Dumping Dollars - Political Forum

Wheeldog · 09-20-2007, 01:48 PM

Quote:

Fears of dollar collapse as Saudis take fright - Telegraph Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East. ... "This is a very dangerous situation for the dollar," said Hans Redeker, currency chief at BNP Paribas.

This could be the straw that breaks the back of the American dollar. Most major oil exporting nations have operated with the dollar as the basis of exchange. This has propped up the dollar forcing other nations to buy dollars in order to purchase oil. This has made the dollar the primary currency throughout the world. Now, however, other nations are beginning to question the ability of the U.S. to back its currency as it sinks into debt through trade deficits and excessive spending at home. If Saudi Arabia drops the dollar it could set off a massive selling of dollars worldwide, especially in Asia. Suddenly, we could find that the American dollar sinking in value causing runaway inflation.

Diligent_d · 09-20-2007, 03:09 PM

I agree. For years, the US has been living on credit and the rest of the world knows this. I think many of the Saudi Princes and what not are already quietly attempting to sell their dollars for Euros and gold. As you mentioned, as more people pull out, the dollar becomes even more infirm. This cannot be good for the US or global economy. There are so many isolated areas lately where we can now start to make out ominous writing on the walls - when it all adds up, it could potentially be very serious.

Wheeldog · 09-20-2007, 05:39 PM

Quote:

Originally Posted by Diligent_d

I agree. For years, the US has been living on credit and the rest of the world knows this. I think many of the Saudi Princes and what not are already quietly attempting to sell their dollars for Euros and gold. As you mentioned, as more people pull out, the dollar becomes even more infirm. This cannot be good for the US or global economy. There are so many isolated areas lately where we can now start to make out ominous writing on the walls - when it all adds up, it could potentially be very serious.

You make good points. As a nation, we have been on a credit card spending spree acting as though there is no tomorrow. We have been acting as though consuming is the same as producing calculating our debt as part of national GMP. I have friends who refuse to believe the U.S. economy is actually very fragile. They say that we have evolved from a manufacturing-export based economy to a so-called "service economy." This means that we don't have to make and export things anymore. All we have to do is buy and sell what other countries make and ride the realestate rocket to riches. From my perspective, that is a hollow economy that will implode whenever serious pressure is applied. It is not possible for us to indefinitely live on the dole borrowing from other countries to pay for the high life. All it would take is for one major holder of American debt to dump their dollars and treasury bonds or for oil exporting countries to break the link to the American dollar and the U.S. economy would deflate and collapse.

Leeu · 09-21-2007, 06:00 PM

The Saudi-US Relations Journal analyses that the Saudis will not remove the Dollar PEG...not "dumping dollars" because it would be more expensive than beneficial at this time. There is no point to it.

And speak for yourself, the Nation's debt is sustainable and thus a good policy in generating economic growth, and while some people in this nation are incompetent with money, many people are competent and will be plenty rich to off-set any "Great Depressions".

Wheeldog · 09-21-2007, 10:51 PM

Quote:

Originally Posted by Leeu

The Saudi-US Relations Journal analyses that the Saudis will not remove the Dollar PEG...not "dumping dollars" because it would be more expensive than beneficial at this time. There is no point to it.

And speak for yourself, the Nation's debt is sustainable and thus a good policy in generating economic growth, and while some people in this nation are incompetent with money, many people are competent and will be plenty rich to off-set any "Great Depressions".

It is my sincere wish that you are right, and I am wrong. However, I think it is the other way around. The dollar standard has been accepted internationally based on the U.S. history as a solvent and stable nation. In other words, it is based on faith that we will continue to repeat our history. However, that faith is increasingly being called into question. For the first time in history, the majority of Americans have a negative savings rate. In other words, we are a nation in hock. I have heard that a weaker dollar is good for our balance of trade, because it will make our exports cheaper. Please tell me, what do we make that other countries want to buy? We have outsourced the guts of our economy leaving a hollow shell in its place. We are literally living off the reputation of America's past. America today is the world's greatest debtor nation. The Canadian dollar is now equal to our own! The U.S. dollar is being creamed by the Euro and British pound. The only thing keeping creditor nations from dumping dollars and U.S. treasuries is the fear that it would set off panic selling before they could get rid of what they have on hand. This situation cannot continue indefinitely. Eventually the dam will break.

Leeu · 09-23-2007, 04:49 PM

Everything is based on prediction, not faith, faith is for God and God alone - because in all things you can see or deny God; that is faith. Prediction is you see a rock roll down a hill, you assume the next time you roll a rock down the hill it will continue down the hill as before. Errors in prediction may be your previous rock was a round bowling all and your current rock is a giant flat pancake...which probably won't roll at all.

Are people in error predicting that the US economy will continue to be the strongest economy in the world? No...it's a pretty round bowling ball...

The US has the largest line of credit, it's no where near maxed out (nations have sustainable debts of as much as 150% of the GDP, the US debt is only 60% of the GDP) and the US monetary policy is driven to make US consumables cheaper abroad, and thus more competitive, while we see a declining dollar it is actually a nominative change, the purchasing power parity doesn't change within the US. Well it does, but very minutely. A steak dinner was 50 cents in 1950 so the joke goes, but 50 cents was worth $10 USD today.

Now here's the oft unheard benefit of a "weaker dollar". Less payment on Debt. Debt is not adjusted to inflation so if your dollar is worth less your debt is worth less and it offsets the debt, you repay your balances and a recessional or deflationary period (which in today's Global economy simply means your inflation rates are lower than someone elses) brings the power of your currency back up so you pay off larger debts more cheaply and then can buy larger debts with a stronger dollar.

It's sort of cheating but it balances with the countries that loaned you debts being able to buy goods more cheaply and it balances for people who bought bonds by giving them access to foreign markets easier, and access to local goods more cheaply.

Of course nothing is THIS simple but it's the gist of the situation.

What you perceive as the US Dollar being creamed by the Euro and the British Pound the Europeans and the Britts (those in charge of their economies anyway) see this as a problem.

The British have tried to inflate their currency but they also run into the problem of too much inflation too fast and their economy tanks.

The British are coming from a long way though, remember the British Pound used to be worth $5 US Dollars.

Now the British Pound is worth only $2 US Dollars.

So they have been gaining on US competitiveness.

And think of Debt as being good, if you make more money on your debt. Let's say you can invest $1,000 dollars....and get back $2,000.

Would you rather invest $1,000 or $1,000,000?

So you take out a $999,000 US Dollar loan and make $2,000,000 off it, pay back your say...$1,400,000 dollar debt (with interest) and keep $600,000.

Instead of just $600 or even a full $2,000 dollars.

The thing keeping people from dumping their US debts is they know that the US has never, not once, defaulted on a loan, ever in the history of the US.

The US has a 237 year impecable credit history, that surpasses Britain, France, certainly Germany, surpasses EVERY nation in the world, not only does it have a 237 year credit history...but its credit history began with one of the world's greatest DEBT CRISES...that of the US Debt after the Revolutionary War.

The US paid it off in full, timely, and went on to never fail even during the Civil War the US debts never failed, even through the Great Depression, which compared to the Civil War was nothing but a hiccup....

If you were to have such an amazing credit history...you would have an AMAZING credit line as well...

People predict the US will continue that impecable credit history and there is no reason to assume it cannot.

never lift · 10-02-2007, 08:55 PM

im just getting interested in economics, ive got a question. does the falling dollar have anything to do with the artificially lowered wages and subsequent artifically low prices that come with illegal immeigrants? also the fact that billions are payed here by employers and spent in other counrties - seems like that would hurt the value of the dollar too. the euro is, what, double the dollar and it doesnt matter to the EU econonomy if a euro is earned in one country and spent in another cause its all the same. am i getting my mind around this right?

donsutherland1 · 10-02-2007, 11:25 PM

Never lift,

There is no credible economics literature that I am aware of that blames the depreciation in the U.S. dollar on undocumented immigrants. Rather the most common factors cited concern the enormous and chronic U.S. trade deficits (but government can't really erase such deficits as they are more a function of competitiveness relative to the rest of the world e.g., certain sectors in the U.S. economy are relatively uncompetitive. Another factor is U.S. dependency on imported oil, which has accounted for growing chunk of the trade imbalance in recent years). The annual federal deficits coupled with the long-term fiscal challenges associated with mandatory programs (particularly Medicare and Social Security) are also influencing marketplace expectations. In short, risk assessments concerning the U.S. are gradually becoming more adverse.

Meanwhile, the Fed's recent decision to cut interest rates has had an additional impact on putting downward pressure on the dollar. In my opinion, given the present relatively limited extent of the subprime mortgage issue, such a move should not have been made. In fact, the magnitude of the economic impact of the falling dollar likely greatly outweighs the potential impact of the subprime mortgage matter. Additional harm has likely been caused from the impact of moral hazard e.g., the expectation that at least some of cost of bad lending practices will be borne by others, which distorts risk assessments The decline in the dollar could have a disruptive geopolitical impact if it is too prolonged or too sharp. Allowing the subprime mortgage issue to resolve itself on its own would be of little geopolitical significance.

Wheeldog · 10-03-2007, 03:25 AM

Quote:

Originally Posted by donsutherland1

Never lift,

..... Another factor is U.S. dependency on imported oil, which has accounted for growing chunk of the trade imbalance in recent years). The annual federal deficits coupled with the long-term fiscal challenges associated with mandatory programs (particularly Medicare and Social Security) are also influencing marketplace expectations. In short, risk assessments concerning the U.S. are gradually becoming more adverse.

Meanwhile, the Fed's recent decision to cut interest rates has..... In fact, the magnitude of the economic impact of the falling dollar likely greatly outweighs the potential impact of the subprime mortgage matter. Additional harm has likely been caused from the impact of moral hazard e.g., the expectation that at least some of cost of bad lending practices will be borne by others, which distorts risk assessments The decline in the dollar could have a disruptive geopolitical impact if it is too prolonged or too sharp. Allowing the subprime mortgage issue to resolve itself on its own would be of little geopolitical significance.

Excellent overview. What all-too-few seem to realize is that the strength of our currency is as important - or more important - than the strength of our military in maintaining our international position. The U.S. sits on top of a huge pile of debt supported mostly by other countries which trade in U.S. dollars. While some flexibility in value can be positive, a prolonged and steep decline in the dollar can set off a chain reaction of negative economic and geopolitical impacts.

Case in point, we have been engaged in an extremely expensive war in Iraq, yet taxes have remained relatively low. How can we possibly finance the war without increasing taxes? Simple, we borrow what we need. The same holds true when it comes to financing our trade deficit and paying for the enormous burden of Medicare, Social Security, etc. To say the U.S. is in hock up to its eyeballs is an understatement. Eventually, the creditors who hold our IOUs (treasuries, dollars, etc.) will come to the conclusion that we are on our way to being a deadbeat nation and decide to dump our IOUs and make it very expensive for us to borrow any more from them.

donsutherland1 · 10-03-2007, 01:59 PM

Wheeldog,

Unfortunately, it appears that at least some people don't understand that economic strength is really the mostg important aspect of a nation's strength. Any country can sacrifice wellbeing for a time and build a power military force. But, at some point, even then the burdens become too great e.g., such burdens contributed to the implosion of the Soviet Union. The quality of life in North Korea is another example.

On the other hand, a nation with a robust and competitive economy has more resources available. Hence, it can enjoy material wellbeing and have a strong military. Moreover, given the innovation associated with such economies, in the long-run, such a state is more likely to have a leadership position in new technologies, including military ones. This could give it an asymmetric edge over others in terms of military power.

Also, your point that "a prolonged and steep decline in the dollar can set off a chain reaction of negative economic and geopolitical impacts" is most definitely on the mark. Over time, if the U.S. is forced to raise interest rates ever higher to meet what will likely be growing borrowing needs, such hikes could drain the economy of its vitality. If the U.S. is unable to raise interest rates to such an extent, then it could be forced to make wrenching and dramatic cuts in its budget (in the long-term that means deep cuts in Social Security and Medicare) to make up the difference. Such cuts could be so severe that they could impose real societal hardship. In turn, this could lead to a sharp decline in consumer demand. Given how interconnected the U.S. economy is to those elsewhere in the world, such a situation would have substantial adverse global implications.

There is still time for the U.S. to take on its fundamental challenges e.g., restructure its entitlement programs, eliminate its fiscal deficits, and adopt a more focused foreign policy that avoids the risk of overextension. However, the longer it waits, the more limited its options could become. Hopefully, the next President will offer the kind of leadership that is needed.