Posted on 09/28/2003 5:53:18 AM PDT by sarcasm
WASHINGTON -- A slide in the value of the U.S. dollar has spooked stock and bond markets this week, a reminder that a dollar crash could devastate the U.S. and global economies.
A rise or fall in the value of the dollar against other currencies matters little by itself for most consumers, unless they travel overseas. Yet a sudden change in the exchange rate can indirectly raise or lower the cost of goods in the stores, influence job-creation, investment and mortgage-interest rates and shrink the value of retirement portfolios.
In recent years, foreigners buying dollars -- and investing in the United States -- have been an important prop for the economy. Should they suddenly get cold feet, propelling the dollar down, they probably would pummel the stock market, drive up interest rates and push up the price of imports, stoking inflation. Such a shock would drag down other economies as well, because so many countries depend on the huge U.S. market to sell their goods.
While many economists agree that the dollar is too strong, they are hoping for a gradual fall instead of a sudden plunge. But herein lies the danger: The herd mentality of markets can turn a gradual decline into an all-out run. If investors believe the dollar is headed down, they will sell their dollar holdings. Those sales will depress the dollar, sparking a new round of dollar selling in what can quickly become a downward spiral.
That fear drove down stock and bond markets Monday and well into Tuesday. Stocks fell further Wednesday amid fears of another threat to the global economy: rising oil prices. The Organization of Petroleum Exporting Countries surprised markets by announcing it would curtail production by 900,000 barrels a day, about 3 percent of total production.
Economists say the dollar, despite falling 33 percent against the euro and 17 percent against the Japanese yen since early 2002, remains overvalued. The U.S. currency needs to fall much further to emerge from the danger zone, they say.
"The road ahead will be long and arduous, and not without risk, especially in oft-volatile currency markets," Stephen Roach, the chief economist at Morgan Stanley investment bank in New York, wrote in a commentary this week.
Behind the dollar's vulnerability is the huge U.S. current account deficit, which consists of the trade deficit along with some financial transactions.
The United States in essence has been living beyond its means, importing more than it exports and relying on money from abroad to get by. That money can come from foreign investments in U.S. stocks or foreign purchases of U.S. bonds.
The current account deficit is headed toward a record $550 billion this year, the equivalent of $1.5 billion a day.
As this deficit grows, foreign investors could lose faith in the United States' ability to repay its debts. Any sign of weakness could lead them to dump their holdings, causing a dollar collapse.
"You're piling up more and more dry kindling, and at some point there could be a spark," said Jay Bryson, global economist at Wachovia Corp., a Charlotte, N.C.-based bank.
There's reason for hope, however. The dollar, which started rising in 1995 and peaked in early 2002, has declined gradually since then. A dollar buys about 111 yen today, down from 135 yen in February of last year. The euro has risen from 86 cents to about $1.15 over the same period.
A weaker dollar makes imports more expensive and U.S. exports cheaper for foreign customers. Over time, that should decrease sales of imports and boost exports, chipping away at the trade deficit, by far the largest piece of the current account shortfall.
But the dollar is only halfway there, according to Fred Bergsten, the director of the Institute for International Economics, a research group in Washington.
The Bush administration, facing a re-election campaign next year, is trying to talk the dollar down further to help beleaguered domestic manufacturers boost exports.
Treasury Secretary John Snow succeeded last weekend in getting finance ministers from Japan, Canada and four European countries to join him in calling for "more flexibility" in exchange rates. The implication was that China and Japan should let their currencies strengthen against the dollar.
Continuing trillion dollar deficits mean that the dollar will be only a slight fraction of what it is currently worth - that is a law of economics. A country that produces nothing, and has trillion dollar deficits each year, ends up with worthless currency.
However, in the long run, holding stock will offest the comming inflation, since it is a value of real assets, as long as the asians let us operate our factories over there with all of the profits going to amerian stock holders. I dont think stock prices will go down, as long as the asians/communists let us use their land, their labor, their factories, their management, and let us reap all of the profits forever.
It is a good thing that the chinese communists dont care about profits, else they would just take over ownership of all the offices and factories and technology that we are moving over there.
On the other hand, if you dont think the communists will let us profits from all their efforts, and if you think there might be some risk that the chinese and others will just take over the plants in asia, then buy gold.
The price of gold today--courtesy of Nixon's "floating" the dollar--is somewhere around $350 per ounce. So every dollar you own is worth ten cents.
Apropos of nothing.
--Boris
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