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Thu 24 Feb, 2005 07:56 pm
February 24, 2005
Honey, I Shrunk the Dollar
By THOMAS L. FRIEDMAN
I have just one question about President Bush's trip to Europe: Did he and Laura go shopping?
If they did, I would love to have been a fly on the wall when Laura must have said to George: "George, do you remember how much these Belgian chocolates cost when we were here four years ago? This box of mints was $10. Now it's $15? What happened to the dollar, George? Why is the euro worth so much more now, honey? Didn't Rummy say Europe was old? If we didn't have Air Force One, we never could have afforded this trip on your salary!"
The dollar is falling! The dollar is falling! But the Bush team has basically told the world that unless the markets make the falling dollar into a full-blown New York Stock Exchange crisis and trade war, it is not going to raise taxes, cut spending or reduce oil consumption in ways that could really shrink our budget and trade deficits and reverse the dollar's slide.
This administration is content to let the dollar fall and bet that the global markets will glide the greenback lower in an "orderly" manner.
Right. Ever talk to someone who trades currencies? "Orderly" is not always in the playbook. I make no predictions, but this could start to get very "disorderly." As a former Clinton Commerce Department official, David Rothkopf, notes, despite all the talk about Social Security, many
Americans are not really depending on it alone for their retirement. What many Americans are counting on is having their homes retain and increase their value. And what's been fueling the home-building boom and bubble has been low interest rates for a long time. If you see a continuing
slide of the dollar - some analysts believe it needs to fall another 20 percent before it stabilizes - you could see a substantial, and painful, rise in interest rates.
"Given the number of people who have refinanced their homes with floating-rate mortgages, the falling dollar is a kind of sword of Damocles, getting closer and closer to their heads," Mr. Rothkopf said. "And with any kind of sudden market disruption - caused by anything from a terror attack to signs that a big country has gotten queasy about buying dollars - the bubble could burst in a very unpleasant way."
Why is that sword getting closer? Because global markets are realizing that we have two major vulnerabilities that this administration doesn't want to address: We are importing too much oil, so the dollar's strength is being sapped as oil prices continue to rise. And we are importing too much capital, because we are saving too little and spending too much, as both a society and a government.
"When people ask what we are doing about these twin vulnerabilities, they have a hard time coming up with an answer," noted Robert Hormats, the vice chairman of Goldman Sachs International. "There is no energy policy and no real effort to reduce our voracious demand of foreign capital. The U.S. pulled in 80 percent of total world savings last year [largely to finance our consumption]." That's a big reason why some "43 percent of all U.S. Treasury bills, notes and bonds are now held by foreigners," Mr. Hormats said.
And the foreign holders of all those bonds are listening to our debate. They are listening to a country that is refusing to raise taxes, and an administration talking about borrowing an additional $2 trillion so Americans can invest some of their Social Security money in stocks. If that happened, it would almost certainly weaken the dollar, further depreciating the U.S. Treasury bonds held by all those foreigners.
On Monday, the Bank of Korea said it planned to diversify more of its reserves into nondollar assets, after years of holding too many low-yielding and depreciating U.S. government securities. The fear that this could become a trend sparked a major sell-off in U.S. equity markets on Tuesday. To calm the markets, the Koreans said the next day that they had no intention of selling their dollars.
Oh, good. Now I'm relieved.
"These countries don't have to dump dollars - they just have to reduce their purchases of them for the dollar to be severely affected," Mr. Hormats noted. "Korea is the fourth-largest holder of dollar
reserves. ... You don't want others to see them diversifying and say, 'We'd better do that, too, so that we're not the last ones out.' Remember, the October 1987 stock market crash began with a currency crisis."
When a country lives on borrowed time, borrowed money and borrowed energy, it is just begging the markets to discipline it in their own way at their own time. As I said, usually the markets do it in an orderly way - except when they don't.
Copyright 2005 The New York Times Company
now see C.I. there you go again with that liberal negativity, if you were a loyal american you won't read, let alone, post such negative stuff. It's very un-american of you and I don't want to have to talk to you about this again.
Ha! I'm going to Europe in June and I pray to God that
the dollar will be stronger by then. My poor capitalistic
heart is bleeding.
CI - I worry about it every single day. I qualify for early retirement in 449 days and I can't wait to get out of here. We'll have enough income to lead a very modest lifestyle if I leave then. But what happens in 20 years when I can't work anymore, and my income has shrunk by 70% courtesy of the imbeciles in Washington DC?
The United States is living about 3 billion dollars a day beyond our means. That's the combined Fedral and trade deficits. And as long as this keeps up, the dollar is only going to sink lower and lower.
Thanks to the Dollar<> Euro exchange rate, I could enlarge my cd-collection with imports quite cheap .... even with fastest postal delivery much cheaper than buying them here :wink:
And since this is completed by now, I really would like, the dollar does CJ a favour and gets up by June (actually by April/May would be better, isn't it dys and c.i.?
).
Yes, by mid-April would be perfect if it stays at a favorable exchange rate for the US dollar for several months...
What I would like to know is how many of George's friends have bank accounts in Euro's.
Together with the friends of mexican president Fox, they probably get a volume discount with the Swiss.
The Swiis have Franken and no Euro, but that's not bad either :wink:
we have decided that due to the incredible shinking dollar our sojourn across the big ditch will involve not eating.
I've already booked two tables in the soup kitchen, dys.
perfect, i'm partial to posole with either corn bread or corn tortillas.
Jim, You still have over a year for retirement, and things may change in our favor. Who knows? The fact of the matter is, we should all be worried about the deflating US dollar; monopoly money doesn't buy much in this world of ours. In Vietnam last week, we were spending 230,000 for a meal.
canada has seen its "canadian dollar" go up-and-down(mostly down) against other currencies ever since we arrived in canada in 1956. in 1956 one C$ bought about four german marks; now one C$ buys about 60-65 "euro cents" (let's see, that's about "one mark 20 pfennig" of the old currency ?). without going into higher mathematics the C$ has dropped considerably. within the last two years the C$ has finally started to move up against the US$. the C$ was at par at one time , rose to about US$ 1.10, only to fall to just above US 60cents, and it is now hovering at about US 80 to 83 cents. somehow canadian businesse and citizens have adjusted to it over the years . since many of the contracts in international business are expressed in US$, canadian exportes (lumber, wheat, coal, minerals) have been quite satisfied with a low canadian dollar, since after converting to the canadian dollar they would make a good deal of money. as a tourist visiting the U.S. we have also made adjustments as necessay : took along a little extra money, purchased a little less (and american merchants in locations close to the canadiann border have often accepted the canadian dollar at par for certain purchases; it's all a bit of a game and keeps the brain active !). a few years ago canada had a pretty severe exchange problem and was put on notice by the international monetary fund, and it started slowly to revise its monetary policies and seems to come along a little better. the U.S. will probably realize at a certain point that it will have to change its monetary policies and start to get its fiscal house in order. these things seem to take time, and if one is caught in the "downturn" it can be pretty disturbing for the individuals effected. hbg
The conservative party and this president has made Americans more conservative in the world marketplace. I'm not so sure that was their primary goal, but it was accomplished with ease.
c.i. : aren't you glad someone (even if it's not you) is winning at this game ? btw. saw an interesting feature on ABC news earlier this week. it dealt with "outsourcing" of major medical operations to thailand. i pulled up the website for the hospital, quite an impressive facility, just not sure if i would want to travel that far for medical treatment. apparently there is no shortage of both u.s. and canadian patients since the cost seems to be only about one third of the cost in north-america. hbg
As long as my wife continues her employment at Kaiser Permanente Hospital, we do not need to consider outsourced hospitals in Thailand. I'm covered under Medicare and her health insurance plan, so I have no co-pays for anything for my medical care or drugs. My benefit also includes $350 every two years for new eyeglasses. It also had $3,500 for each ear for hearing aide which I purchased last year, but used only $1,500 per ear, because I didn't want the inside-ear ones that makes oneself hear their own talking. I'm greatly satisfied with my personal physcian, an Indian woman trained at Stanford - one of the best doctors I've had in my life. I'm lucky, considering what others must pay for their health care.
When a seemingly innocuous remark from the central bank of South Korea makes the dollar tank, as happened on Tuesday, all is not well with the United States' position in the world economy..
The dollar has been on a downward trajectory for three years, thanks in part to the Bush administration's decision to try to use a cheap dollar to shrink the nation's enormous trade deficit. To be truly effective, however, a weak dollar must be combined with a lower federal budget deficit - or even a budget surplus, something the administration clearly hasn't delivered. So predictably, the weak-dollar ploy hasn't worked. The United States' trade deficit has mushroomed to record levels, as has the United States' need to borrow from abroad - some $2 billion a day - just to balance its books..
Enter South Korea. On Monday, its central bank reported that it intended to diversify into other currencies and away from dollar-based assets. And why not? It holds about $69 billion in U.S. Treasury securities, or 4 percent of the total foreign Treasury holdings. Such dollar-based investments lose value as the dollar weakens, leading to losses that any cautious banker would want to avoid. But as the Korean comment ping-ponged around the world, all hell broke loose, with currency traders selling dollars for fear that the central banks of Japan and China, which hold immense dollar reserves - a combined $900 billion, or 46 percent of foreign Treasury holdings - might follow suit..
That would be the United States' worst economic nightmare. If it appeared that the flow of investment from abroad was not enough to cover the nation's gargantuan deficits, interest rates would soar, the dollar would plunge, and the economy would stall. .
Tuesday's sell-off of dollars did not precipitate a meltdown. But it sure gave a taste of one. The dollar suffered its worst single-day decline in two months against the yen and the euro. Stock markets in New York, London, Paris and Frankfurt, Germany, dropped, and gold and oil prices, which tend to go up when the dollar goes down, spiked..
Luckily, the markets calmed down Wednesday, as Asian central banks said they did not intend to shun dollars. While such damage control is welcome, it's no fix. Tuesday's market episode has its roots in American structural imbalances that will be corrected only by new policies, not more of the same tax-cut-and-weak-dollar deficit-bloating ploys. If George W. Bush were half the capitalist he claims he is, he would listen to what the markets are telling him..
au, The US dollar is balanced on a thin wire, and anything that shakes the confidence of our currency is going to hurt the whole world's economies - not just the US. The Bush administration claims they will cut the federal deficit in half in five years, but that leaves most of the cutting to be done by the next administration. Our economy, although pretty strong compared to other economies, cannot continue to increase our trade and federal deficits. The world's economy has a positive growth, but it will be slow compared to the past. Our's is changing into a service economy, and we are losing ground in the high tech field where the future economic growth is prime. With our schools failing our children compared to other developed and developing nations, our future looks bleak. The only savior we have is our monetary system; Greenspan is doing us no favor by keeping interest rates low. Savings rates are too low and consumer debt too high. It's going to be a long, hard struggle for America's future.
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