Europe's force de frappe (The consequences of a weak U.S. dollar)

Independent ^ | 04 May 2003 | Hamish McRae

[virgil]

Wouldn't a weak dollar also encourage more american manufacturing and people buying american?

[RedWhiteBlue]

Wouldn't a weak dollar also encourage more american manufacturing and people buying american?

It certainly seems that way to me. For products that are manufactured in countries that have currencies that strengthen vs. the US dollar, their US price has to increase relative to similar products manufactured in the US. Or, if they want to stay competitive in the US market vs. US manufactured products, they have to cut their price and thereby decrease their profit margin. The imports lose, one way or another.

[pragmatic_asian]

Not necessarily. American goods would actually be cheaper because there would be more domestic production. US prices aren't just constrained by imports. Services, which make up a huge portion of the US economy, would also be cheaper.

[ggekko]

The answer to the current situation with the world economy is not to play games with currency values in search of a competitive edge. This will cause everyone to fall in a ditch.

The main problem right now is that most of the EU is NOT buying anything. This problem is being exacerbated by a ridiculously tight monetary policy being orchestarted by the ECB. Unless Europe starts growing again we are headed for a mess.

[n-tres-ted]

I think you are correct. What the U.S. and the world needs is a dollar with a stable value, indefinitely into the future. That value presently should be about $350/ounce of gold, because that is about the average value of the dollar over the past 8-10 years. Stabilizing the dollar at that value will be fairest to borrowers and lenders who have entered dollar-based transactions since that time. Also, it will end the movement of prices seeking equilibrium with the changes in value of the dollar, so we would have more stable prices. The substantial swings we have experienced in dollar valuation since the dollar was floated against gold and other currencies have been very burdensome to the economy, and ought to be ended.

[RedWhiteBlue]

The oil market is competitive. If it cheaper for foreigners to buy dollars, they will be willing to pay more for oil.

I have been in the petrochemical industry for over 20 years. That makes absolutely no sense to me. The market price is just that -- the market price. It varies from day to day based on fundamentals -- like supply vs. demand. From one contract to another, regardless of the buyer or supplier involved, the price does not vary and stays within a slim margin. (Unless there is a longer term contract were future price has been guaranteed or in a case where a country was giving illegally low prices such as was the case to Saddam to Syria). The only time someone is "willing" to pay more is when the supply gets tight, and in that case the whole market moves up in response to the new price and that is what everyone ends up paying.

Natural gas can replace oil in many applications, so as the price of oil increases, the demand for natural gas increases, and so the price.

Yes, the technology exists for natural gas to replace oil in many applications, but there are very few places where we have the technology IN PLACE and the infrastructure to handle that. If we decided to do that today, it would take several years to have our current petrochemical facilities and the infrastructure for such converted. We just aren't ready, so we really aren't able to switch at this moment. Aside from that, natural gas is at an very high historical prices, so nobody in their right mind would advocate moving toward natural gas and away from crude oil. Oil is still a much better bargain. That will not turn around any time soon, either. While the price of oil has been high (and has been coming down), natural gas will be in short supply and at a high price historically for some time to come. We don't even have a good supply situation for natural gas to cover the CURRENT demand for natural gas, so we can't even consider converting crude oil technologies toward natural gas. Natural gas as a raw material just wouldn't be available. I hope that changes.

I'm not sure we can count on the Chinese to continue the same exchange rate if the US dollar drops too much.

Heck, we can't count on the Chinese for anything, but let's just explore what happens when the Yuan is pegged to the USD and the USD weakens (and therefore the Yuan Renmenbi weakens).

Since the Asian currency crisis of 1997, all of the other Asian nations' curencies were weakened vs. the USD. These countries, most notably Japan, have been pleading with China to let their currency float and stengthen or weaken along with the other Asian currencies because they were losing their ability to compete vs. China. China refused. They have been ingnoring the request for years. Now, that the USD is weakening, and they are pegged to the USD, why would they want to strengthen now? Not only will they maintain their US market, but with the strengthening of the euro, their products will be even more competitive in European market.

The Chinese are cut-throat. They are not going to lose this opportunity to get a larger market share in Europe. Just think of it: The price that their goods are sold for in Europe can stay the same, while the amount of local currency they recieve for the sale will increase. But, more likely, they are only going to try to get the same price in their local currency, which means that in Euroland the price of their goods will decrease. Not so good for European manufacturers of similar products. But, no different here in the US for consumers since, because they are pegged to the dollar the price won't change (but they already have a commanding presence anway).

Our local prices from Chinese goods won't change, but the Chinese might cut their prices in Euroland. I don't know, but I have a feeling, that the goods we sell to Europe and the goods China sells to Europe don't overlap so much. If they did, I would think that would also happen in the US and that apparently isn't the case because we have already pretty much given up too much of our small goods consumer market to China -- but that is another discussion altogether.

[FreedomCalls]

What about these dollars:

Or at a minimum these (read the seal on the left and the inscription at the bottom center of the front):

[rimmont]

"Higher prices for imports, which we have become dependent upon."

This is true to some extent, but the only imports we are really dependent upon are commodities such as oil and perhaps some of the finished goods we import from China whose Renminbi is pegged to the U.S. dollar anyway.

[ggekko]

"The substantial swings we have experienced in dollar valuation since the dollar was floated against gold and other currencies have been very burdensome to the economy, and ought to be ended"

In theory the idea of floating currencies should be the best system as it should reward the most disciplined Governments with a higher currency value. In practice it has been a disaster as Governments attepmt to manipulate their currency for political reasons.

I now advocate an implied Gold standard wherein the Fed would transparently use a price rule to add or subtract liquidity from the banking system based upon this rule. This system would work much better than current system and transactions costs associated with financing would fall across the broad. We still do not have adequate cooperation with our main trading partners, however, in order to full utilize such a system.

The ECB is pursuing a tight mentary policy even through the French, German and other EU economies are choking. The Japanese are still clinging to their export led economic model which demands an artificially low Yen value; the Chinese are pursuing a similar strategy with their currency. It is not sustainable for the US to be the only buyer.

The current deflationary pressures in the world economy are a result of Government subsidized over investment in a number of export industries. The South Koreans have the way out the current mess by liquidating some of their redundant capacity and stimulating internal consumer demand in order to replace sales from exports. The other Asian countries should be looking to South Korea for a solution to their problems.

[n-tres-ted]

A stable dollar can be achieved by targeting the price of gold at $350, and keeping it there by buying or selling government securities on the open market to add or subtract dollar liquidity as needed. If other currencies rise or fall against a stable dollar, and continue to do so after the proper equilibrium is achieved, those other currencies will simply harm their own economies. I think a stable dollar will encourage stability in other currencies, and will certainly be a great benefit to the U.S. economy.