When dollar falls, European exporters count their bruises

LA Times ^ | 17 November 2007 | Geraldine Baum

[shrinkermd]

The euro's rise and dollar's slide are squeezing European exporters' profits or multiplying their losses, prompting layoffs and plant closings. Companies are not only curbing production of goods headed to U.S. buyers but also rethinking the way they do business.

The euro recently passed the record $1.47 mark, gaining 11.5% since the beginning of the year against the greenback. It closed Friday at $1.46; a dollar bought 0.68 euro.

Most emblematic of the problem has been the impact of the euro-dollar relationship on the aeronautics industry -- and particularly on France's Airbus, whose main rival is U.S.-based Boeing.

With a falling dollar making Boeing's products cheaper outside the U.S. and Airbus' more expensive, Louis Gallois, chief executive of Airbus' parent EADS, recently described the sinking U.S. currency as a "sword of Damocles" hanging over the company's future. He vowed to cut an additional 1 billion euros in operating costs by 2010 or 2011.

This would mean more layoffs at a company that is already purging 10,000 jobs, a decision made when one euro equaled $1.35.

Survival strategies

Less dramatic but no less crucial is the impact on other European companies that export sophisticated equipment, technology, cosmetics, cars and luxury goods. For firms that make a large portion of their sales in the United States or compete with firms that deal in dollars, survival depends on raising prices, cutting costs or hedging currencies.

The strong British pound, moribund Japanese yen and undervalued Chinese yuan also play roles in this tale of currency chaos, from a European exporter's perspective. Nearly every day, another company announces more lost earnings and job cuts and blames the currency commotion.

[A Strict Constructionist]

“The problem is that Americans long ago lost the talent for designing and producing products that: a. meet the needs for which they were designed b. are of a quality that they don’t rust, bend or break in normal expected usage, c. are attractive in appearance d. provide any sort aesthetic enjoyment, such as having attractive lines, pleasing colors or pleasant and appealing taste. e. If food, tastes good.”

We still have the talent. We just have too many Harvard MBA’s and Bill Gates types that prefer to use cheap overseas “talent”. The most useless degree available unless you already know how to make something. Most MBA’s dont’t even know how a screw driver works, unless your talking about drinking. Flame away.

[A Strict Constructionist]

Well maybe drilling in AK and FL will finally happen.

[A Strict Constructionist]

I guess our tourist economy will improve if we can keep the Muslim extremists under control.

[RFEngineer]

Before I hurl myself over a cliff with a gun pointed at my head and a mouthful of rat poison, is there anything....ANYTHING that America does right anymore?

[AndyJackson]

Microprocessors. fighter aircraft. Microbrewed beer. Wine, if the winery hasn't fallen to the curse of Robert Parker's rating system. Bourbon. Sailing yachts. Pretty women. Small towns in the South or New England (if they are not too twee with $500 per night B&B's), skiing in the Rockies - if it survives global warming, nuclear submarines, the US marines (about 3 Generals and the Colonels and down). Good beef. Cheasapeake bay crabs and oysters. In sum, almost anything that is not produced by an organization acquired and organized thorugh leveraged buyouts, downsized and run by a bunch of MBAs trying to figure out how to screw union labor out of their health care benefits. Unforunately the fraction of our world that is exempt from those forces has been dwindling. The Navy was long done for, and I don't know about the army.

Don't jump off a cliff. Since you are an engineer hang around. Maybe once the economy hits rock bottom we will need to make a living producing high quality goods that others want to buy, rather than the old-fashioned way - printing money.

[Red6]

The US government does not print more money when it wants to spend more; we have the Iranians doing that for us- lol. Monetary policy is not set by a bunch of third graders as you seem to think. As an economy grows, and ours has been for many years, the need for currency expands. There are also other factors to consider, such as the velocity of the currency. There are many variables, but your little cliché world of how it works is superficial and inaccurate.

Like a trade deficit, a topic chosen by the media because of its perceived negativism (Bad news and the out of the ordinary sells stories), the dollars exchange rate is misconstrued to mean all sorts of things except what it is; a natural and positive development for us that more or less is a correction and puts the dollar at its natural state as defined by supply and demand, vs. the inflated value of past. People like you think a bigger number must be better. Higher blood pressure is obviously better. Really high cholesterol is better than low cholesterol as well, right? We can run a trade deficit indefinitely, and it will not hurt us. In fact we have been doing in for long over a decade and despite the self proclaimed experts purporting doomsday prophecies of what this will bring, as Friedman predicted, all is fine and the sky is not falling. Likewise, a lower valued dollar is no negative thing and as it stands it is indeed to our advantage. Of course those being crushed by the dollar will complain, and ironically it’s a devalued dollar that does the crushing, ask EADS, the topic of this thread. Did you read the article?

“and Germans have had one of the highest standards of living in the world for many years now.”

• The Germans have double digit unemployment.
• They have had near no economic growth in the last years and today are happy with a meager 2% adjusted.
• They have a per-capita income ¼ less than in the US.
• Their standard of living and per capita purchasing power has dropped over the last decade.

For further reading and a quick fact check: http://www.destatis.de/jetspeed/portal/cms

“Surely Buffett and I are not the only one’s who think that borrowing abroad, mortgaging our real estate abroad to finance consumption from abroad is a sign of underlying economic weakness, you know, like the Congo or Sierra Leone or Brazil in the bad old days. That our currency is in decline is a reflection of that underlying weakness. “

Sure, and the economy of Great Britain with their high valued pound was so great off years past, right? Besides, what sort of reasoning are you applying? Your reasoning is like that of a lemming. “Well, others are jumping off the cliff so I guess I too should go!”

A powerful currency does not equate to an economy that is doing well, it is not an indicator of economic prosperity, long term economic stability or the wealth of the people within that society, or its distribution among the people within that society. Like any commodity on a market, it has a supply and a demand, and as the demand decreases, so does its value. The devaluing of the dollar is not a function of more currency as much as it is demand in our case. If we wanted to, we could take actions to stop the devaluing of the USD. We have not done so for a reason. In fact when the US pushes China to stop pining their currency we are de facto doing the opposite, since China likes the status quo and does not want to see a devaluing of the USD for all the reasons I listed.

“And as for all of your claimed experience in Germany, it must have been a long long long time ago, because in the past 20 years being stationed in Germany for married service members has been to be cast into financial hell.”

Actually I left Germany in 2005 again, this time as a service member, 1AD, 1BDE. I grew up there and spent my first 24 years in that socialist nightmare you so admire. I actually do remember (While I was there) them phasing in 1 Euro jobs so that they can pay people their unemployment plus 1 Euro a day but no longer count them on their unemployment statistics, or created retraining programs, which when enrolled in the people also don’t count in the official statistics……….

While it is beneficial for 86,000 US service members stationed abroad when the dollar is highly valued, it hurts us as a nation because the US as a point of production becomes more expensive. I made that point in my first post I do believe and this is probably the third time or so that I make it. What you seem to forget is that the US is a little bigger than 86,000 service members in Germany, there’s another 299,914,000 living here who like to have jobs and prefer a playing field that at least gives us a chance to compete. When you have situations as in the mid 80s when 1 USD = DM 3.60 no matter how productive, no matter how low the taxes, how good the labor laws, how educated and skilled a work force, etc. the US is in such a situation at a huge disadvantage.

My last attempt with a hypothetical example: Let’s assume you have a guy named Schmidt. He works at a plant for MAN trucks. He costs his employer an average of Euro 51,000 per year, of course that’s not what the employee sees but this is the cost that is built into the product from the human capital invested in transformation. On a truck, well say 36% of the cost is labor in some way or fashion. The cost of assembly line worker Bob in the US is about $65,000 per year. Now let’s do some real simple math. Let’s assume its $1.46 = Euro 1. The average worker in the US plant hypothetically now costs Euro 44,520. All other variables held constant, this is a difference of Euro 6,480, or 13% less in labor; better yet, this amounts to 4.7% less in total end item cost.

“Surely Buffett and I are not the only one’s who think that borrowing abroad, mortgaging our real estate abroad to finance consumption from abroad is a sign of underlying economic weakness,”

Actually it’s a sign of globalization. What’s the meaning of old retires from Europe retiring in Florida? Like Lord of the Flies you can read into it as much as you wish, or simply see it as a reality of a global economy.

” And people buy BMW’s and Audi’s not because they are cheap because of their reputation for quality (reliability, design, performance, total cost of ownership over the real life of the car, etc.) Surely even you are not that much of a dolt despite your fancy perfumed finery flapping in the wind with the little MBA monogram on it.”

Wow- Never have I seen a consumer so enthusiastically scream “I’m a sucker” so loud. I have two cars, both with over 170,000 miles. I tow, I go light off roading when hunting etc. I have no interest in an overpriced car that gives me no functional advantage. I don’t Fu%! my car. I like my vehicle white and bare bones. I don’t care for conceptual advertising trying to push a feeling of status or quality. The only extra I have a need for is A/C, everything else is frivolous B.S. that people think they need. As to your super duper BMWs and Mercedes, between my father and I we have owned a 528i, 520i, 380SE and it is not without reason why he today drives Volvo and I Jeep. They are overpriced and besides some illusion of being special, that vehicle is still just a pile of plastic, rubber, steel, and glass; stamped out of sheet metal, spot welded, bolted, and glued together, these machines are mostly assembled from third party components often even the same suppliers between various brands. You are a great example of how various techniques in product differentiation and branding work to allow a higher price point to be set.

[AndyJackson]

The US government does not print more money when it wants to spend more; ... As an economy grows, and ours has been for many years, the need for currency expands. There are also other factors to consider, such as the velocity of the currency. There are many variables, but your little cliché world of how it works is superficial and inaccurate.

And when the need for currency expands where does it come from - who prints it? The government or some backstreet print shop? What happens if they print too much? If they only print what the economy "needs" explain this chart to me:

How do they know how much more currency the economy "needs."

Until you explained it to me I really had not guessed that our economy has been growing at 14 and 16 nay 18% per year. If that is how it all works, shouldn't we just print some more and it will grow even faster.

All those exploding mortgage CDO's with the exploding interest rate, currency and default swaps hidden in the package, the high flying real estate valuations, now collapsing, the collapsing dollar and rising price of gold and oil couldn't possibly be explained by the fact that maybe a pit too much of this really valuable currency was printed, making it kind of a glut in the vaults of central banks around the world. Naah. Couldn't be.

Monetary policy is not set by a bunch of third graders as you seem to think.

I am glad that when Greenspan was running around telling everyone how all the smart people were taking out 1.75% exploding ARMS that would destroy their equity, credit, lives and the real estate industry to boot, he was being an adult with full knowledge of forethought.

[Toddsterpatriot]

The real problem with the US$ as a reserve currency is that whenever the US government has been running a bit short it just prints some more

You think the Federal Reserve creates new money and hands it to the government to spend? That's funny.

A strong currency (one whose purchasing value in international markets remains releatively stable rather than declining by 50% in ~3 years)

What currency has declined 50% in the last 3 years?

The Mark / Euro has been a strong and stable currency for a long time,

Your poor math skills are showing.

[AndyJackson]

You think the Federal Reserve creates new money and hands it to the government to spend? That's funny.

Oh you silly silly boy. When the fed engages in open market transactions to increase liquidity by purchasing treasuries that the treasury prints and sells that is exactly what they do.

You must be the only "expert" who thinks otherwise.

[Toddsterpatriot]

You think the Federal Reserve creates new money and hands it to the government to spend? That's funny.

When the fed engages in open market transactions to increase liquidity by purchasing treasuries that the treasury prints and sells that is exactly what they do.

When the Fed buys Treasuries, the Primary Dealer gets the money.

You must be the only "expert" who thinks otherwise.

LOL! You really should stop talking about things you know so little about.

[NeoCaveman]

Do they count cars that are made and sold here but owned by a foreign company as imports/exports?

No, that would be counted as domestic production and consumption.

If they are then exported to a foreign country, even the foreign company's home country they'd be exports.

[AndyJackson]

By the way, can you instruct us on a few things?

1. Who does print money?

2. How does it get into circulation?

3. What is inflation? Who causes it? Who benefits?

[AndyJackson]

Tell us then. Who creates “money”? How does it get into the system?

[Toddsterpatriot]

1. Who does print money?

The Bureau of Engraving and Printing.

2. How does it get into circulation?

They sell new bills to banks.

3. What is inflation?

A continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services.

Who causes it?

Whoever increases the volume of money and credit relative to available goods and services.

Who benefits?

Debtors and holders of hard assets.

Maybe you can answer mine? Do you think the Federal Reserve creates new money and hands it to the government to spend?

[AndyJackson]

Who causes it?

Whoever increases the volume of money and credit

Oh, and who increases the volume of money and (through reserve requirements and fractional reserve banking) credit? Goldman Sachs, the repo market, primary dealers, the tooth fairy, colonel mustard. Me? You?

[AndyJackson]

Do you think the Federal Reserve creates new money and hands it to the government to spend?

No they don't run off a bunch of cash and hand it to the federal government. They purchase treasuries.

[Toddsterpatriot]

No they don't run off a bunch of cash and hand it to the federal government.

Excellent! So this claim was wrong?

The real problem with the US$ as a reserve currency is that whenever the US government has been running a bit short it just prints some more.

[AndyJackson]

1. Who does print money? ...The Bureau of Engraving and Printing. ....2. How does it get into circulation? ....They sell new bills to banks.

Why are the bills printed by the bureau of engraving and printing called federal reserve notes. What faction of M1 is in the form of printed federal reserve notes and what fraction is in the form of credits (ones and zeros in demand depository accounts).

Who sells the notes? The bureau of engraving and printing? When they are bought by a bank how are they paid for? When reserves in the system drop as a consequence does anything happen? Does anyone do anything about it? Who does it? What do they do?

[AndyJackson]

Who benefits? - Debtors and holders of hard assets.

Who are "debtors and holders of hard assets?"

Do all debtors benefit from inflation? Do those who have credit card debt benefit from inflation? Do those who have auto loans benefit from inflation?

Does inflation benefit real estate speculators? How?

[AndyJackson]

The real problem with the US$ as a reserve currency is that whenever the US government has been running a bit short it just prints some more.

As you have already stated, inflation is caused when "whoever increases the volume of money and credit relative to available goods and services." The whoever list is really very very short, like a club with one member whose name dare not be uttered in this circles. When the $ is a world reserve currency it is held by other central banks who loosely or tightly peg the value of their own currency to the dollar. Therefore when an extra dollar is created it inflates the world's economy, and the extra demand is on the world-wide economy. When on the other hand the $ is on par with an Argentinian peso, then, the exchange rate on the American peso drops relative to the world currency, ceteris paribus , and you now only steal from US citizens.

Now tell me. What happens when you take advantage of the fact that the $ is the reserve currency for 40 years by printing lots and lots of it and having it purchased by central banks around the world, and suddenly one day they wake up and decide they are holding, collectively enough of it?