The Real Reason to Worry About the Dollar

TrendMarcolytics/SmartMoney.com ^ | November 9, 2007 | Don Luskin

[FreedomPoster]

Ping.

[papasmurf]

It's because interest rates in the U.S. are too low to compensate for the inflation that the market expects over the coming years.

Right there. That's where you lost me. That's just a small part of it, IMO, and we have been in that position before, without the same results.

[the invisib1e hand]

when the currency that drives global consumer demand is worth less, it simply pisses off all the merchant countries. Let them squeal. And let them sell dollars. It's about time they gave 'em back and frankly, I don't mind at all if they take a loss on them.

It happens to be a very powerful political lever, but don't expect that to make the headlines. Besides, any lever that is politically powerful for the US is clearly more attempted Imperialism by the Bush administration.

Let them squeal.

[Perdogg]

There is pressure to increase rates in Europe due to inflation and out of control govt spending. France’s fiscal problem boiled over this week when Sarkozy blew a gasket over US pressures to lower rates.

Maybe we should go back to Breton Woods. (just kidding)

[beckaz]

Guy is right on inflation but some of his reasons NOT to worry are wrong.

E.g. he says:

Actually, a falling dollar should make our debt more attractive to foreigners, not less, because then they can buy more of it for the same quantity of their own currency.

That's wrong and idiotic. The crux there is what foreigners expect the dollar to do in the future.

[muawiyah]

Foreigners should, of course, look at the rate of increase in American productivity. Currently that's 4.9% annualized.

That makes our economy, which backs the dollar, more and more valuable even if growth is 0%.

Most other economies are "growing" with much lower rates of productivity increase. Sure, they boost the demand for their currency by increasing the discount rate, but that does not affect productivity. Given a small recession where both productivity and total growth DROP, the value of their currencies will drop like a rock compared to the dollar and all will be well again.

Some people think that's the way we export inflation ~ actually, it's the way we export our productivity increase ~ and the foreigners will have to work harder to catch up.

[Malsua]

we get their manufactured goods, they get our little pieces of paper.

I wish people would stop using this idiotic canard. They're only little bits of paper if we choose not to honor them. If the US gov't decides not to honor currency, the whole house has collapsed.

[Lijahsbubbe]

And what happens when they redeem those pieces of paper for our goods and services? That's no problem — we'll have an economic boom providing all those goods and services.

What goods and services?

[dennisw]

Another reason you hear all the time is the US trade deficit — that fact that we are spending more on imports than we receive for our exports. So how come the dollar's fall has accelerated over the last three months while our trade deficit has actually gotten smaller? I've never understood why a trade deficit is supposed to make the dollar less valuable. It just means some dollars have moved from here in the U.S. to the rest of the world. That's terrific — we get their manufactured goods, they get our little pieces of paper. I'll do that trade all day.

Another imbecile with his lame "little pieces of paper" jive. I wish I had a dime for every time I've read or heard that gem

Wow, I use this little piece of plastic and strangers shower plasma TVs and laptops on me. Is this guy going to rip off his credit card companies too?

[USS Alaska]

I'm more worried about a four hour erection {and I'm petrified to think what it would be with viagra} than I am about the strength of the dollar.

If push comes to shove, we tell the debtor nation to piss off and cancel the debt.

Our first move is to the world bank as a nation the "just needs a little help" with our debt.

The next step is to give them 24 hours to cancel the debt and move our N-subs into position.

Since the biggest paper holder is china, we re-negotiate our debt structure based on floating currency or refuse to pay and close our borders to china imports.

Sure it's a little harsh and some would say a misuse of military power, but I say, it's time for smashmouth strategery.

Close the state department and open the "department for begging nations".

Foreign diplomats come to this department to make the case that the USA should not nuke them.

In case of any doubt, refer to my tagline.

[MNJohnnie]

Don’t worry. As soon as Hillary and the Dems get annointed in Jan 2009 they will tax up all that liquity for you.

[USFRIENDINVICTORIA]

"Now let's start moving things around a bit. Suppose interest rates fall to 4% in the U.S., but not in your country. Suddenly you'd rather hold your own currency and earn 5%, than hold the U.S. dollar and earn only 4%. But there is one condition under which you would trade your currency for the U.S. dollar — that's if you got the dollar at a 1% discount to your own currency. So instead of trading the currencies one for one, the dollar would fall by 1% when measured in your country's currency."

Not so. The amount of interest has actually fallen 20%. The currency would have to fall by the present value of the amount that people expect to lose in interest.

[garyhope]

I personally think it’s embarrassing that the Canadian dollar is now worth more than the American dollar for the first time in 31 years. Canada!

Don’t get me wrong, beautiful country, nice people, good beer, but Canada is 25 million people and a lot of frozen lakes and trees. Good fishing. Lots of fish there have never seen a person.

[balls]

Consider the U.S. software industry. Most of their costs are in cheap dollars. A lot of their sales are foreign currencies. And they tend to get valued on sales, not on profits anyway. Maybe that's why the tech sector has been booming since the Fed started lowering rates in September.

This is a completely bogus statement. Many software firms have outsourced some or all of their development to India or elsewhere where the costs are in foreign currency. Consequently, their costs have risen in direct relationship to the dollar's fall.

[seowulf]

...Canada is 25 million people and a lot of frozen lakes and trees. Good fishing. Lots of fish there have never seen a person.

...and a lot of commodity resources like oil, uranium, gold, nickel, etc. In an inflation economy commodities rule.

[Mr. Jeeves]

People who don't create value love those 2% interest rates, because they have to borrow prosperity to keep up with their neighbors. The Fed has been catering to them for years, giving them the misleading label: "The American Consumer".

People who do create value would love to see higher interest rates, a stronger currency, and the opportunity to keep the value of the dollars they have earned safe from inflation - but value creators are a shrinking minority in today's America.

Too many people are trying to live lifestyles beyond their means on credit at everyone else's expense and they are the first ones to run shrieking to the media about how hard times are and how mean the Republicans are. ;)

[garyhope]

” In an inflation economy commodities rule.”

Excellent point. I’ll remember it. Thanks.

[Popman]

It's because interest rates in the U.S. are too low to compensate for the inflation that the market expects over the coming years.

I told my son almost the exact same thing not ten minutes ago because he was worried about the dollar falling

I swear.

I was trying to explain to him the US is not going into freefall depression.

[ALPAPilot]

I've never understood why a trade deficit is supposed to make the dollar less valuable. It just means some dollars have moved from here in the U.S. to the rest of the world

Then stop writing and take econ 101. When those overseas go to trade those dollars back to there home currency they find there supply of them out paces the demand and guess what? The value drops; the price drops; and that is reflected in the exchange rates.