Why the dollar is so cheap By Peter Morici http://www.atimes.com/atimes/Global_Economy/JC07Dj02.html The dollar is trading at all-time lows against the euro and gold for good reasons. The George W Bush administration has flooded the world with greenbacks, and global investors have little confidence in the management of the US economy. During the Bush years, the US trade deficit has doubled. Thanks to dysfunctional energy policies and tolerance for Chinese mercantilism, the deficit has exceeded US$700 billion each of the past three years and is more than 5% of gross domestic product. The Bush energy policy emphasizes incentives for domestic oil production and letting rising prices instigate conservation, but those have failed. Domestic crude oil production is falling, the price of gas has risen from $1.51 to $3.21, automakers have populated US roads with fuel-guzzling sports utility vehicles, and petroleum now accounts for about $380 billion of the trade deficit. Cheap imports from China have chased millions of Americans from manufacturing jobs, as the US purchases from the Middle Kingdom exceed sales there by nearly five to one. The trade deficit with China is about $250 billion. China has engineered this competitive triumph by keeping its yuan even cheaper than the dollar, euro and gold. Annually, it sells at deep discount about $460 billion worth of yuan for dollars, euros and other currencies in foreign exchange markets. That provides a 33% subsidy on Chinese exports and keeps Chinese goods cheap on the shelves at Wal-Mart. The Bush administration has sought changes in China's currency policies through diplomacy and has failed. Paradoxically, Treasury Secretary Henry Paulson has managed to tar as protectionist any proposal for US government action to offset Chinese subsidies. The remainder of the trade deficit is largely autos and parts from Japan and South Korea, which through various means have kept the yen and won cheap too. The huge trade deficit must be financed either by attracting foreign investment in new productive assets in the United States or by printing IOUs. Investment has only provided about 10% of necessary cash, so each year the United States sells currency, bank deposits, Treasury securities, bonds and the like to foreigners. Those claims on the US economy now total about $6.5 trillion. That floods world financial markets with US dollars and paper assets that function much like US dollars - what economists call liquidity. And, it evokes an iron law of the universe. If you print too much money, it won't have any value. Until recently, most of that borrowed purchasing power was put into the hands of US consumers by large Wall Street banks. Essentially, through mortgage brokers and regional banks, those Wall Street banks loaned Americans money to buy homes and refinance their mortgages. In turn, the banks got the cash needed by bundling mortgages, as well as auto loans and credit card debt, into collateralized-debt-obligations - bonds backed by consumer promises to pay - for sale to fixed-income investors, hedge funds and others. The bankers could get reasonably rich on this scheme, but they got greedy. Last summer, we learned that the banks were not creating legitimate bonds. Instead they sliced, diced and pureed loans into incomprehensibly arcane securities, and then sold, bought, resold and insured those contraptions to generate fat fees, big profits and generous bonuses for bank executives. Now investors ranging from US insurance companies to Saudi royals are not much interested in buying bonds created by large US banks, and the banks can no longer make loans to many creditworthy consumers and businesses. Without credit, the US economy cannot grow and prosper. The Federal Reserve has direct regulatory responsibility for the large US banks, and it is chairman Ben Bernanke's job to require them to fix their business practices and resurrect the market for bonds backed by bank loans. Yet, Bernanke has offered no plan to address these problems, or even acknowledged the urgency of the situation. And, without a well-functioning banking system, the US economy heads into recession of uncertain depth and duration. International investors, recognizing the US economy lacks competent helmsmen at the Treasury and the Federal Reserve (some have accused the U.S. of economic 'mismanagement,' as the next article will show), are fleeing the dollar for the best available substitute - the euro and gold. When Bush was inaugurated in January 2001, the euro was trading at 94 cents and gold cost $266 an ounce. Now they are trading at $1.52 and $985 an ounce. That is a plain vote of no confidence in the Bush-Bernanke economic model. Peter Morici is a professor at the University of Maryland School of Business and former chief economist at the US International Trade Commission.
makes me wish we were still using the gold standard. kind of an interesting article regarding the trade deficit, and nafta. http://www.chron.com/disp/story.mpl/business/steffy/5599864.html
the biggest reason is that it would prevent us from printing money we don't have. it essentially controls inflation. there are obvious flaws with the gold standard system, but there are many flaws with our current fiat-esque(?) system as well.
This piece injects the author's pre-formed biases around a number of topics. His biggest omission is completely overlooking the contribution to our economy of providing quality, cheap goods from China into the US economy. This lowers prices for all Americans, which is a good thing, allowing us to afford more. He spins it into losing manufacturing jobs, but it's a better specialization of labor to have those goods made in China where it's cheaper to do so. The biggest component of US GDP is consuming spending, and having a source of cheap goods is very important. His other bias is that a weak dollar is always a bad thing - it's not as long as other countries continue to invest in the US and the dollar, which they have done. Europe's worthless central bank is furious over where the dollar is today, since their exports are now much more expensive.....but their chickenschit central bank over there is too disorganized to come to a decision on lowering their interest rates. Meanwhile, China is so addicted to the American consumer buying their exports that they have no choice but to continue to subsidize our money printing in the US.
The truth is the Chinese are dumb to sell us goods with huge subsidies. (The purpose of them doing that is to keep their people employed and hence less social unrest but that's another story) We can only gain from this. If they really allow yuan to float to its true value, our $ will go even further down to the tube. That will be disastrous. Bush obviously play a role in the decline in $ value. But the fundamental problem is our culture of spending money we don't have yet. That's not going to change any time soon, so we should get used to this and be proud of our culture.
That has been the case for a very long time, but the dollar was never been this bad. I blame three people: W, Greenspan and Bernake. Well I don't blame Greenspan as much. If we didn't spend three trillion on the "war of terror," the dollar would be worth more. If bush had just kept Clinton's policies we might have been able to pay down some of the debt. Second you have blame greenspan for lowering the rates so much for creating the housing bubble. Thirdly I think no one has any confidence in Bernake. Bringing Greenspan back if possible should be good. They need stop putting academics as Fed chairmen and get somone who is good at making money.
I do think that we were headed that way of continuing to balance budgets but a thing called 9/11 happened that changed EVERYTHING and made our military bigger as well as our government.
Greenie wrote newsletters, did consulting, and sat on the boards of some corporations prior to becoming Fed chief.......he never actually made $$$ as an entrepreneur or businessman. What's more, going back to your previous post.......he was actually a staunch proponent of the Gold Standard back in his days with the Rand Corporation. Only after Ayn Rand passed, did he sellout his soul to the vultures.
I remember reading articles at the beginning of the first Bush term about how the administration wanted to weaken the dollar, and were pursuing a strategy to do so. The idea is that this would help cheapen American exports. I don't think in practice that the benefits have offset the costs, but I think this was the Bush Administration plan all along, just as keeping the dollar strong was a primary priority (and stated as such) when Robert Rubin was Secretary of the Treasury under Clinton.
Shhhh.... We live in a country that does not like to bring up the facts that have steered the economy. They also like to point fingers at a POTUS that inherited bad intel practices, a growing terrorist regime emboldened by the last guy falling asleep at the helm, and had the largest act of war on our soil take place less than 10 months into his presidency... All while ignoring that -despite all of this- our economy has grown, under his Republican leadership, to record levels. But why face facts? There's much more fun in singing the blues and pointing fingers in the never ending blame game. McCain '08! (He won't over look the fact, by blaming and finger pointing, that we are here NOW. And he knows we should face facts, not run from them.)
9/11 did not change everything. I hate that statement. The economy was going down, because of the tech bubble. Instead of learning from it they created the housing bubble. It was the best thing to happen to bush and he squandered every bit of goodwill he got from it. 9/11 was terrible, but the tsunami and the hurricane did much more damage.
So it's Bush's fault that home lending companies set up so many people with ARM's that they knew very clearly these people could not afford once the rates went up? Hahahahahahaaaaa... Also, part of that responsibility should fall on the ignorant, or dumb, masses signing themselves into homes they could not afford. And when you add in the tsunami and the hurricane on Bush's watch, it shows he's done an even better job, post-9/11... I cannot for the life of me understand why it seems that most around this side of the bbs lay EVERYTHING at Bush's feet. Makes no sense. It's ludicrous to think that the POTUS is that personally responsible, or to blame, for this number of issues. That's just as lame as blaming Carter for the ENTIRE oil crisis of the 70's, or like it was all his fault that IRAN did not release the hostages, or even took them to begin with. The POTUS is not the driving force of world events... sometimes, most of the time, these things happen in the world with little or no prior knowledge to the POTUS, ANY of them... Yet people lay all weather patterns, terrorist groups, calamities and housing lenders' shady practices on the POTUS table of blame. I didn't blame Clinton for Kosovo's issues, yet he dealt with them as he could... so that's what he could do... I blamed him for his personal actions... Bush went to congress for approval to go into Iraq. So if we're all being honest, all -ALL- who voted for the action there are the "blamed." And they ALL had the intel sitting before them. If it was bad intel, then we need to look at why. Why the patterns of bad intel lasted from the previous admin. Even with the bad intel practices during the Clinton admin, I still don't blame Bill for it personally.. It's not like he went and gathered, or didn't gather, intel in the field... He only saw what was given him. So- I think what people fail to realize is that a POTUS must be able to react to REAL situations. Real war threats... Real economy issues... Real disasters... And a passive agressive, seeming to be "unphased" type is not who I want sending signals to the baddies of the world.... again. Bill had a laid back attitude... And the world took advantage of it. In many ways, Dubya seems kind of laid back too... So, it IS time for change. We need a staunch defender of America. A war hero. A former POW that won't give up. A man that will be just hard and disciplined toward a shady home loan company as he is to a terrorist faction. A man that will be just as tough on criminals abroad as he is with domestic criminals. The time is now. McCain '08! (Like a Bush in "HD" - with more experience in being tough under fire.)
Part of it is to unpeg the RMB off the dollar, but that isn't happening anytime soon because of China's willingness to subsidize the currency imbalance and boost their manufacturing sector. The prospect of a hydra of unofficial world currencies becomes more and more apparent. I can't claim that Americans living within their means is a better thing, but right now, the exuberance for the past 15 years feels like a sickness reaching across all classes and aspects of American society.
