FOLLOWING THE EUROPEAN UNION

And what was the reasom for the the British devaluation of 1931 and the US devaluation of 1933? :wink:

Walter

I'm not really an economist! I know that was the period in which the "Gold Standard" was dropped.

I was just trying to point out that bad management of a country's affairs can have terrible consequences...

KP

I read the Economist piece that Kitchen Pete quoted with great interest. I believe the essential point there has some validity: namely that the dollar's position as the world's primary reserve currency confers certain benefits on us, and that it may be threatened by our balance of payments deficit. However, as in most such analyses, I find some elements that defy understanding, such as this one.

The fact is that Japan reduced interest rates to almost nothing, after the collapse of the real estate bubble, to stave off a collapse of their banking system and stimulate growth in a then stagnant economy. The internal Japanese problem of dead companies being kept alive by recycled loans from near dead banks was a far greater factor in the phenomenon - as described in great detail in other articles in the Economist.

It is all too common in such prognostications for analysts' predictions to run afoul of two key points: (1) Quasi-linear extrapolations in a highly non-linear world can be both appealing and deceptive; (2) There are other factors besides those identified in the process, and they, in a non-linear dynamic can have decisive effects. The coming explosion in the earth's population, so confidently forecast by self-proclaimed sages just two decades ago, has turned out to instead be a precursor to an actual decline, now forecast to begin in a few decades, based on solid demographic data. There are also political and geostrategic factors involved in getting or keeping a country's status as the issuer of a reserve currency, as amply confirmed in the histories of the late years of the Spanish and British empires.

What might replace the dollar as the world's reserve currency? I doubt the Euro will do it. Despite the truly amazing success the EU has achieved so far in perfecting its economic and political union, there may be a more difficult road ahead. Lifting up the economies of the new, central European members may be more difficult and may cause more internal dissention than the previous problem of lifting up the economies of Ireland, Portugal, and Greece. More importantly all of the EU area is faced with an ongoing and accelerating demographic collapse, and this leads to a number of social, economic, and political problems.

GDP growth in the U.S. has been a good deal greater than that in Europe. More to the point, however, is that GDP per capita in the U.S. is also growing slightly relatively to that in Western Europe. The median age of Europeans is almost four years greater than Americans - a huge difference in demographic terms. None of this suggests to me that the currency of the relatively sclerotic economies of Europe will seriously threaten ours.

Good point Walter. The fact is that the Follies of the architects of Versailles set the stage for the eventual collapse of the German economy. Worse, in attempting to capture political control of the Middle East and Africa, they not only denied Germany export markets, they also set the stage for the problems besetting the world today.

Can't speak for the British devaluation of 1931, but ours was mostly the result of our own failures. We retreated from the world economy with high tariffs, mismanaged a steady decline in our agricultural economy coupled with a bubble in the industrial sector.

georgeob, Your post about the non-lineear world explains quite well why the Euro is not even close to taking over as the world's reserve money. We can still look at all the GDPs of the Euro countries and see that it still pales in comparison to the US, Japan, and China, with Japan and China holding the greatest amount in US treasuries. Your description of the economic problems inherent in Europe will not find a quick solution. Even many of their governments are struggling to maintain the regulations set up by the Euro countries. There simply isn't enough economic production to support a world currency.

You certainly are correct about $/€ > world's reserve currency.

But I wonder, who ever suggested the EURO for that (I've never heart such by an European politican, economist ... even not from anti-Bush media).

I doubt that there are any real conspiracies or competitions afoot here by any of the parties. The fact is that there is no longer any real single reserve currency that dominates the world, as in former times and as implied in the Economist article. Indeed the role of some universal commodities, notably oil, have to some degree replaced paper currencies as the standard of value. The Euro already is an important part of world currency reserves, just as is the dollar.

).Well, I think, the EURO could be an important part - but until now, it's more or less a better currency of the "2nd league" (with the 1st having only the Dollar and Gold as members :wink:

With the increased value of the Euro against the US dollar, the Euro country economieis are going to be struggling to maintain their economies in the world market place. I read only this morning that GM Europe is going to be laying off 12,000 workers, and I think that's only the tip of the iceberg. If they can't sell in the American market - nor in the world market place because their cost is too high, I don't see how they can continue to retain their workers at present levels. A strong Euro becomes a handicap - not a plus.

In order for the Euro countries to survive, their governments are going to have to intervene in the Euro/US dollar valuation in the near future. Otherwise, they are going to be seeing more layoffs, and the people are going to be very unhappy.

I thought, the Dollar is weak vs. other currencies as well?

E.g.:


But actually now, the Dollar is "rising" against the Yen, EURO ...

Walter, The dollar is weak against other currencies, but not as much in the Asian trade zones where most of our trade will continue. That's the big problem with the over-valued Euro; the US has other countries to trade with. Asian currency/US dollar valuations have lost about ten percent, but against the European currency, the US dollar has lost almost 50 percent during the past four years. That means your competiveness in Asia also suffers.

Can anyone think of a reason why the EU shouldn't just print the amount of euro's necessary to keep the euro stable?

georgeob1's take is pretty similar to mine, seems to me. If anything, I think the world's emerging default reserve currency is oil itself, irrespective of whatever denomination by which it might be valued, or, perhaps not even a discrete tangible, but a fungible concept - that of productivity. The predominance of any single particular national monetary unit likely is a concept of the past.

It also seems to me that those who seek currently to attack the US Dollar do little or nothing to inconvenience either its foundation or function while with their own weapons and tactics they imperil their own fiscal wellbeing.

If e.g. China's central bank - China has the second largest pool of international reserves, about $600 billion - decides to use some of its surplus dollars to buy euros for its reserves, it further depresses the dollar ... and the value of its dollar reserves. (Same with Japan, although they reduced their Dollar reserves already.) :wink:

Walter, The dynamics you describe are 'real,' in that the actions taken by both China and Japan does in fact depresses the dollar further, but they can't let the dollar go too low, because their trade with the US is important to them. Sorta like having your cake and eating it too!

Direct currency intervention is a waste of time and money.

Only by changing interest rates can the relative values be corrected, in the short term.

The economic slowdown resulting from falling Euro-denominated exports will bring the Euro back down of its own accord.

KP

While interest rates are a huge part of at-the-moment market interest in a currency, its an economy's fundamentals that regulate the strength of its currency in the long run. The US economy in that regard is very much like a whole buncha other things American; one underestimates it at one's own, and certain, peril. The appreciation of currencies against the Dollar has the effect of directly benefitting the US Current Account Deficit (further helped by relatively low interest rates)while affording the US competitive advantage in the global marketplace for goods and services.

The idea is unpopular with some, but like it or not, the World Economy is pegged to the essentially self-sufficient, self-sustaining US Economy, and there is hardly evidence of anything out there which might change that, despite the preferences of some. The Dollar is perfectly capable of taking care of itself, and is doing so.

In fact, over the immediately coming few quarters, inevitable increases in US interest rates - primarily directed at staving off inflation as the Domestic Economy continues to expand will serve also to render US Mid-and-Long Term Instruments - and thus the US Dollar - ever more attractive in the World Currency Market. While there always is interest and acrtion in aebitrage and short-term speculative investment, by far the greatest amount of invested funds seek long term security and stability, attributes of the US economy unparallelled elsewhere. Likewise, the impact of currency appreciation against The Dollar on the export opportunities of other economies will force its own inevitable Dollar-ward correction.

Although the USA are essentially self-sustaining e.g. in oil, they are still importing it, and buying at with dollars.

You are correct, timber, World Economy really is pegged to the essentially self-sufficient, self-sustaining US Economy.

Since this won't change, the oil exporters however want to get the most out of it (and not 'loosing' in getting paid with dollars), they are shortening the oil supply again.

It was reported by some financial pundit yesterday that the oil supply in the US is sufficient to carry us over this winter - if it doesn't get extremely cold. OPEC will cut the supply in hopes of maintaining some price controls on the higher side, but I'm not so sure they can efficiently play the supply/demand game with so many suppliers. Timber's analysis concerning the US economic fundamentals sounds right on the mark to this reader.