving enough. What is not counted is investments like IRA’s, 401k’s, etc. In that dept we lead the world as it is extremely high. Savings must be money stuck in the bank earning a negative interest rate due to inflation.
I wouldn’t bet on it.
Probably a dollar blast in the future to screw all the short positions.
One thing about this market is that you can’t take a position for gospel truth.
Just be nimble and don’t get greedy.
Sorry to ignore you like that, but it doesn't mean a damned thing.
My grandparents didn't have much money back in the thirties. They had to grow most of their food and Grandma had to sew most of Dad's and Uncle Stanley's clothes.
Fortunately for me, things are better now. I make so much money that I regularly run an annual trade deficit of some $10,000 with the local supermarket (it doesn't buy a dime's worth of anything from me). This year alone I ran a deficit of $7,500 with a local used car dealer. Am I worried? No.
America's in a similar situation. We make so much money trading amongst ourselves that we can afford to pay foreigners to do quite a lot of our work for us. We pay for it out of the wealth that we create right here.
Most other countries can't do that because they don't have our size or our well-developed and prosperous internal economy. Your numbers are interesting but not in the least worrisome.
Excellent, thoughtful post. thanks
I think your argument is spurious. I work in capital markets, but I will give you the opportunity to educate me here. I’m definitely young and don’t know everything, so here’s your chance.
The US economy is zero-sum. Money supply changes, sure, and that money has some value. But trading amongst ourselves does not inherently create value.
You seem to be suggesting that we can print more money, and that the amount by which our currency suffers vs. other currencies is somewhat less than the inherent inflationary response to increased money supply.
When does the value of the dollar reach the level that no matter what our internal economic activity we are at a disadvantage to the rest of the world?
We owe a lot of interest to the rest of the world, and as our currency value goes lower they will demand a greater return for buying our debt. Maybe that is the efficient market at work, but to claim that America “makes money trading amongst ourselves” is just wrong. Sorry.
X
>> The US economy is zero-sum.
Huh?
What are you basing that “fact” upon?
>> But trading amongst ourselves does not inherently create value.
I don’t know what it means to “create value”. Maybe you meant to say “create *wealth*”. You’re right, merely buying and selling the same stuff over and over to each other doesn’t create new wealth.
But desigining and building chips, writing software, creating movies, writing books, building roads,, &etc. *does* create wealth — that is, something “of” value that wasn’t there before.
We Americans are very good at that, and always — ALWAYS — have been.
Our economy is not a zero sum game.
Put another way, we are NOT a nation composed entirely of real estate agents and securities traders. Not yet, anyway. :-)
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