The Dollar "crisis"

[sailaway21]

I've been reading of much concern about the weak dollar, foreign exchange rates, and the US trade deficit, and much of it has been written by people who should know better. The current weak dollar will aid our exports and that will help our balance of trade, that is, if you feel there is a problem with our current balance of trade. John Deere is reporting record increases in equipment shipped-shipped overseas. Most of the sales are due to a favorable exchange rate.

The last time we had this hullabaloo was during the eighties when the concern was that the yellow peril, er, Japan was going to buy us out since they held so much US T-notes and were buying US properties as fast as possible. How'd that work out? I was in NYC this late summer and Rockefeller Center was right where it's always been, even where it was in the eighties when the Japanese owned it. Given the current real estate market,it might be a good buy for some Canadian corporation. When things pick up again we can buy it back once more for pennies on the dollar. Although I'm sure there's something written into NAFTA about taking advantage of gullible Canadians.

The fact that foreign nations are so eager to buy our government's debt is actually a good sign. The line is considerably shorter to buy Somali securities and investing in France is a nice way to lag behind inflation. the really good news is that the US economy has been expanding quite nicely for how long? Somewhere around the early eighties, with only a couple of minor bumps, making one wonder if the business cycle has finally, in fact, been repealed.

The below article, written from across the pond, does a rather short and concise job of summing up why I am not worried and you should not be either.
http://www.timesonline.co.uk/tol/com...cle2925872.ece

[sailingdog]

Unfortunately, we currently have a President who thinks you can spend money like water against a California brush fire and not have it impact the economy. The high deficits the Bush regime has run up, combined with our trade imbalance; the credit crunch—caused by the real estate bubble and the overextended home mortgage market failure; and the high energy costs—which are not going away any time soon; wiil lead the country into a recession fairly shortly.

The article points out:

The reality is this: why save when the value of the investments you own is increasing at rapid rates? The total value of mortgage and consumer debt is indeed up by a massive $5 trillion since 2001, according to the latest figures published by the Federal Reserve.

But consider the increases in the wealth of Americans during that period. The aggregate value of houses alone is up $8 trillion. The increase in the value of stocks held either directly or through pension funds and other investment instruments is higher by another $8 trillion. That's an increase in net wealth of American households of $11 trillion in less than six years. That's about $90,000 for every household in the country. As someone once said, 11 trillion dollars here and 11 trillion dollars there and pretty soon you're talking serious money.

But it fails to mention that much of the $8 trillion in the value of housing is due to a housing bubble and that those prices are in many areas vastly optimistic and overpriced, and due for a massive correction shortly.

He also clearly states:

All right, but isn't the US going into recession, you say? Maybe, but so what? The US is overdue a recession by the standards of the business cycle in the past 60 years. It's possible the housing market and related problems will tip America into another one. Provided the people responsible get policy right, it doesn't have to be a depression.

However, the Bush administration has proven itself to be very bad at getting the policy right. Their idea of proper government fiscal responsibility ranks up there with most third-world dictatorships.

Unlike the period of time the author discusses, 1985–1995, where oil prices were reasonably low, we've got a similar drop in the value of the dollar, and the inflationary pressures like the US experienced in the 1970s, with the gas crisis and the first oil shock. Soon, the inflationary pressures caused by very high oil prices will kick in. The article would be much more realistic if it mentioned that minor fact.

Keep drinking the Kool-aid Sailaway...

[Rockter]

But look at the debt... $9 trillion.... close to $30,000 per citizen, perhaps close to $150,000 (say) per family, and rising. At (say) 5% interest rate, that needs each family to pay (or borrow!!!!) another $7500 each YEAR.

That's one of the big reasons why the currency is weakening.

Why does this debt have to have such a vast foreign component to it. Why is the debt not "sold" to Americans.

I am puzzled.

Why the mystery?

[PBzeer]

Dawg, ya gotta get over your Bushphobia. Deficeits are going down, due to increased tax revenues, due to lower tax rates. This has proven out with the Kennedy cuts and the Reagan cuts, just as it is with the Bush cuts. Yes, he is spending way too much, but I suggest you look at what the Demo candidates for Prez are promising, then throw in their way of financing it, and it makes Bush look like a piker when it comes to spending your money.

[Valiente]

I'm happy to buy your products, but I won't buy your debt, or your stocks for that matter.

Not yet, anyway.

February/March is looking good to pick up a few bargains in the U.S. economy. After most and not just some of the chickens have come home to roost.

I don't care much which set of well-heeled thieves runs your government, as there is a bigger deficit between their actions and their rhetoric than there is in the economy (blah blah war on terror, blah blah no child left behind, blah blah ethanol economy...it's all complete xxxto me).

I do care that the U.S. is stable, because whether I like it or not, you buy so much of our stuff, and our export sector is far too stupid and cheap to establish other markets. Still, it's better to be the pusher to the pimp, than the pimp's whore.

Of course, my ideas for Canada aren't popular, either. I want to see the dissolution of the Senate, the combining of some of our provinces into single entities, the entry of Canada into the EU (before Russia, certainly), because a petro-power in the EU can affect EU policy via the turning of the taps, and...well, I could go on, but let's say it would mean an end to unemployment.

You guys are talking about the colour of the rats, and failing to notice they both carry the plague. Time to get a ferret!

[Sailormon6]

Originally Posted by sailingdog

The article points out:


Quote:

But it fails to mention that much of the $8 trillion in the value of housing is due to a housing bubble and that those prices are in many areas vastly optimistic and overpriced, and due for a massive correction shortly.

Okay, SD, so let's assume, for the sake of argument, that 1/5 of home mortgages are foreclosed. Those home values don't suddenly drop to zero. Somebody will buy them. The other 4/5 won't be foreclosed, and they'll hold onto their homes until the prices come back up, which they will. If all that happens, the net wealth of all American households might only increase by 10 trillion dollars, instead of 11.

Oh my God! We're not getting fat and rich as fast as we thought we were! Curse that cursed Bush!

[danjarch]

Originally Posted by Valiente

You guys are talking about the colour of the rats, and failing to notice they both carry the plague. Time to get a ferret!

I like that one

[Sailormon6]

Originally Posted by Rockter

Why does this debt have to have such a vast foreign component to it. Why is the debt not "sold" to Americans.

I am puzzled.

Why the mystery?

It's a (whispering) conspiracy!

[AjariBonten]

Originally Posted by Valiente

the entry of Canada into the EU

Val, you can't do that; you guys are scheduled to be state #'s 51 - 63, right before Mexico joins the United States of North America.

[sailaway21]

To the extent that there is a housing bubble it is in a few markets. Were overall housing values to retreat even 10% it would not, in and of itself, produce catastrophe. The vast majority of mortgage owners are paying their mortgages and will continue to do so. Speculators are going to take it in the ear-hole perhaps, but then isn't that what always happens to speculators?

The Bush administration can be criticized for not vetoing past spending bills. Otherwise, the spending by the US government is exactly what the elected Congress has determined it should be, including bridges to nowhere and a massive, un-needed subsidy to the Boston commuter for a tunnel that drains money into Boston Harbor. Both Republican and Democratic congressmen have fed at the trough of pork barrel spending, although the case can be made that it would have been even more excessive had the Dems controlled the Congress.

Annual deficits are coming down and the reason is not reduced spending. The deficits are being reduced in the only way that they have ever been reduced, or ever will be reduced. We grow our way out of the deficits as Reagan and others were vilified for saying. Bill Clinton was the heir to that policy, which the Dems like to take credit for, but the low taxation policies of the preceeding three administrations are what produced the massive increase in federal revenues, albeit not as large as they might have been had G.H.W. Bush not caved in on a tax increase.

The currency weakening has nothing to do with federal debt. There is a more than ample supply of money available for federal borrowing; after all, were you a bank, who would you rather lend to, some company or the federal government? One need look no further than the large run-up in crude oil prices to see why the dollar has weakened. What country produces the most goods and thus is most dependant on the supply of oil? And why is a weak dollar inherently bad? As stated above, American equipment manufacturers are having a field day with their products more competetively priced overseas. And, coincidently, those jobs are the good high paying ones we hear so often about from the Dems that are disappearing. It just reinforces the fact that, to some, economic news is always bad news.

In his single salient point, the Dog makes mention of inflation and that is indeed the thing that must be guarded against. The rest of his boilerplate fails to even take into account that interest rates are at nearly the lowest rate they've been within his lifetime and for a good measure of his father's lifetime. Somehow our myopic canine sees a credit crunch somewhere in those facts. Once again, there is no good economic news-ever. If you're focusing on the things that Dog and his ilk are, you're missing the fact that this is a fantastic time to buy a house or to put some extra money into the market. When the market and economy rejuvenate themselves you won't be left saying, "I wish". But then, the average investor buys at or near the top of the market, just like those speculators did in the housing market. Buy low, sell high does not imply that buy high and hope for higher will logically follow.

As far as recession goes, I see little to disagree with in the article. It would be an excellent time to make the Bush tax cuts permanent, sending a positive signal to the markets if there ever was one. In '08 the market is going to start to get nervous about the possible implications of a tax and spend Democratic congress and presidency. Cut taxes now.

And to Rockter's last question: Americans do buy T-Bills, ie... government debt obligations, but only do so either in the interest of a more secure investment or when they can do no better in other markets. Currently, they are doing much better in those other markets. Foreign investors are attracted to investments that are backed by the full faith and credit of the US government, ie... they're more positive about our future than we are.