You Don’t Give A Shit About The Value Of The Dollar

[Lush For Life’s Economics Correspondent Edward Payne first submitted this story to Forbes Magazine, The Wall Street Journal, The Bloomberg Report, The San Francisco Chronicle, The St. Pete Times, The Tampa Bay Business Journal, In the Loop, The Carrollwood Times, The New Tampa Neighborhood News, The Gazette, The Idlewild Baptist Church Newsletter, and The Coffee Times. After rejections across the board, we at Lush For Life opted to run this piece, hoping to increase our street cred in the financial world and boggle the minds of our fifth-grade reading-level demographic. Enjoy! – Ed.]

As I watch our economy, seemingly kicked out of the plane with no parachute and presently plummeting earthwards towards the far end of terminal velocity, I can draw comfort from one fact: the general public is terribly dense about boring old math and economy, so there shall be no retaliatory revolution disrupting my own various indulgences, most of which require the existence of a reasonably advanced socioeconomic infrastructure to exist. I refer of course not to you, Dear Reader; for simply by virtue of holding this eminent publication in your hand, you have already differentiated yourself from the vast hordes of unwashed masses content with little more than Miller Light and “America’s Next Top Model”. Perhaps Federal Open Market Committee meeting minutes ought to be read by bikini-clad models during prime time.
The United States dollar is devaluing rapidly. Treasury CEO Henry Paulson and ECB head Jean-Claude Trichet are both fine with this, according to Bloomberg.
A dollar is worth about 0.73 Euro as of this writing, down from 0.82 a year ago, an 11% drop. The dollar is down from buying over 1.10 Euros in 2001, an astonishing 33% drop. Where has a third of the value in our dollars gone?
Lacking innovative powers even when given carte blanche to find any way to pad the pockets of their ultrawealthy constituents, the Bush II administration could do little more than revisit daddy’s old playbook: the Reaganomicsesque “massive tax cuts for the rich” plan implemented by Bush II produced a massive budget shortfall, just as the extremely expensive invasions and occupations of Iraq and Afghanistan were launched. The shortfall was made up by going into massive debt. Interest rates were held artificially low during this period so that the government wouldn’t have to pay much interest on the money it was borrowing. (As a side effect, this sparked the housing bubble that is now bursting and wreaking havoc in the mortgage industry. It is too soon to say whether this burst will spread to the finance sector and thence to the larger economy.)
The invasion also sent oil prices skyrocketing, which produced a big charge against the economies of the developed nations in general and the US in particular. Ongoing rapid economic development in the emerging economies, particularly in manufacturing (as free trade off shores more and more of the developed nations’ manufacturing base), simultaneously produces ever increasing worldwide demand for oil and other commodities, especially raw material metals, while reducing the cost of the finished products in terms of major currencies, creating inflation.
The US policymakers must maintain the illusion of a prosperous economy as long as possible for political reasons. The wars are very unpopular; a simultaneous economic downturn would be a political disaster for those in charge. The massively low interest rates that were set for war borrowing not only sparked a disastrous housing bubble, they also produced a great deal of inflation. They’ve raised rates a bit since then to contain the inflation somewhat, but they cannot raise them much further without aborting the nascent economic recovery taking place since the 2001-3 downturn, given the huge upswing in commodity and particularly oil prices. The paper recovery is based more than anything else around easy money and revaluation of scarce capital assets against inflation.
The solution: devalue the dollar. The honchos all have their assets in European bonds. The devaluation functions as a tax on anyone who holds dollar assets, which is used to decrease the real value of the nominal bond debt the Bush administration has incurred to simultaneously finance the war and its tax-cuts-for-the-rich program. The devaluation is politically justified by claiming that it will make US exports more competitive in the world market; unfortunately, the US economy is largely driven by consumer spending and exports relatively little these days.
As the dollar plummets, central banks across the world are dumping their dollars, or at least halting new purchases and shifting to buying Euros as a reserve currency. Iran, Russia, and Venezuela are already transacting oil sales in Euros; Russia, in rubles, as well. This only increases the downward pressure on the dollar.
The United States itself has only $41 billion of currency reserves, less than Nigeria, Indonesia, or Poland, and smaller than Bill Gates or Warren Buffet’s personal fortunes.
This is consistent with a decision to devalue the dollar – why accumulate large reserves of something that will soon be worth much less?
European exporters are hurt by the strengthening of their currency. Why does the ECB accept the situation? Their own economy is not doing so great as the heavy costs of absorbing East Germany and Eastern Europe generally into the Union weigh on their economy; however, these countries are at the same time experiencing phenomenal GDP growth as they modernize and provide cheap labor to the Western European countries. The EU economy does seem to have marginally improved lately, anyway. Rather than raise Eurozone interest rates to contain the Euro’s rise and risk damaging or slowing down the eastern European integration, the ECB authorities are prepared to take the negative effects of a higher Euro now in the interests of keeping easy money available to finance eastern European integration, so as to get the eastern economies on par with the west that much faster. The much more socialist cast of European society also undoubtedly plays a role; short-term export growth is not as much of a priority as it would be for US or Japanese policymakers. As a nice side effect, Europeans can now afford more consumer goods from China, too.
In the near to medium term, the US equities market will continue to rise (slowly) as the dollar devalues, to re-price the real assets held by the corporations at new inflated nominal values, offering the illusion of economic prosperity to the financial public. In the 1970s, this situation of ongoing inflation with little real economic expansion was called “stagflation”. Perhaps this explains the bell-bottoms fad of a few years ago.

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Hoping to create the world's first perfect FemBot, Mr. Payne achieved his Master's degrees in Artificial Intelligence and Linguistics. After the government pulled his funding, he took a position as a part time correspondent with Lush For Life. He continues to travel the globe, establishing numerous contacts for microchips and silicon enhancements on all seven continents.

8 Responses to “You Don’t Give A Shit About The Value Of The Dollar” Subscribe

  1. Frank Mackey May 13, 2007 at 11:32 am #

    I think it is incorrect to associate dollar weakness purely with government spending. Sure, the government is accumulating debt to pay for tax cuts, the war, etc. However, the U.S. government debt-to-GDP ratio is much lower than both that of Japan and many of the Eurozone countries. The main driver of dollar weakness is negative consumer saving rates combined with projected weakness in the U.S. economy relative to other G7 nations.

    The idea that the U.S. exports “relatively little these days” is not correct. The U.S. exports were 11.1% of GDP in 2006, 9.6 in 2002 and less than 6% 50 years ago. Sure, the US imported much more, accounting for the current account deficit, but its exports were not minute.

    Finally, the statement about the U.S. not accumulating reserves is a red herring. The main point of reserves for developing countries is to buffer their economies against currency shocks. When developing countries’ currencies are falling against the dollar, central banks can defend it by purchasing the currency in exchange for dollars. The dollar a reserve currency. Therefore, if the U.S. central bank really wanted to intervene in the market to strengthen the dollar, it would just raise interest rates. I suppose it could buy euros in exchange for dollars, but that wouldn’t be preferable. Either way, since the collapse of the Bretton Woods system the Federal Reserve isn’t supposed to interfere in markets like that.

    Now that I’ve said my piece, feel free to flame me 🙂

  2. Joe vs Volcano May 19, 2007 at 11:46 pm #

    I like moneeee and orange soda :))))

  3. Edward Payne May 23, 2007 at 2:08 pm #

    No need to worry about flames. We at Lush for Life adhere to only the very highest standards of journalistic integrity. 🙂 I will, however, rebut:

    My point was not that dollar weakness is exclusively due to government spending; rather, that a seperate and preexisting borderline situation of potential dollar weakness and general economic stagnation was deliberately exploited and exacerbated by the Bush administration to greatly extend the deficit spending leverage available to them, at the expense of the general dollar economy.

    The economic weakness in the US was induced as a direct result of Bush administration economic policies, in particular, offshoring of American production (admittedly started by Clinton, though accelerated by Bush) and the institution of MASSIVE tax cuts for the welathy (to the tune of $1.35 TRILLION over ten years, http://archives.cnn.com/2001/ALLPOLITICS/06/07/bush.taxes/), instituted with the disingenuous rationalization that such people will reinvest their extra money into capital production rather than purchase new imported brass toilet seats for their yachts. These economic policies are good for holders of capital (i.e. the Republicrat elites), bad for the middle and lower classes, and bad for the American economy per se.

    The stage thus set, the unforeseen invasion of Afghanistan after Sept. 11th attacks produced a huge charge that had to be paid for somehow. The subsequent (unrelated and likely planned far before Sept. 11th) conquest of Iraq has failed to produce substantial oil revenue to pay for itself, as Cheney had envisioned, producing an ever spiralling ongoing charge (estimated at $1.2 trillion, http://www.nytimes.com/2007/01/17/business/17leonhardt.html?ex=1326690000&en=7f221bfce7a6408c&ei=5090)

    Trillions of dollars are not trivial sums, even for the United States government. The Bush administration cannot reinstitute the taxes they repealed without losing all credibility with their base. Fortunately, the already-weak economy presented a ripe opportunity for a controlled currency devaluation after issuing massive amounts of bond debt — an invisible tax on dollar holders that most people won’t even notice.

    That the debt-to-GDP ratios of Japan or some European countries are worse than that of the US is not relevant. Consumer spending is certainly a factor — it is fuelled by the massive trade deficit, which provides cheap plastic stuff to sell at Wal-Mart but inexorably erodes the value of the dollar, all part of the synergistic system described above (and which Cheney, at least, is fully aware of; his money is in Euros.) The projected economic weakness you speak of relative to the other G7 nations is, as described above, a direct result of the Bush administration’s misguided economic policies.

    When I spoke of exporting relatively little, I referred to the trade deficit. While the US certainly exports more in terms of percentage of GDP than 50 years ago, it also imports a much larger percentage, producing an obvious drag on the value of the dollar (and fuelling middle America’s consumerist lifestyle in the meantime as the dollar slowly sloughs off the relative value accumulated over many years of economic superiority.)

    The low currency reserves of the US are becoming increasingly a problem. As you noted, the US dollar is no longer the base currency of the world. The Euro is rapidly unseating the dollar as an international reserve currency. Soon the yuan and the rouble will also be major international players. The US dollar is well on its way to becoming “just another currency”. The Fed is unable to manipulate the relative value of the dollar at this time (what they are “supposed” to do is not a consideration) because raising rates would create a cash squeeze that would abort what little economic growth remains in the US; not that they want a stronger dollar anyway, according to my thesis — this devaluation is a concerted and deliberate policy of the Bush administration.

    Finally, I note that, one month on, the Euro and the pound are both still making new alltime record highs against the dollar every week, and the US equities market is creeping upwards to new record highs, just as I predicted. Kuwait’s financial authorities have just a few days ago unlinked their currency from the dollar in favor of a Euro-tilted basket, which they would not have done were it not in an ongoing devaluation process (http://www.bloomberg.com/apps/news?pid=20601087&sid=axpON9NWC0W4&refer=home).

    China has widened the yuan’s daily trading band (they are certainly aware of the devaluation, and they realize that their already shaky dollar-tilted-basket-vs-yuan peg becomes increasingly untenable against a devalued dollar, so they are moving slowly towards a free float. http://www.bloomberg.com/apps/news?pid=20601080&sid=a0PobShDqvJA&refer=asia), and the yuan is now trading at alltime record highs vs. the dollar (http://www.cctv.com/program/bizchina/20070523/101911.shtml).

    The Bush administration has only a huffy “no comment” on the matter of dollar weakness. (http://english.sabah.com.tr/A2CDF7ED676E4AB5A325E809665BB3AE.html)

    Cheers,
    Edward PAYNE

  4. Frank Mackey May 23, 2007 at 5:53 pm #

    Hi,

    But I’m not sure what your general thesis is… Is it that dollar weakness is bad/trade is bad? If so, I’m just going to have to disagree with you.

    I mean, you talk about off-shoring. However, trade is Pareto Optimal, in that the winners from trade can always compensate the losers. Of course, this doesn’t happen, which makes trade adjustment painful. But, for the economy as a whole, trade is good. In fact, I think it was Ricardo who showed that ALL trade is good. If you keep all your borders completely closed and I open up all of my borders, I will, as a country as a whole, be better off, always. Otherwise, why else would I be trading with you?

    I do agree un-“fair” trade is politically unpalatable, but, even in the case of unfair trade, I have never seen any theoretically strong economic argument that it is not an improvement for the economy as a whole. That’s the damnedest thing about trade, people view America lowering a trade barrier on agriculture during a WTO round as a “concession” when its actually helping us.

    As for the weak dollar, I don’t necessarily view that as a bad thing. It should do a few good things. First, it will lower the trade deficit. I view the trade deficit not so much as fueling consumer spending as you do but consumer spending fueling the trade deficit. Second, it will be inflationary, which will put some of the brakes on our economy without requiring the federal reserve to raise interest rates, which will also lower the trade deficit. Finally, it will cause some of the massive amounts of money invested in America (which fuels the massive capital account surplus, and, in term, the trade, or current account, deficit) to go elsewhere. I think in all ways, a weak dollar is healthy for an economy as out of balanced as ours is right now. Of course, if this unwinding happens very rapidly, there will be a massive slowdown in the US. However, there hasn’t been any indication yet this will happen. The main reason is that the U.S. is still, by far, a much more dynamic economy than Europe.

    You think a weak dollar, and all those effects are bad, I disagree. You are very correct in the sense that anyone who has money in Euro/Yen/etc investments is doing good. I know I am! Of course, during the mid-late 90’s anyone with money in Euro (legacy currency)/Yen/etc investments was doing bad. I view it just as part of the economic cycle, not the coming of the apocalypse. You might think it is… The nice thing about finance and economics is that one of us is right. However, until 5-10 years from now, there is no way to know which one of us it is!

  5. Recipher June 18, 2007 at 10:32 pm #

    Frank Mackey, I don’t think it’s the issue of a natural cycle of economy. It’s that we will have to pay off trillion of dollars in debt for the TREASON of a bunch of assholes in office. Something like this it isn’t easily solved by investing in Euros or the British Pound, we will lose in many different ways other than in $ devaluation. Why should we have to experience a recession or depression for the bad choices of our elected officials?

  6. Edward Payne June 30, 2007 at 11:27 pm #

    Dear Mr Mackey,

    I think my thesis is abundantly clear: summed up, the ruling cadre in the United States is selling out our economy for their personal gain and that of their friends, through the many specific mechanisms outlined in detail above.

    “Improvement for the economy as a whole” neglects to consider the vast and growing disparities within that economy. These are muted in the United States (though very much so still present, they are masked by the easy availability of consumer credit, which simply gives people the plasma TV or new truck now and chains them to the compound interest debt treadmill for the rest of their economically productive lives), and far more pronounced in third world countries. In Buenos Aires, for example, you find high-end boutiques selling US $1,000 imported designer Italian shirts while right outside 20 guys are digging through the trash can looking for recyclable cardboard.

    In both cases, “the economy as a whole” looks great, on paper; but the money is ridiculously concentrated in the hands of a wealthy elite. This process is generally the same in any country (including the USA); only the details differ. The wealthy elite holds political power too, naturally; and thus they manipulate the economy in various ways to better their own position at everyone else’s expense. (Again, see the article above for the description of how this is playing out in the United States right now.) Sure, the GDP grows as a number in an equation, the elite gets richer (and keep their money in foreign investments) on the backs of the middle and lower classes, whose nominal wage gains are quickly nullified by increasing inflation.

    Free trade, a related but seperate issue, benefits only those with heavy capital holdings (which is a very tiny fraction of the populace). Allowing the free exchange of goods but not of labor (i.e. open migration) is an inherently lopsided recipe for bettering the economic position of the elite. Labor is offshored to places with lax labor laws and low wages; the goods are exported to a rich country and sold at a ridiculous markup; the elite keep the balance; inflation eats up the nominal wages the workers in the poor country make, perpetuating their poverty; and the workers in the rich country simply become unemployed, or they work for minimum wage at Wal-Mart stocking shelves with the imported product they used to make. The illusion of prosperity is maintained with easy credit. Anything where this recipe doesn’t work (food and textiles, for example) is heavily tariffed by the rich countries, in hypocritical defiance of their own ostensible “free trade” philosophy.

    As long as the foreign bourgeois keep pumping the profits they make from us back into our financial system, liquidity will remain high enough to keep the credit smokescreen functioning. How long that will happen is anyone’s guess; Euros are already supplanting the dollar in many international transactions (oil and bonds, for example). The yuan and rouble are next. The days of the dollar as the international currency are numbered, as I mentioned. At that point, the liquidity firehose will drop to a trickle.

    The current weak dollar is but a symptom of this exploitive process, not the problem in and of itself.

    Finally, my analysis is only of the conditions at the present time, not a medium term prediction. In 5 to 10 years, conditions will have changed, rendering any predicitons speculative at best. It is not unlikely that the next US president will significantly alter the rapacious economic course charted by the neoconservatives and their neoliberal allies. It is not unlikely that political and labor conditions in the countries that provide the slave-labor input into the US economy will change to the point where that is no longer feasible. It is not unlikely that some exogenous and unpredictable event (e.g. a massive financial meltdown triggered by the current glut of poorly-understood derivatives transactions, a major war, a major natural disaster or series of disasters, etc.) will alter the situation. My analysis is, at best, short term in nature.

    In the short term, however, I note that, another month on, all of my predictions are holding: the US stock market is still flirting with making new alltime record highs; the Euro and the pound are regularly posting new alltime record highs vs. the dollar; and rumors abound that various currencies around the world are going to drop their dollar pegs (http://news.google.com/news?hl=en&ned=&ie=UTF-8&q=dollar+peg) – as of this writing, Hong Kong, Saudi Arabia, the United Arab Emirates, and Jordan are considering dropping their dollar peg, and Syria has already announced that it will end its dollar peg in July.

    Cheers,
    Edward PAYNE

  7. Edward Payne July 12, 2007 at 8:56 pm #

    BTW, the Canadian dollar and British pound are both now flirting with new alltime highs vs. the dollar, having already traced severla new multi-year highs since I wrote, and the Euro is at an alltime high and entering uncharted waters.

    The IMF is begging the Gulf oil states not to drop their dollar pegs (IMF begs Gulf oil states to not drop their dollar pegs: http://www.menafn.com/qn_news_story_s.asp?StoryId=1093158608), which indicates that they are all seriously considering dropping it.

    And the few exporters left in the US are doing great. (http://www.bloomberg.com/apps/news?pid=20601103&sid=asrSOxyB_HFQ&refer=news)

  8. Duncan Idaho July 13, 2007 at 3:35 pm #

    Ok… This is a comedy news and satire website. None of you have said anything funny in any of these posts. Also, you are citing your work. WTF!? Why don’t one of you post something about the economy going down the tubes because aliens are controlling the brains of the Chinese and forcing them to buy up all US T-bonds and are devaluing their economy to position themselves for world economic domination through slave labor. (Actually, they do use slaves… how is it that slavery is immoral here, but we have no problem exporting our slavery needs to China.) What ever happened to “made in the USA”?

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