australia wrote:But what will happen when the weaker economic countries join the euro?
I would suggest, you read something about how a country can join the EMU like e.g.
here.
Few random thoughts:
Walter is absolutely right about the ECU as predecessor to the euro. (Funny, how people react visually.)
I hate it that the dollar is depreciating against the euro. Freaking euro is now over 15 pesos! I liked it when Europe was only about 10/25% more expensive than Mexico. Now it's almost double.
australia, a hypothetical devaluation of the euro against the dollar would mean little, in terms of standards of living, to the Europeans, since most of their trade is within the EU.
Mexico, how is the mexican currency? know a lot of latin american countries such as Brazil depreciates like crazy. Against the aust $ the brazil reis is practically halved in 3 years. It is great for me travelling there, I can live like a king on not much money. But i feel sorry for the people that live there. Imports must be so expensive.
Though our government stoutly denies it, they are taking no action whatever to stem the depreciation of the dollar relative to the Euro. I believe this is either a conscious policy (or very willing acceptance of a process) on their part that reduces our imports from Europe and increases our exports to them. It is a good way to get Europe to pay their share of the strategic burdens which they shirk and which we carry for them.
I believe it os a clever and necessary policy.
Similarly, Canada refuses to cooperate with some of our concerns about continental immigration and assylum controls, as well as drugs law enforcement. It is certainly their right to go their own way in these matters, bur we should then thake the necessary steps of increased inspection and controls at our internal border with them. While this might have a devastating effect on some Canadiam manufactures supporting 'just in time' deliveries to U.S, producers, it would be entirely appropriate. Canada enjoys a tremendous trade surplus with the United State, but howls loudly whenever we take the slightest action, for any of several legityamate reasons, that impact their steady stream pf profits. At the same time they repeatedly assume a gratuitous stance of presumed moral authority in thwarting steps we are taking to deal with serious security matters that will ultimately affect the whole western world if left unattended.
Europe and Canada are quite content to let the U.S. deal with security issues that threaten us both, enduring the high political and economic costs that go with it, while presenting themselves as neutral in these affairs and ecsaping a share of the burden that is justly theirs. They did this to a lesser degree throughout the Cold War too. During WWII, when the threat to them was both grave and immediate, they were only too glad to accept our help. We should not let such cynical exploitation, duplicity, and hypocricy go unpunished.
georgeob1 wrote:I believe it os a clever and necessary policy.
"Raping the world with the dollar" others say.
This year alone, USAmerica's trade deficits are projected to amount to 650 billion dollars. That amounts to almost two billion dollars a day.
"Clever and necessary", as George said, since -theoretically- thus the deficit can be lowered, indeed.
Well Walter just in the world of economics a sustained trade deficit normally does induce a reduction of the value of the exported currency relative to the imported one. There is no reason for the U.S. government to expend valuable resources to 'hold back the sea' and attempt to hold up the relavive value of the dollar compared to the euro under these circumstances. We are merely letting the normal feedback process operate to restore balance.
Others have termed this 'rape by the dollar', but this is both unfair and inaccurate. Relative to the European powers the U.S,. sustains a very high cost of military preparedness and, as well, a very high cost in their operations. If there is any benefit from this it inevitably flows to everyone in the Western World. I accept that some believe we are doing harm, not benefit. However in general these folks have little to offer in terms of what they would do to contain the Islamic discontent that is the historical consequence of mostly European actions during the 20th century.
G OB - the USMC thread now being locked I've posted a reply on Lola's Cafe thread.
Will be back in 2 weeks if you really need more info.
P.S. to Walter: you may wish to look up seigneuriage - it can't be rape when the other party agrees!
As for the weak dollar - here is what this week's Economist has to say
Quote:The disappearing dollar
Dec 2nd 2004
From The Economist print edition
How long can it remain the world's most important reserve currency?
THE dollar has been the leading international currency for as long as most people can remember. But its dominant role can no longer be taken for granted. If America keeps on spending and borrowing at its present pace, the dollar will eventually lose its mighty status in international finance. And that would hurt: the privilege of being able to print the world's reserve currency, a privilege which is now at risk, allows America to borrow cheaply, and thus to spend much more than it earns, on far better terms than are available to others. Imagine you could write cheques that were accepted as payment but never cashed. That is what it amounts to. If you had been granted that ability, you might take care to hang on to it. America is taking no such care, and may come to regret it.
The cost of neglect
The dollar is not what it used to be. Over the past three years it has fallen by 35% against the euro and by 24% against the yen. But its latest slide is merely a symptom of a worse malaise: the global financial system is under great strain. America has habits that are inappropriate, to say the least, for the guardian of the world's main reserve currency: rampant government borrowing, furious consumer spending and a current-account deficit big enough to have bankrupted any other country some time ago. This makes a dollar devaluation inevitable, not least because it becomes a seemingly attractive option for the leaders of a heavily indebted America. Policymakers now seem to be talking the dollar down. Yet this is a dangerous game. Why would anybody want to invest in a currency that will almost certainly depreciate?
A second disturbing feature of the global financial system is that it has become a giant money press as America's easy-money policy has spilled beyond its borders. Total global liquidity is growing faster in real terms than ever before. Emerging economies that try to fix their currencies against the dollar, notably in Asia, have been forced to amplify the Fed's super-loose monetary policy: when central banks buy dollars to hold down their currencies, they print local money to do so. This gush of global liquidity has not pushed up inflation. Instead it has flowed into share prices and houses around the world, inflating a series of asset-price bubbles.
America's current-account deficit is at the heart of these global concerns. The OECD's latest Economic Outlook predicts that the deficit will rise to $825 billion by 2006 (6.4% of America's GDP) assuming unchanged exchange rates. Optimists argue that foreigners will keep financing the deficit because American assets offer high returns and a haven from risk. In fact, private investors have already turned away from dollar assets: the returns on investments in America have recently been lower than in Europe or Japan (see article). And can a currency that has been sliding against the world's next two biggest currencies for 30 years be regarded as "safe"?
In a free market, without the massive support of Asian central banks, the dollar would be far weaker. In any case, such support has its limits, and the dollar now seems likely to fall further. How harmful will the economic consequences be? Will it really undermine the dollar's reserve-currency status?
Periods of dollar decline have often been unhappy for the world economy. The breakdown of Bretton Woods that led to a weaker dollar in the early 1970s was painful for all, contributing to rising inflation and recession. In the late 1980s, the falling dollar had few ill-effects on America's economy, but it played a big role in inflating a bubble in Japan by forcing Japanese authorities to slash interest rates.
This time round, it is a bad sign that everybody is trying to point the finger of blame at somebody else. America says its external deficit is mainly due to sluggish growth in Europe and Japan, and to the fact that China is pegging its exchange rate too low. Europe, alarmed at the "brutal" rise in the euro, says that America's high public borrowing and low household saving are the real culprits.
There is something to both these claims. China and other Asian economies should indeed let their currencies rise, relieving pressure on the euro. It is also true that Asia is partly to blame for America's consumer binge: its central banks' large purchases of Treasury bonds have depressed bond yields, encouraging households in the United States to take out bigger mortgages and spend the cash. And Europe needs to accept, as it is unwilling to, that a weaker dollar will be a good thing if it helps to shrink America's deficit and curb the risk of a future crisis. At the same time, Europe is also right: most of the blame for America's deficit lies at home. America needs to cut its budget deficit. It is not a question of either do this or do that: a cheaper dollar and higher American saving are both needed if a crunch is to be avoided.
Simple but harsh
Many American policymakers talk as though it is better to rely entirely on a falling dollar to solve, somehow, all their problems. Conceivably, it could happen?-but such a one-sided remedy would most likely be far more painful than they imagine. America's challenge is not just to reduce its current-account deficit to a level which foreigners are happy to finance by buying more dollar assets, but also to persuade existing foreign creditors to hang on to their vast stock of dollar assets, estimated at almost $11 trillion. A fall in the dollar sufficient to close the current-account deficit might destroy its safe-haven status. If the dollar falls by another 30%, as some predict, it would amount to the biggest default in history: not a conventional default on debt service, but default by stealth, wiping trillions off the value of foreigners' dollar assets.
The dollar's loss of reserve-currency status would lead America's creditors to start cashing those cheques?-and what an awful lot of cheques there are to cash. As that process gathered pace, the dollar could tumble further and further. American bond yields (long-term interest rates) would soar, quite likely causing a deep recession. Americans who favour a weak dollar should be careful what they wish for. Cutting the budget deficit looks cheap at the price.
Two fast comments:
Mexican currency has been relatively stable against the dollar for almost a decade (we had a terrible devaluation at the end of 1994, and fast "slipping" in 1995). It was horrid from 1982 to 1988, though.
Dollar seignorage.
HofT wrote "it can't be rape when the other party agrees!".
Well, the other party may agree because it finds the rapist too strong. It's a question of relative power.
Why can the US mantain a deficit so big for such a long time (and not have the IMF impose restrictive policies upon them)? Simple, because everyone accepts the dollar, and is ready to finance the US.
And why does everyone accept the dollar, even in times of American inconsistency in macroeconomics policies? Because the US is economically and politically powerful and has a lot of leverage in world financial markets.
Should the US try to appreciate the dollar? Why? Every devaluation of the dollar means that, in terms of other coins, the US foreign debt lowers (every dollar possesed overseas is a US obligation of payment).
fbaezer's quote, "Should the US try to appreciate the dollar? Why? Every devaluation of the dollar means that, in terms of other coins, the US foreign debt lowers (every dollar possesed overseas is a US obligation of payment)." Therein lies the magic wand and the key. Why should the US appreciate the dollar? Our debts have been reduced by 35 percent without our government changing our spending habits. The world trading partners are now holding much devalued dollars for all their previous trades at "full value." Why, indeed!
This has to do with the relative weight of foreign trade in the economy of different nations.
Even with the globalization process, the US economy is more inward directed than the economy of any other industrialized nation. In that sense, a devaluation of the dollar is not as harmful to the US as a devaluation of any other currency is to the corresponding country.
(This also means that the adoption of the euro helps most members of the EU: their currency is 100% stable in terms of their biggest trading partners: the other members of the European Union).
I am trying to assimilate your recent posts with a quote by ther past Sec of the Treasury. (was it ) Oneill was complaining to the Vice-President about our rising deficits to which he replied, increased deficits are not a problem. Reagan proved that.
I must have too much of a blue collar background; I was taught to live within one's means. It's a little puzzling to assert the government is smart by increasing the deficit.
Well, once the dollar is worthless there is no defecit.
Mapleleaf wrote: I must have too much of a blue collar background; I was taught to live within one's means. It's a little puzzling to assert the government is smart by increasing the deficit.
I'll put it another way, Mapleleaf.
As long as you have unlimited credit, you can live over your means.
The key is to keep the unlimited credit.
This has not always been possible to the United States. It happened in the late 60s/early 70s, when the US was forced to leave the dollar-gold standard. This, and an inflationary push, due to lack of labor market control in Europe, led to a worldwide recession in 1974-76.
It wasn't that long ago that the Thai baht threatened the economy of the whole world. It amazes me that the US dollar still retains some stability at the rate our government and consumers spend like there's no tomorrow.
And not only spent it like there is no tomorrow, but waste it on non essential expenditure. No wonder the tax rates are so high
australia wrote:And not only spent it like there is no tomorrow, but waste it on non essential expenditure. No wonder the tax rates are so high
Actually, only Mexico and Japan have lower tax rates than the US, among the OECD countries (which include almost all of Europe, Canada, Korea and Turkey).
Yes, I meant Australia but thats okay. How can some countries like Malaysia and Hong Kong have such low tax rates?
I guess that would be over-digressing in this European Union thread.
Einherjar wrote:Well, once the dollar is worthless there is no defecit.
Isnt' that what Germany did in the inter-war period? Devaluation of the currency made the reparations following WWI manageable for the German economy.
Of course, it caused untold damage to the population and led to the rise of extremes in politics. Nazism beat communism because it received the backing of big business.
Yet another parallel between Germany then and the USA now - the military industrial complex and rise of the right - suppression of human rights (Guantanamo?) and poor management of the economy.
