Economics guys - help me better understand U.S. dollar decline

[Porsche-O-Phile]

I think we all know that the U.S. dollar is in the tank with respect to foreign currencies right now, particularly the Euro. My understanding is that a lot of this is due to lack of investor confidence in the U.S. economy, largely related to the whole housing bubble fiasco (driving down the demand for dollars). However I have also come across articles that cite excessive foreign holdings in the U.S. (particularly Chinese) as being a reason for dollar declines. This seems a bit counter-intuitive to me - wouldn't foreign holdings be reflective of HIGHER demand for U.S. dollars and push value/price UP? Or is this analysis too simplistic?

Also, I read yesterday that the nation's money supply (directly controlled by the Federal Reserve) is actually a private banking institution and not directly accountable to the people. This seems a bit strange, I always thought the Federal Reserve was an extension of the U.S. Treasury Dep't. By extension, wouldn't this make the Federal Reserve an extension of the Executive Branch? Or is it the Legislative (Congress). In other words, who ultimately calls the shots about how many dollars are in circulation? And is oversupply the ultimate culprit in the declining dollar right now?

[jluetjen]

It would take a couple of graduate level courses to even start to answer your questions (trust me, I took them). Looking back with some of the clarity of time (as well as some of the biases and filters), here are my thoughts...

1) The Federal Reserve Bank is a "quasi-governmental organization". It is NOT the government, nor part of the government. Nor is it a publicly owned corporation. The head of the Federal Reserve, as well as the other board members are appointed by the US President on a rotating basis. Since the days of Alexander Hamilton, the Federal "Bank" has been independent of the government, to ensure that it is not directly controlled by government, but rather that it reacts to the needs of the economy. There are others who can elaborate on the "ins and outs" of this relationship. Wikipedia also has a discussion of these topics.

2) As far as the value of the $US, it's strictly a function of supply and demand. When the $US goes down, it means that in general investors are finding better returns in other investments (compared to buying and holding $US notes). In order to offset that, the value of the $US will fall until it is discounted to a point where the expected future value reaches parity with other currencies and investments. Why that happens can be a function of many things -- and usually is. Some of these that come to mind easily are the following. Note that there are a lot more, not to mention they are all interrelated like a Rubik's cube.
- The supply of US $'s
- The velocity of the $US
- The future value of assets valued in $US, and their availability compared to other assets.
- The structure of the economy (import based, export based, service based, etc)

A "weak" dollar is not necessarily a bad thing. It merely means that as the value of the dollar sinks, it becomes more expensive to buy imports, and easier to sell exports. In recent history, the US has been the driver of the world's economy. The result has been a strong dollar. But much of the world economy was defined by what the US bought. As other economies grow and mature, they become more efficient, and the US becomes less of a stand-out. In the long run I consider this a good thing since the world economy will become stronger as all of the non-US economies contribute more. For example, I believe that it will become less likely to have another "great depression" as the world wide economy becomes more diversified -- much like a strong investment portfolio.

[NICKG]

the dollar decline is a good thing in long term thinking...it will bring back the outsourced jobs and make us more competitive in manufacturing..
china will have less and less of a trade surplus as this happens...which is better
technically Bernanki is the most powerful man in the world...in economic terms, as was greenspan

[s_wilwerding]

It's often difficult to think of dollars as a commodity, and it's difficult to think of the "worth" of a dollar.

The best example I could think of is to assume that every person who sold something on eBay got paid in Euros. Right now, since the euro is worth more, it may not be a bad idea to keep the money in euros instead of converting it to dollars. It also may be worthwhile to use those euros to buy debt in Europe, which might have a higher interest rate than those in America.

But suppose at some point that people couldn't buy foreign debt and decided they just wanted to convert the euros to dollars. If enough people do this all at one time, the "value" of a euro will go down, because no one will want to own euros and consequently, the euro will fall in value relative to the dollar.

This is essentially what is happening in the world market, except with dollars. America buys far more than we sell abroad, and we pay for imports with dollars. That means all those people around the world are getting dollars instead of whatever currency they use. For a long time, foreigners were using those dollars to buy US debt, which was safer and returned a higher rate of interest than they could get at home. Eventually, though, the world got flooded with dollars, and since our interest rates are now so low, foreigners are no longer buying as much US debt, and they are dumping their dollars for foreign currencies, which is pushing the value of the dollar down.

If our interest rates were higher, there would be less dumping of dollars, and the dollar would appreciate against other currencies. The flipside of this situation is that products that were made with dollars are cheaper to foreigners, which is why you are starting to see our trade deficit come down. It is mostly a self-balancing system - if our currency isn't "worth" as much as yours, it's cheaper for you to import from us, and so our trade deficit goes down, there are fewer dollars being converted to euros, etc., and the value of the dollar goes back up.

[Mo_Gearhead]

QUOTE: "the dollar decline is a good thing in long term thinking...it will bring back the outsourced jobs and make us more competitive in manufacturing..
china will have less and less of a trade surplus as this happens...which is better"
___________________________

Shouldn't this have been typed in Green? You certainly must be joking???

[strupgolf]

You're right Gearhead, I cant believe he said that. The dollar declline is not good, now or in the future. And those "jobs", they are gone from the US, never to be seen again.

[legion]

The nice thing about markets, is that they are self-correcting (barring government intervention).

If left to its own devices, the dollar would deflate, making the purchase of U.S. goods more attractive, which in turn make investment in the U.S. more attractive, which would inflate the dollar.

But governments can't keep their hands out of things, can they?

China heavily subsidizes it manufacturing, and effectively has tarrifs on foreign goods. Meanwhile, the Fed (which we want to be independent and not controlled by politicians) is lowering rates to appease the stock markets, further delfating the dollar.

[hardflex]

So, if the Dollar decline is a good thing, let's expand on that. Why don't we all just agree to cut our wages by 1/2 because that will be even better....

And we act as though only Foreigners have the option to buy Dollars vs Euros. Certainly wealthy Americans are not dummies, they can also see the Euro backed investments (for example) would be better, creating a Tidal Swing away from Dollars.

[s_wilwerding]

Originally Posted by hardflex

So, if the Dollar decline is a good thing, let's expand on that. Why don't we all just agree to cut our wages by 1/2 because that will be even better....

I'm not quite sure what you're arguing here. The decline of the dollar only makes imports more expensive. Anything I buy that is made in the US is produced using dollars and is sold in dollars, so the dollar's decline against other currencies makes no difference.

Since the vast majority of my monthly income goes to things like electricity bills, mortgage payments, food, etc. that are priced in dollars, the falling dollar impacts me very little.

[hardflex]

We import everything. Last time I looked, we only had a trade surplus with 2 countries, Holland, and an African Republic. So our buying power in all areas gets knocked for a loop by a weak dollar. And you buy gasoline, made from Oil, of which 50% or so is imported. Is gasoline still $1 per gallon? Imported Beef still 99cents/lb? etc...

[WI wide body]

The "experts" and the goofy economists and the government bull*****ters can spin it just about any way they want but what it boils down to is a very simple truth. Although of course there are a variety of other items that mitigate and affect inflation, the fact of the matter is that there is only one major cause of inflation:

An increase in the money supply of an economy that does not correspond to the increase in the output of goods and services by that economy. Anyone who tells you otherwise it either incredibly stupid or being mendacious.

There was a cute little story I saw long ago about an island economy that had only 100 inhabitants and a given amount of coins/money that they used in their required daily trading among themselves and the other local islands. It was very good in indicating how "inflation" really works. I'll try to find it.

[cairns]

Thank you John for those concise, accurate and non political statements. Thank goodness this hasn't turned into another anti-Bush screed. At least yet.

For those of you who think the decline of the $ is only a bad thing- let's use airplanes as an example.

The US is Airbus's primary market- and it's airplanes are now greatly overpriced compared to Boeing- even with the subsidies of their own governments. Boeing, on the other hand, is receiving more orders than ever- they're hiring, engaging more subcontractors and investing in plants, people, research and technology.

The same is true for Cessna, Beechcraft, GE, GM, Ford, Microsoft etc.- any US manufacturer or producer who exports to the global marketplace. We don't import everything- and as the $ declines we'll import less- or those companies who want to sell here will have to cut their prices to compete.

[WI wide body]

Originally Posted by cairns

Thank you John for those concise, accurate and non political statements. Thank goodness this hasn't turned into another anti-Bush screed. At least yet.

For those of you who think the decline of the $ is only a bad thing- let's use airplanes as an example.

The US is Airbus's primary market- and it's airplanes are now greatly overpriced compared to Boeing- even with the subsidies of their own governments. Boeing, on the other hand, is receiving more orders than ever- they're hiring, engaging more subcontractors and investing in plants, people, research and technology.

The same is true for Cessna, Beechcraft, GE, GM, Ford, Microsoft etc.- any US manufacturer or producer who exports to the global marketplace. We don't import everything- and as the $ declines we'll import less- or those companies who want to sell here will have to cut their prices to compete.

What you are basically saying is that if our economy drops to the level of China then we will be just as competitive as they. Not sure how that will play with Joe Sixpack when he discovers that he might have to work for $0.81 cents per hour.

[The Gaijin]

Not exactly. What it takes to build a Boeing can't be done by those fleeing the countryside and making $0.81 an hour in Chinese factories..

[jluetjen]

Originally Posted by WI wide body

What you are basically saying is that if our economy drops to the level of China then we will be just as competitive as they. Not sure how that will play with Joe Sixpack when he discovers that he might have to work for $0.81 cents per hour.

Actually, I think it works slightly differently. As the Chinese economy grows and matures, all of the billions of Chinese who have moved off the farm and to work in the cities will...
- Want the latest cell phone
- Want a huge HTDV
- Want a nice Audi sedan that's bigger then their neighbor's
- Want to travel more and see the world
- Want to be paid more so that they can have all of those things
- Not want to work 60 or 80 hours a week, since they'll have no time to enjoy all of the above
- Want a bigger apartment or even a detached house
- etc, etc, etc

Suddenly...
-- their labor rates aren't so cheap any more!
-- their raw materials are not so easy to get, and have to be transported further.
-- Their population ages as they have fewer kids
-- Their medical costs go up due to pollution
-- etc. etc. etc.

When that happens -- do you know what will separate them from the US (and some economies in Europe)? Innovation. It won't be good enough to be able to just make the same old widgets cheaper then before. The production of widgets will no longer be a high value added activity since the people in India/Africa/Newfoundland will be willing to get paid less since they have a lower cost of living. The key will be innovation. Who can come up with new ideas -- whether they be technology, web content or artistic content, it's the new ideas that will ultimately separate the winners from the losers. If you can come up with a new idea that people want -- you'll be paid well. If you want to follow-the-leader, then fight the pack.

Getting back to the point -- the value of the dollar. Much like individual stocks and the markets -- it will go up and it will go down. Don't sweat the noise -- look at the fundamentals and the innovation.

('Sorry for unloading like that!)

[Wickd89]

Another perspective is that the total value of the dollar reflects the value of the country. For example, in the past there was gold held in reserve that equated to the value of all the dollars that were printed.
In the early 1900's they stopped that in the US. The value of the dollar, a promissory note, was the inherit value of the US of A: the stability of the government, the infrastructure, etc..

When the international community uses dollars, it is because it is stable; unlike their own currencies. When the international community picks the Euro, it believes that it is more stable and will show more growth.

This might be short term, but it is definitely an issue.

Point made earlier about making US goods cheaper and more attractive to other countries. True, but since we are not as big a manufacturing country (as we are a service country), does this have enough value to offset the shrinking value of the $.

[NICKG]

i just wrote my economics term paper on this very subject..i will post it up when i get home..I got an a.. my professor is one of the cheif economists for at&t. he said it was spot on

[WI wide body]

Originally Posted by The Gaijin

Not exactly. What it takes to build a Boeing can't be done by those fleeing the countryside and making $0.81 an hour in Chinese factories..

You seem to have tunnel vision per the airline manufacturing business. Yes, you can suggest various isolated instances but they are mostly irrelevent to the context of the discussion. Very few people have lives that revolve around who might build or buy a Boeing jet.

Besides, if you think that the "Chinese countryside" will not be soon building their own jets similar to anything Boeing produces then you are nearly as foolish as our brilliant government leaders who saw no harm in opening our nation's markets to China, India, etc with virtually no control or regulations.

[Hugh R]

With the Canadian loonie now more than the US dollar, most of the Studios are re-visiting just how much future TV and feature production they're going to be doing in Vancouver.

[The Gaijin]

Originally Posted by WI wide body

Very few people have lives that revolve around who might build or buy a Boeing jet.

.

The airplane business was the example given - and it is a good one. I remember when the Japanese were going to take over building jets...but that is besides the point..

Most people have a job in some kind of service industry. And how is they going to be shipped to China?

What control or regulations do we need?