Opinion

The Great Debate

Dollar faces long journey downward

October 13, 2009

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- James Saft is a Reuters columnist. The views expressed are his own –

Even putting aside the spectacular but hard-to-measure risks of a financing crisis or the loss of its special status, the dollar faces really serious headwinds from boring old fundamentals.

The dollar has been weak for months and markets have been fretting over a host of big picture worries.

Perhaps the world’s oil exporters will stop using the dollar as the medium for petroleum trade. Or maybe the so-far patient and docile buyers of Treasuries will finally turn jittery. Either could be a disaster for the dollar, but you don’t need conspiracies or crises to be bearish on a currency from a country which on some measures has run the largest-ever deficit between what it imports and what it sells abroad.

One of the most interesting side effects of the first part of the financial crisis was that the dollar actually rose despite being the locus of the credit bubble and despite the U.S. consistently importing far more than it exports. That strength, which has now been reversed in part, was largely because the freezing up of markets set off a scramble for dollars.

The acute phase of the crisis is over and a return to something approaching normalcy is not treating the dollar kindly; from its peak this year the dollar has fallen more than 13 percent against a trade-weighted basket of currencies. The current account deficit — the balance of exports to imports — has also been reduced greatly, from a peak north of 6 percent of GDP to below 3 percent at the end of June, with further narrowing in the months since. That is because a weaker dollar makes U.S. products more competitive, but also because the price of oil, of which the U.S. is a net importer, has dropped, and consumption at home is flagging.

It is far too early, however, to say that the dollar adjustment has done its work and the deficit will now close.

“The U.S. current account shortfall was primarily driven by a consumption surge rather than an acceleration of investment on the back of productivity growth and high profitability,” Citigroup currency strategist Michael Hart wrote in a note to clients.
THINGS THAT CAN’T GO ON FOREVER DON’T

That is bad news for the dollar and bad news for the outlook for U.S. growth. A 2005 paper by Caroline Freund of the World Bank and Frank Warnock at the University of Virginia <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=875699> found worse outcomes for the countries that ran current account deficits to finance consumption as opposed to those which ran deficits in aid of investment.

Industrialized countries which, like the U.S., run current account deficits for consumption, find that the currency depreciation that follows tends to be deeper. What’s more, the adjustment in the deficit lasts longer and is often twinned with lower growth. It is not, I suppose, a big surprise that importing more than you export and then consuming it leads to depressed growth. The real wonder is the way in which the U.S.’s special status and the generous financing terms offered by its trade partners made this possible without more immediate damage to the dollar.

There is also the possibility that globalization has permanently raised the “natural” level of the U.S. current account deficit. Huge swaths of the U.S. manufacturing base and a growing wedge of the country’s service sector have been offshored or simply moved out of the U.S. Many of these goods and services are still consumed by the U.S., but now much of the money generated by those sales will be the result of dollars being sold to buy pesos, ringgits or yuan.

This may place more structural pressure on the dollar to fall over time.

Australia’s decision to raise interest rates last week hurt the dollar and for good reason. It demonstrated that as a recovery happens the action will not be in the U.S., but in resource-based economies and in places, mostly in Asia, where the best prospects for productive investment lie. The U.S., where the Federal Reserve will likely need to keep rates low for a very long time, will have a hard time capturing the imagination of investors.

For policymakers, and not just U.S. ones, the puzzle is how to allow the dollar to fall gently without precipitating trade friction or a disastrous loss of confidence. Because it’s more or less in everyone’s interest, it will probably more or less be avoided. A weaker dollar, though, is simply consistent with the outlook for the U.S.

A long shamble downwards rather than a fall off a cliff looks to be in the dollar’s future.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. )

Comments
64 comments so far | RSS Comments RSS

Thanks. It looks as though you don’t think a cheap dollar will be really harmful, but you didn’t go into pros and cons much, something I complained to Reuters about in another story the other day. Somebody else said that most outstanding Treasurys are of quite short terms, so inflation could be catastrophic to our ability to run deficits rather than rapidly pay off a huge debt (or default). In my own case, I’m keen on a revival of American manufacturing, so the prospect of a cheap dollar aiding exports excites me.

Posted by Pete Cann | Report as abusive
 

So… what about the looming bubble in China? How would that effect the dollar?

Posted by Nick | Report as abusive
 

Your comments strike to the core of the matter. Our rail system has been ignored for 40 years. Hong Kong International Airport is light years ahead of JFK , LAX or Heartsfield. Our roads are so congested that freight by truck moves slower than it did twenty years ago. China and Europe have beaten us at the infrastructure game. Air rail and ground transportation are far more efficient in other industrialized countries now. It should come as no surprise that manufacturing is looking overseas to invest capitol. Time is money.

Freund and Warnock are right. Inflation is only insult to injury. We should have borrowed to invest in our infrastructure, not to support excessive consumption. Perhaps this along with the high cost of health care and obsolete manufacturing facilities is the reason why corporatons and the jobs are leaving the U.S.?

Posted by Anubis | Report as abusive
 

By looming bubble do you mean going to pop, or going to rise?
China’s currency is currently undervalued because it is set by the state. It costs Chinese people more money to buy their own goods and services then it does for us. Thus, money is flowing from us to China.
When their currency reaches its proper levels, this will reverse. Suddenly, the manufacturing that moved to China will start coming back to Mexico (which got the big shaft with China) and to the U.S…or it will go to Peru, and perhaps even to Africa (which is starting to get businesses interested in low-end labor). The Chinese will start buying from overseas, especially raw materials, which they overpay for now because their currency is artificially devalued.
If you mean the Chinese bubble is about to pop, that just means they are going to try to keep their currency level with the dollar…in part so their trillion dollar investment in us doesn’t lose hundreds of billions of dollars (which George Bush SR did to the Japanese in the 90′s).
==Bob D.

Posted by Bob D | Report as abusive
 

I live in Canada, earn Canadian dollars and spend a lot of time and money in the good old USA.

I am getting richer by the minute.

Posted by lefty noonan | Report as abusive
 

So the standard of American living is going to go down, the Chinese, the Japanese and the oil-producers are going to take a haircut, American imports will get more expensive and American manufacturing may make a comeback. How long do you think before this equilibrates? How much does the dollar have to depreciate before trade parity is reached?

Posted by Victor | Report as abusive
 

Double thanks! This is a great article. I “get” all the international finance and currency stuff, but can’t explain it anywhere near as well as you do here!

I hope lots of people read this instead of listening to Sara Palin and other maniacs who think a weak dollar is a bad thing.

Posted by NoName | Report as abusive
 

If the Chinese would normalize the remnimbi in relation to the dollar instead of artificially pegging it at about 30% less, the trade deficit would disappear. I don’t understand how our government, or the WTO for that matter, allows this direct subsidy to go on indefinitely while we continue to export our jobs and technology offshore.

 

The long term issue isn’t the value of the dollar, it is what happens to teh U.S. economy when interest rates recover. What is the interest on ten trillion dollars at say, 8% and where will the dollars come from to pay that interest?

 

“…revival of American manufacturing…”, eh?

It’s nice to dream. Cap and trade (or whatever punitive energy tax government cooks up) will abort any manufacturing renaissance, in utero. Homeowners in the midwest and south will send their dollars to their electric companies to be redistributed to subsidize consumers on the coasts.

The last of the Heartland’s vestigal manufacturer employers will skedaddle overseas. China will gladly host them, building new coal-fired power plants to replace the ones we shutter, and not a pound of net carbon will be reduced. But we can feel really, really good about ourselves, can’t we!!! So sustainable!!

And the Great Plains can become The Great American Desert once again.

Posted by The Resistance | Report as abusive
 

A long shamble downwards is purposeful neglect. It is like watching a steam roller slowly heading to run over an unsuspecting person. Neither the Fed nor Congress is doing anything to stop the demise of the dollar which makes me thin this is a planned demolition. America can fix this problem with a responsible budget, legislation that supports small business entrepreneurial activity, and downsizing the massive bureaucratic government. But who wants liberty these days anyways…

 

It’s the resiliency of the American economy at work here. A weak dollar makes our products more competitive in the global economy, lowering our trade deficit at the same time. Win-win as far as I’m concerned.
How many billions have been wasted in off-shoring manufacturing, only to be faced with the current situation (no quality control, high shipping costs, weak dollar, etc.). I’m the Larry Kudlow opposite I guess, a “weak dollar advocate” if you will…

Posted by Joe Bonasses | Report as abusive
 

Currency exchange rates have virtually nothing to do with our trade deficit. As evidence, consider the dollar/yen exchange rate. In 1971, the dollar bought 308 yen. Today it has weakened to 89. Yet, in spite of that precipitous decline, we went from a trade surplus with Japan to a huge trade deficit – four times worse than our deficit with China when expressed in per capita terms.

Global trade imbalances are driven by huge disparities in population density. Nations with extreme population densities, like Japan, Germany, Korea, China and many others, have very low per capita consumption due to over-crowding and are thus incapable of consuming at anywhere near the level required to absorb their productive capacity. This makes them utterly dependent on exports to sustain their economies. They will never let currency exchange rates erode their U.S. market share, as a long history of trade with Japan has proven.

In 2006, with the half of nations below the global mean population density, the U.S. had a trade surplus in manufactured goods of $17 billion. With the other half – those above the global mean population density – we had a $480 billion deficit.

The only way for the U.S. to restore a balance of trade is through a tariff structure on manufactured products that is indexed to population density.

 

Historically, when currencies have failed, it usually happened suddenly.

Posted by Ra | Report as abusive
 

The falling Dollar may be good for boosting exports, but it’s terrible for the American People — those ones the academics and politicians seem to have forgotten! The cost of everything goes up! Dollar devastation means the price of everything else must goes up — even food!

And a declining dollar also means that those same corporations that applaud higher overseas sales must may domestic employees and investors more dollars just to break even.

There is no prosperity with devalued currency. It is fool’s gold prosperity that will lead to a day when we will suddenly realize our prosperity was just a dream and a mirage. It seems good at the time, but then we awaken and are still hungry!

 

A cheaper dollar is what Canada needs to shore up it\’s manufacturing. I cannot believe that over years of importing and the lack of reporting of companies failing due to cheaper imports and layoffs, that we in the U.S. and Canada are surprised?

Now we have U.S. protectionism with States and\\or Federal procurements for stimulus projects between Canada\\U.S. We will all be flipping hamburgers for our job retraining and our children and their children will be working for a foreign Company in the U.S. either flipping burgers or shipping the imported goods from their warehouses that all received subsidies to locate in their state\\city\\town. How pathetic. Europe has already rolled over, now it\’s our turn. The stealing must stop. We must support our neighbours without being protectionist. A balance. A joint venture. The Greed got us here. (Example): Wiping out Goldman\’s competition blatantly without a whisper of protest. The goal of Western \”enemies\” is to keep the U.S. busy with two wars and others pending, lower property values (so others can buy the U.S. without firing a bullet), and destroy the social fabric of our once prosperous and caring society. What happened? (answer): Got to get back to my ipod and video game. up to the second level!

Posted by Tom | Report as abusive
 

An awful lot of our currency leaves the country in order to buy energy. That may soon change due to the smashing success (pun intended) of new technology to extract gas and oil previously thought to be out of reach — to the extent of possibly even reversing the current account imbalance. http://www.telegraph.co.uk/finance/comme nt/ambroseevans_pritchard/6299291/Energy -crisis-is-postponed-as-new-gas-rescues- the-world.html

Posted by Steve | Report as abusive
 

Pricing oil in dollars is not a major driver of demand for dollars. If every barrel of oil produced in a year and sold for dollars were sold in single day it would contribute less to dollar demand than a single day of non-oil foreign exchange transactions (which run around $2.5 trillion daily). So, no, no longer pricing oil in dollars would not be remotely catastrophic for the dollar.

Similarly, there have been only tiny blips of what could be described as real concern for treasury demand, and it’s illogical that unless a large number of nations collectively decided to eat the profoundly negative repercussions of not plowing dollars back into the U.S. in this way that it would come to pass. The U.S. may find itself being gamed into paying more, and may over time simply have to pay more to continue to attract adequate enough demand to keep the emotional side of the markets from going into freak-out mode, but so long as America is continuing to buy a quarter of the world’s imports this is not a realistic scenario. It’s like sitting around worried that a 7-foot tall clown will break into your home, cut off his leg, and beat you with it. While it’s within the bounds of reality for this to happen, the odds of a 7 foot tall clown choosing to permanently maim himself in order to inflict temporary harm on you with the leg he cut from himself are pretty low.

Resource-based economies can only recover for so long and so far. China continues to drive these economies, and the U.S. continues to drive China. Until China develops adequate domestic demand (it is not even in the parking lot of the ballpark at this point), this will continue to be the case. China is inflating a couple of massive bubbles at the moment which are in turn driving the “recovery” of resource-based economies. Why this is not a more heavily covered story is beyond me. When it is covered, it is typically by someone who is putting a reassuring best-scenario spin on it (much the same way many spoke of the U.S. housing bubble for a decade), versus the coverage such as this article for the U.S. and the dollar, in which no amount of negativity or prognostication stretching for decades into the future is too wild to be printed with a straight face.

Posted by Michael | Report as abusive
 

I am just wondering how it will all play out. Dollar will keep on declining untill US exports start to support dollar. That means US would be importing less and exporting more (also consuming less). Other then high inflation due to devaluation of dollar, this will also lead to less US influence in the world. US strength does not stem from its military might but from its consumer base. As the “customer is always right”, US could dictate to producer countries whatever is in its interest and as they do not want to lose their biggest customer, they comply. Now if US becomes a net exporter or a big enough exporter (compared to its imports), its buyer nations would have the same leverage. How would all this affect North America, Europe, Middle East & Asia……

Posted by Sohail | Report as abusive
 

I don’t think a declining dollar is helpful for most individuals here. Those who save especially. Inflating really helps governments not people. I don’t care about helping them either. Inflating IS default in a greater sense. I can say for certain that our rulers have spent more money in my name than I ever would as a individual consumer/investor. As a individual this type of stupid spending would land me in jail. Funny how that works. I don’t own and license the big printing press to bail me out.

Posted by Patrick Henry | Report as abusive
 

“The U.S., where the Federal Reserve will likely need to keep rates low for a very long time, will have a hard time capturing the imagination of investors.”

To save the dollar, the Fed will begin to raise interest rates, precipitating a reduction in stock market and precious metals values. When? My guess is Feb – March.
More foreclosures esp for variable rate mortgages !

Posted by chaz | Report as abusive
 

“Other then high inflation due to devaluation of dollar, this will also lead to less US influence in the world. US strength does not stem from its military might but from its consumer base.”

US strength stems very much from its military might as well as its economy, which is far more than just its consumer base. The U.S. could import dramatically less and still be the single largest export destination for global exports. These are RELATIVE changes. The U.S. will necessarily lose some relative influence versus other nations, just as it has been doing since the end of WW2. This is a completely different universe from the U.S. losing its influence.

“Now if US becomes a net exporter or a big enough exporter (compared to its imports), its buyer nations would have the same leverage.”

Being a net exporter gives a nation influence as well. China is dependent on the United States for its economic stability, yet that does not keep it as being portrayed as being in the driver’s seat. The reality is dramatically different, of course, but this is a situational issue. Narrowing the current account deficit (which has already, by the way, fallen to around 3% of GDP from a peak of over 6.5% literally just a few years ago) has value for the United States. Narrowing its trade surplus will have value for China.

Thanks to journalism not unlike this article, people are living in a world of rhetoric without hard numbers. “Decline,” “demise,” “end of the dollar,” doomspeaking in general for the U.S. It’s mystifying.

“What is the interest on ten trillion dollars at say, 8% and where will the dollars come from to pay that interest?

8% is radically high, and that’s not how things work with this kind of debt. It should also be pointed out that the majority of U.S. debt still is owed to domestic entities.

Posted by Michael | Report as abusive
 

This was the plan from the entire get go. Use America to destroy America. The central banks are replacing the dollar with a basket of currencies called SDR. Special Drawing rights. The globalist are almost done seizing America and now the American citizens are about to be destitute. All this country had left was the dollar. We have no manufacturing base, we hardly produce anything at all. Service sector jobs, government jobs and casino jobs, don’t produce anything. They just take money from someone or just shovel existing money around. The people that you call conspiracy theorist were right all along. The plans were right out in the open but the public was to dumbed down to even recognise it and stop it. They just got fat, cheered for illegal wars, ate poisons foods that gave them heatlth problems and watched football. Bravo New World Order, Bravo. :-(

Posted by Sammy | Report as abusive
 

The americans thought they can have the world by practically buying it with monopoly money called american greenbacks. Thanks to several reasons including lack of fuel for their military, industry and civilian society, this may no longer be possible. More junk money anyone?

 

Most of the world’s debt is denominated in US dollars. When earnings fall and borrowing slows down, to pay back what they owe, people will be demanding US dollars. To pay back debt, they will have to sell everything except US dollar. When the debt to the banks is paid back, money will dissapeaper into thin air just the way it was created. Our entire money supply of US dollars was borrowed from the banks. It is NOT printed money. It is borrowed bank credit. And bank credit can deflate. Before Bernanke really prints money, expect another round of deflation to hit the economy. Debt was inflated for 50 years, it won’t dissapear with a small crash. It will take time. This is why all the money printing by the FED is not causing a blip in inflation. Debt levels are too high to inflate. When deflation occurs, USD will go up simply because debt is denominated in USD.

http://www.tradingstocks.net/html/inflat ion_deflation_credit_bub.html

 

Charles Dickens said it best in David Copperfield: “if a man had twenty pounds a-year for his income, and spent nineteen pounds nineteen shillings and sixpence, he would be happy, but that if he spent twenty pounds one he would be miserable.”

This quote has two interesting aspects. First, it explains why the United States is so miserable. But more importantly, it says worlds about what happens when a reserve currency collapses. How happy could you be on twenty pounds a year today?

 

Well, to all of those “America will be a service economy” folks – thanks for this.

It is becoming obvious (finally) that our trade deficit is at the root of this whole economic meltdown.

Business was stupid to think that power will stay with those who make nothing and only consume.

Manufacturing and technology are a nation’s muscle. They are (and were) the only reason anyone would want to sign up to our program. Technological and Industrial superiority were testimony to our credibility.

Who has more power: the guy who has money or the guy who has stuff? Try eating money.

We need an American Industrial Renaissance NOW!

Posted by usaguy | Report as abusive
 

“The americans thought they can have the world by practically buying it with monopoly money called american greenbacks. Thanks to several reasons including lack of fuel for their military, industry and civilian society, this may no longer be possible. More junk money anyone?”

There’s nothing in this comment with a shred of relevance or basis in reality. Lack of fuel for the military, industry and civilian society? I sincerely do not understand how people become so wildly uninformed or misinformed.

 

This problem has been brewing for 15 years, and it will run it’s natural course.

We send way to much money overseas to buy gas, support foreign goverments, etc, and we borrow money directly and indirectly to finance it all.

Contrary to the popular belief America can borrow to it’s heart’s content, it’s growing closer and closer to the time to pay the piper.

Only once the dollar is devalued so much we can balance what we export, with what we borrow from overseas, and only when we get to that point over the long term, there will always be stress against the dollar, lowering its strength against other currencies.

Posted by Robert | Report as abusive
 

The dollar was the signature mark of the American age. The downfall of the dollar is not by any foreign economic power but by our own leaders. Just like past Empires impermeable to outside forces the downfall comes from within.
The fearful aspect is that President Obama did not do this because he was naive, as he is an ivy league graduate. I believe his deep rooted far left wing Socialist philosophy that borders on being a neo- communist has influenced his decisions to take down what he sees as an oppressive economy and a racist culture.

I have no doubt that President Obama sincerely believes that the free market system is evil and a government controlled economy is the best alternative. I also believe that he sees past American foreign policies as wrong and an apology is in keeping. This new government is willfully and with full sense taking apart what they see as evil and unfair and by their actions they believe that the average American needs taking care of, that we do not know what is good for us except them. That may explain why so many Congress men were taken by surprise by the ferocity of the town hall meetings and meant when they accused us as “nazis” “thugs”, and other derogatory terms for they actually see us as such. That may explain why Barbara Boxer dressed down a General for not addressing her as a Senator, or Obama’s tongue lashing at General McCrystal for speaking the truth.

As Judge Sotomayer stated she is the “wise Latina” and in keeping our government officials we elected believe they are the enlightened ones facing an ocean of unwashed ignorant masses.

Since high school we are taught of the three branches of government: the executive, legislative and judicial. But the fact is there are a few more. The main (fourth) branch is the electorate, and the fifth branch is the military. One even could state that the media makes a branch onto itself.

Taking this into consideration, a military take over may become plausible as our present government goes all out to dismantle the US culture, her economy and destroy her image abroad.

Posted by Asian view | Report as abusive
 

This problem has been brewing for 15 years, and it will run its natural course.

We send way to much money overseas to buy gas, support foreign goverments, etc, and we borrow money directly and indirectly to finance it all.

Contrary to the popular belief America can borrow to its heart\’s content, it\’s growing closer and closer to the time to pay the piper.

Only once the dollar is devalued so much we can balance what we export, with what we borrow from overseas, and only when we get to that point over the long term, there will always be stress against the dollar, lowering its strength against other currencies.

Posted by Robert | Report as abusive
 

All good points, but weren’t they just as true a few years ago when the euro, for example, was worth about 85 US-Cents? Nobody cared back then.
Isn’t the reason for the most recent weakness of the dollar just simply the carry trades?

Posted by wu_trax | Report as abusive
 

So if the dollar drops like a stone. We will have hyper-inflation and high interest rates but other countries won’t want to finance our debt. That might not be bad? -If we can help our elders and preclude other countries from the purchase american assets.

If the dollar is strong we will ship jobs overseas, have highier unemployment, highier imports and lower interest rates (at least for some)

I’ll go for door number 1 monty.

Posted by kit | Report as abusive
 

“There is also the possibility that globalization has permanently raised the “natural” level of the U.S. current account deficit. Huge swaths of the U.S. manufacturing base and a growing wedge of the country’s service sector have been offshored or simply moved out of the U.S. Many of these goods and services are still consumed by the U.S., but now much of the money generated by those sales will be the result of dollars being sold to buy pesos, ringgits or yuan.”

And, this is exactly one of the reason why unemployment rates are getting to the point of ridiculous, now. Since the bulk of the manufactured goods have been coming from China–and services from India–the United States basically subsisted on land development and construction. That is the only reason why things didn’t go belly-up much sooner than now. But, as soon as the real-estate market started drying up, all these people lost their jobs, leaving no options aside from an underpaid service sector that fast filled any empty positions.

An example, a large appliance manufacturer had 60,000 employees on the payroll in their US factory. Ten years later, they have only 3,000! That’s a 95% layoff rate. Absolutely amazing.

While we are encouraged to “buy American”, it’s not even possible, anymore. That is–unless you are buying a car. And even that’s changing with GM accepting billions in bail-out money. And the thanks the American public gets? Closing all the US factories and offshoring the manufacture of their automobiles to China. They should have been required to keep those US factories open, accepting the bailout.

Just my thoughts…

–Robert

Posted by Robert | Report as abusive
 

well, they should get rid of pennies, but the issue we are facing is getting rid of the dollar. i agree that i should be kept, and it is an american symbol. but i head that the dollar is actually only 38 cents right now,. thats how pathetic it really is.

Posted by jane | Report as abusive
 

My daughter asked me the other day how can Denmark afford to have excellent free medical treatment to their citizens and other social programs. I answered her: “How many super-aircraft carriers does Denmark own? How many ballistic missile submarines does Denmark own? How many troops does Denmark have in Iraq? How many fleets does Denmark have sailing the oceans?” “None.” said she. And that is why Denmark can afford these programs.

America should pack-up and go home. Tell Europe, Asia, and Africa it has been fun; but you are on your own now. Good luck and thanks for all the fishes.

Posted by WRTolkas | Report as abusive
 

The dollar use to be as good as gold worldwide.
Just like every country that has ever printed more and more money our dollar is now or soon to be worthless.
Our country is so much in debt eventually every dollar we worked our whole lives to save will continue to become worthless. Even the super wealthy will be in soup lines.
There is only 2 ways to solve this problem, tax breaks for people and companies that make $30,000 and up and get government and regulation out of everything possible.
Yes this is the opposite of Obama’s Markism but it works every time it’s tried.
Follow the lead of our forefathers to the letter.
They had the wisdom to know that more government will be the downfall of our GREAT nation.

Posted by Mike | Report as abusive
 

Hi,

If I am not mistaken I think the basic argument here is that Americans tend to consume more than they produce, which cannot continue forever. To be frank, I think America has a consumer mentality, which doesn’t work in the long term.

Cheers,

pc :-)

Posted by pc | Report as abusive
 

Sammy, the US still manufactures more goods in dollar volume than any other country on earth. It is projected that China will pass us, but it is inaccurate to say that that “we have no manufacturing base. We hardly produce anything at all.” I’m concerned as many of these commenters are, but if we are making life and investment decisions based on facts, lets make sure we have “real” facts. About manufacturing and everything else.

Posted by Thomas | Report as abusive
 

Agree with pc. Too many people bought too many things with credit cards and now almost everyone I know is in some credit card debt. Too many people wanted that house to own and signed a mortgage without considering how they will pay for it long term and now they’re losing their houses and devaluing the houses of their neighbors. The consumerism mentality just got out of control.

Posted by bob | Report as abusive
 

Considering the staggering burden of debt many Americans are carrying, inflation would be great news – for them. The US government has been encouraging inflation since the Great Depression, which is when they figured out that that kept the economy maximally humming along. This is why you can safely count on the dollar losing 20 to 25% of its value every 10 years- and it keeps on compounding its loss. I’m only 59 years old, and I can remember 10 cent cokes, nickel Hershey bars, and 10 cent comics. Complaining about this or betting against it long term is like betting against gravity.

Posted by BenFranklin | Report as abusive
 

Its funny to read some of these posts. How is this Obama’s fault? He came to office less than a year ago. The issues with the U.S economy are decades in the making. The shifting of manufacturing jobs to other countries, the real estate bubble, the mass consumerism, the mounting credit card debts, investment into sports and entertainment and a very deliberate capitalist attitude of the markets have led to this chaos. This has nothing to do with Obama and him being a “socialist”, anti markets nonsense. The United States lost its competitive edge a long time ago. The fact that the Economists and the government and the corporations did not see the fact that a country sole dependence on service sector cannot sustain for long, as the “earth is flat”. The same financial analysis, consulting, engineering, design can be done anywhere in the world with the advancement of telecommunications and education. Third world countries had deep rooted issues with mass education and affordable, accessible universities, however it was just a matter of time, before they start mass producing graduates in every field from their own universities, which in turn will take up both manufacturing and service sector jobs away from rich countries due to low labor/salary costs. Dependence of foreign Oil and the “drill baby drill” attitude has in fact disrupted a move towards green technology. United States could have led the world in green tech, by having American companies in U.S both manufacturing green products and providing servicing and consulting for green technology to the world, just like it did with semiconductors 15 year ago in Silicon Valley. However our negligence towards this sector, led to Europeans taking the lead for good. Norwegian countries are at least 20 year ahead of U.S in moving towards alternative energy and have created a hot bed of companies, both manufacturing and service sector all over Europe. We have to led the Dollar slide, so our manufacturing jobs become more competitive and we bring back a good 20% back here from China and India as their currencies will appreciate due to industrialization, thus making their wages go up and making exports more costly for them. A green tech industry in the U.S on the other hand will close our dependence on foreign oil, thus decreasing our imports and our trade deficits. We have to invest in Education and put U.S on a Cosmic path, where we as a nation and as a planet start exploring the Solar System and beyond, as our destiny is Cosmic and unbound. We have forgotten our place in this Universe. By creating man made boundaries and borders we forget that we are one species and seemingly trivial in the Cosmos and can easily be destroyed by an asteroid, solar storm, gamma ray burst, tectonic shifts etc etc.

Posted by Sid | Report as abusive
 

Hello,
we in Maritime / Shipping Industry lost bunch of money with such sorry downfall of dollar. Our savings are halved and its sorry to see that we worked such cheap just couple years ago. What should I do with my greenbuck? Convert to Euro, or wait. Appreciate any expert advice.
Cheers!
MPA

Posted by MPA Maritime | Report as abusive
 

The international community seems to have grown tired of taking upon themselves huge amounts of risk in regards to the Dollar. The United States now remains only as a distribution center for global goods, no longer the power-house of manufacturing, imports far exceed and exports. Our fiscally irresponsible nation has finally found it’s limit and Humpty Dumpty is about to fall off the wall. America is a shell of what it once was and no political aspirations or those holding a Messiah complex will avert the inevitable.

Posted by Rodney Dezarn | Report as abusive
 

yes, the dollar is constantly being devalued to hold up the investments of the wealthy.. same thing happens in latinamerica when politicos take on too much debt and can’t pay it back they just devalue the currency so that the poor have to take it and not complain. look at , zimbabwe, was it? one loaf of bread, one million dollars, but everyone was a millionaire.

Posted by steve | Report as abusive
 

And Mr Obama just nominated Helicopter Ben, for another term. You’re almost there, Barry. Keep it up. At this rate, we’ll be a 3rd world country, in no time.

Posted by 9009 | Report as abusive
 

as someone living north of your border, and loves the USA,,I must give my head a shake when I read people blaming Obama for bankrupting America. You bought more than you sold, you borrowed to pay for your wars, you are running out of oil and you produced gas guzzling cars,…. and you have the 27th best medical results in the world. Please pat attention to what is happening… it is not too late.

Posted by geohar | Report as abusive
 

Thomas,

you have to hear what Sammy is saying. You are focusing on comparing us to China. That is wrong-headed. You have to compare us to ourselves…. from 50 years ago. You have to look at the trends, and when you understand that our manufacturing base… talent, machines and factories, have all been leaving at an astounding rate.

It is the direction of change that he is really concerned with, and we should all be. You can’t have an economy based on retail sales of the goods from other countries… or tatoo or piercing parlors, and that is the direction we are heading.

We want to have insane “jobs” working at non-profit organizations to make the world a better place. We want to have a service economy… or a government job. Where the average US teacher is paid over 60 grand a year for delivering terrible results. Where healthcare is free for everyone.

The list of unreal expectations of living fun yet non productive lives is the root cause. When that seems to not work, we mask it by buying on credit… and fool ourselves that we are doing great. “I must be a productive and useful person… look at all the stuff I have!”

The root cause is being over paid to do nothing… like Obama’s Nobel prize. It’s a Hollywood fantasy. People are expecting to be *PAID* to be “volunteers” these days. Think about it!

It is that attitude that is killing us. Non-productive people need to be left to starve. When they get hungry enough, they will eventually wake up and be productive, or they will perish.

Nature has this in store for us. “THINGS THAT CAN’T GO ON FOREVER DON’T”

Those that CAN’T be productive need help from the people around them (NEVER government. EVER.) Individual charity works. Government “charity” never works.

My .04 cents

Posted by Ryder | Report as abusive
 

Every President from Reagan onwards refused to halt runaway US consumption on credit….the voters wouldn’t hear of it.
It was only sustainable while US deficits were willingly funded by takers of the world’s reserve currency….
Helicopter Ben got his wish, now that it’s been dropped like haybales from the air as stimulus, its still just paper.

The scramble for real assets will go on until a new basket reserve is operating, Euro, Yen, gold, maybe oil, Yuan, US$. Much lower living standards are inevitable for the US…..the age of US military deployments in even just wars around the world is coming to an end.

Just like Rome, war will break us in the end.

Posted by James | Report as abusive
 

What needs to be done is to start a trade war with China on purpose. Other nations have floating currencies, but China is pegged, and until it realigns its peg, send ALL SHIPS BACK TO CHINA. If China intends to crash the US dollar on purpose, well we don’t have to buy a thing from them. GET TOUGH WITH CHINA INSTEAD OF WHINING ITS THE END OF THE USA.

Posted by jack | Report as abusive
 

The US dollar deserves to continue to decline.
Why?
Well Mr Benanke and co are more watching hedge funds return to 20-30% annual returns with his very low interest rates and printing money.
Whilst anyone working hard and saving cash gets what?
Mr Benanke kindly gives you 1%. How does he look at himself in the mirror every day
When will the central banks around the world stop rewarding excessive risk takers

Posted by gd | Report as abusive
 

Consumerism is not the problem. The problem is the US government borrowing trillions and trillions of dollars from other countries to finance our out of touch national budgets.
We need to face up to the fact that we can’t afford the myriad of social welfare programs we have and we have already dug ourselves into a huge abyss just trying to keep paying on the promises of social security, medicare, medicaid, etc….
Bottom line is, we need to cut back federal spending to LESS than what the country collects in taxes every year, instead of spending 3 to 4 times more than what we are collecting in taxes. And just raising taxes won’t work, that will supress business even more.
The federal government has become a goliath, and now our leaders in Washington DC want to make it even bigger, and spend like never before, despite the fact that there is no money left to spend.
It’s complete insanity. We need to get this thru our collective American heads. WE CAN’T SPEND MORE THAN WE COLLECT! I know that’s a difficult concept to understand. Look around, our currency is collapsing, our economy is collapsing, and at the same time, we are passing and in the process of passing gargantuin socialist spending bills for social welfare programs.
Understand this. There will be NO PROGRAMS AT ALL, once the we are totally bankrupt and no one will lend us anymore money! Those are the cold hard facts.
We need to re-take the government, tighten all our belts as Americans, and turn things around.
This will be increadibly difficult for all of us, but if we don’t do it, we are headed for disaster.
No one will want to have cut backs to what they are currently getting from the government, but it has to happen. Again, we can’t spend more than we make! This is what has put us 11 Trillion dollars in debt!
We need to cap spending at 70% of the GDP, and dedicate the remaining 30% to repaying the debt. We also need to get real and realise that some of the artificially high wages that are being payed here in the US simply no longer fall in-line with current world realities. Yes it’s nice to make $65 dollars per hour to fasten seat belts to the pillar of a GM car, but when the car company that makes that car goes bankrupt, because those type of wages don’t allow that manufacturor to be competative on a world wide basis, then what good did it do to aftifically keep that wage that high? Considering that the US taxpayer has had to bail out the manufactor that pays that kind of wage more than once, then you need to realise that we are ALL paying the price for that “out of touch” and un-realistic wage, that doesn’t reflect current worldwide realities.
1- cut our spendind to 70% of GDP (it will hurt but it must be done)
2 – start paying off our national debt, and pass new laws banning the federal government from spending beyond our allowable budget other than in cases of national emergency or catastophry.
3 – Stop bailing out corporations that are going bankrupt because they pay un-realistic wages in line with current worldwide conditions. Let them go bankrupt, which will cancel all current wage contracts. New companies will spring up to replace them and wages can be payed according to current realistic conditions, which allow new companies the type of profit they need to invest in better technology, remain profitable, and be competative price wide on a world wide scale with their products.
4 – Realise that no matter how good your intentions are, only a certain percentage of the GDP can go to social welfare programs. The worst thing a country can do, is start to borrow and go in debt, just to keep social welfare programs running. That is the clearest sign that the experiment just doesn’t work.
No one will have any programs when the country is bankrupt anyways right? So then, doesn’t it make more sense to only spend what is available, and according to a budget that doesn’t inccur deficit spending?
Why should this be such an increadible thing to understand? lol
5 – Shrink the federal government by 40% of its current size, cut taxation rates on business and those who generate jobs, fire the federal reserve and take back our currency.
Do those things and watch the biggest economic boom in the history of our nation happen, a recovery of the US dollar, a re-emergence of the US as a manufacturing nation, and record economic surpluses, as the US regains its ability to compete in the world markets.

Posted by ShaneUW | Report as abusive
 

it is inaccurate to say that that “we have no manufacturing base. We hardly produce anything at all.” That is a valid comment and for that reason we have to keep the keep the war machine running. A new war is urgently needed for a solid recovery.

Posted by bachu | Report as abusive
 

To WRTolkas: you appear to be unaware that after the US and the UK, Denmark (population of only 5 million) had the largest contingent in Iraq – in proportion to population, more than the US. It also has a substantial contingent in Afghanistan,where many Danish soldiers have died. So much for supporting the troops! In addition, Denmark has one of the largest merchant marines in the world – roughly 30% of the supplies shipped to the US military in Iraq came in via Danish carriers.

Denmark can afford its expensive social programs not because it’s propped up by the US – which has no troops here – but because Denmark’s citizens pay high taxes to support them. In turn, they can afford to do that because the economy is robust (the recession was mild and is already over here) and employment is high (unemployment is a fraction of that in the US and has been that way for many years). Last of all, they can afford it because successive governments here have kept a tight rein on spending. Through most of the last decade, we have run surpluses, not deficits – and the government has used those to pay down debt.

Over the last decade, US federal debt has climbed from 50% of GDP to over 100%. In the same period, Danish government debt has fallen from 60% of GDP to 15% – and that’s at the same time as they support those social programs. There’s a similar difference in privately held debt. Basically, the Danes (and other Scandinavians) didn’t go on a spending spree when the economy was good – instead they saved and invested against the day when the economy would be not so good.

*That’s* the sort of thing that’s driving pressure on the US dollar, not some mythical transfer of wealth via military infrastructure.

cheers, Mark

Posted by Mark | Report as abusive
 

The US has for the longest time created an environment for parasites (people on public assistance)to grow. Now I know there are people on public assistance that actually deserve and need it, but, there is a large percentage of people on it that could well do without it. Our politicians are going to have to come up with some restrictions to thin the parasites out……… People and corporate parasites.

Posted by harold | Report as abusive
 

What happened to the wonderful SERVICE ECONOMY that was supposed to have replaced the dirty manufacturing and industrial economy? I guess that was all hot air by scumbag attorneys turned politicians and contributed more to Global Warming than actually creating jobs and prosperity!

Posted by Schumann Rafizadeh | Report as abusive
 

Having a little trouble understanding how trade imbalance caused all of this?

Here’s a simple (but accurate) explanation:

After a currency debacle in 1998 left its economy in tatters, Beijing decided to radically restructure its financial relationship with the West. Policymakers pegged the value of China’s currency to the dollar, which had the effect of keeping it artificially low.

The cheap renminbi made it irresistibly inexpensive for U.S. companies to manufacture goods in China, even after shipping costs. As more companies shifted their operations to China, the U.S. manufacturing base was hollowed out in the name of globalization and profitability. Americans who once enjoyed high-paying factory jobs moved on to lower-paying service jobs.

China didn’t need much of anything made in America, so instead of buying cars from Detroit and furniture from North Carolina with its factory profits, it bought Treasury bills. The purchase of all those bills drove down U.S. interest rates. So as middle-class and blue-collar Americans saw their wages stagnate or decline, they discovered they could still keep their old lifestyles by borrowing.

Over the past decade, Americans were able to outspend their incomes by easily rolling their debts forward through serial home refinancing. The situation was never ideal, but it worked as long as the value of their collateral — their homes — kept rising.

As long as China kept buying Fannie Mae (FNM, news, msgs), Freddie Mac (FRE, news, msgs) and Treasury credits, the scheme worked in a strange and beautiful way: Our driveways filled up with cars and boats, shopping malls spread out across the suburban landscape, and the retailer with the closest ties to China, Wal-Mart (WMT, news, msgs), became the United States’ largest company.

Posted by Willis | Report as abusive
 

Folks, get ready for the one-world government. Devaluing the dollar is one of the final steps toward realizing this monstrosity. The North-American Union, the merge of Canada, the U.S., and Mexico into a super-economic (and ultimately governmental) power, is the next step. Our national sovereignty will be destroyed. I urge readers to get a copy of Jerome Corsi’s America For Sale.

Posted by Mufaso | Report as abusive
 

Mark said:
“Denmark can afford its expensive social programs not because it’s propped up by the US – which has no troops here – but because Denmark’s citizens pay high taxes to support them. In turn, they can afford to do that because the economy is robust…”

Not exactly – where do you think the Danes get the money to pay for those social programs?

The U.S. has a $3.28 billion trade deficit with Denmark. The U.S. is everyone’s biggest trade partner and we a have a deficit with just about everyone.

Indirectly, WE are paying for Europe’s social programs.

All of these happy little European Socialist states can maintain their nanny-ness because they are all attached to America’s big dirty Capitalist Economy like parasites.

If the U.S. went socialist – the Global Economy would fall apart. Socialism needs to sell to a Capitalist economy to survive.

Posted by Jones | Report as abusive
 

The reason the dollar is dropping in value is more due to the fact that in the world economy –(where all the different currencies of each country are balanced out and each currencies worth is put against the other.)– has changed ever since the advent of the EURO <– which took away nearly 50 currencies in Europe, the dollar has been dropping. they basically tranformed their entire continent into one big economic powerhouse and it worked for them instead of us being rich now they are because our dollar has to compete against the EURO as a whole as opposed to the many different currencies there used to be It has nothing to do with welfare or obama (although printing <-new money- our way out of debt like his administration is trying to do is why the USSR collapsed).

Posted by Martin | Report as abusive
 

I would be interested in seeing what the components of production, imports, consumption and exports are for the US. Maybe a long journey downward will be a pleasant one, like a tired old 737 jet coming in for its last landing to be replaced by a zippy new technology and way of thinking.

Posted by Casper | Report as abusive
 

There’s so much talk of late about the dollar falling, it surely follows that somebody has a vested interest in seeing it go that way. One doesn’t have to look too hard to figure out who might be involved. [Hint: it's not who it should be.]

Amid all the chatter, what seldom gets mentioned is the degree to which our currency policy now quivers coyly in the hands of an unregulated US finance industry, rather than those of the Treasury.

Underpublicized also are the long-term risks of this presumptuous trend toward total privatization of the national interest. It’s been going on so long now, it’s just “one of those things”.

With the Treasury Department devoting obscene amounts of its time and resources to massaging certain parts of private financial services industries in a suspiciously sensuous fashion, instead of focusing on the vast and troublesome domestic implications of an unruly greenback’s mood swings careening entirely out of public control, the overall situation becomes that much more volatile and vulnerable to catastrophic outcome.

Clearly this concerns the banks not one whit. Boldly using taxpayer funds as gaming chips, you’ll see them short the U.S. Dollar wholesale in a New York minute. And damn the consequences – as long as they come out ahead on paper, they really don’t give a hoot how low the domestic currency sinks and at what inevitable cost to the American public.

Europe On $500 A Day, anyone?

(At the time of publication the writer didn’t seem to have too many dollars.)

Posted by The Bell | Report as abusive
 

Thank you for the article.

Posted by enoch apaibinyesim | Report as abusive
 

So much of this discussion is overblown. The U.S. is the most innovative and hard working on the planet. Our currency is the most transparent and trusted. Period. Until China can produce something other than the plastic garbage sold at big box stores and the EU has a longer work week (and ends its bickering), the USD will continue to be the currency of choice. Another point, oil’s influence on the USD stops when we find transparency (working according to the EIA)- or an alternative abundant and practical energy resource.

Posted by Matt | Report as abusive
 

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