Will The Buck Stop Here?
Dollar decline gathers pace, shaking global markets
Morgan Stanley goes into some detail on the dollar's fall.
Now, to summarize the US economic situation (I'm no economist, mind you, so this is more guess than conclusion from research), the US dollar is falling for one reason-which encompasses many details: deficits. The federal deficit, which has some hope of shrinking in the next 5 years, is one large aspect. However, the US trade deficit is just as important, if not more so. Finally, the US is saving very little.
The government deficit is well known, so I'll jump to trade. America imports more than it exports, by far. American trade with China, for example, is quite imbalanced; the US imports about 150 billion more than it exports per year from China alone. Our trade with Japan is similar, but the trade difference is only around 75 billion. This means that America is losing money, and a lot of it. However, Chinese and Japanese exports are helped by the undervalued currencies of the respective countries (China's currency is undervalued to an extreme). Because the dollar is dropping, US exports will rise, as American products are becoming cheaper.
Personal savings has been low for at least a year (probably a few years), and tends to go down whenever interest rates drop. This is a natural relationship, as people are less inclined to save money when it will accumulate almost no interest. Much of the money that would otherwise be saved is spent on new houses. This is why home ownership has gone up so much. Houses are often seen as an investment, so many people are willing to exchange a savings account with a solid asset (a house).
So, the US is not saving money in three ways; federal deficit, trade deficit, and lack of personal savings. As a result, the dollar is not believed to have the strength that it used to have, though it is still quite strong. Honestly, I don't know the exact reasons that the dollar is falling, but I'd guess that some investors fear that the US may start to print a lot more money-causing some inflation-to cover these deficits. There are also many other factors, but I have no idea what those might be.
The quickest way to slow the dollar's fall is for China to allow its currency to be controlled by the market. Right now, the Chinese government controls the currency very strictly. If China's exports are no longer undervalued, then the US trade deficit with China will drop, because Americans will buy fewer Chinese products and more American products (along with more from other major sources of US imports).
However, the dollar's fall is largely expected to be good for the US, as long as that fall is controlled. A crash, of course, is never good. Europe's fragile recovery, which may have ended already, will be slowed by the appreciating Euro. There is already evidence that the European recovery ended practically before it started, in which case the expanded European Union is off to a very bumpy start.
The dollar accelerated its downward spiral, hitting record lows against the euro and multi-year troughs against other currencies, sending gold racing to fresh 16-year summits and weighing on Asian and European stock markets.
The euro shot to a new all-time peak of 1.3329 dollars in early European trading Friday, hurdling the 1.33 threshold for the first time since its launch in January 1999.
Morgan Stanley goes into some detail on the dollar's fall.
Now, to summarize the US economic situation (I'm no economist, mind you, so this is more guess than conclusion from research), the US dollar is falling for one reason-which encompasses many details: deficits. The federal deficit, which has some hope of shrinking in the next 5 years, is one large aspect. However, the US trade deficit is just as important, if not more so. Finally, the US is saving very little.
The government deficit is well known, so I'll jump to trade. America imports more than it exports, by far. American trade with China, for example, is quite imbalanced; the US imports about 150 billion more than it exports per year from China alone. Our trade with Japan is similar, but the trade difference is only around 75 billion. This means that America is losing money, and a lot of it. However, Chinese and Japanese exports are helped by the undervalued currencies of the respective countries (China's currency is undervalued to an extreme). Because the dollar is dropping, US exports will rise, as American products are becoming cheaper.
Personal savings has been low for at least a year (probably a few years), and tends to go down whenever interest rates drop. This is a natural relationship, as people are less inclined to save money when it will accumulate almost no interest. Much of the money that would otherwise be saved is spent on new houses. This is why home ownership has gone up so much. Houses are often seen as an investment, so many people are willing to exchange a savings account with a solid asset (a house).
So, the US is not saving money in three ways; federal deficit, trade deficit, and lack of personal savings. As a result, the dollar is not believed to have the strength that it used to have, though it is still quite strong. Honestly, I don't know the exact reasons that the dollar is falling, but I'd guess that some investors fear that the US may start to print a lot more money-causing some inflation-to cover these deficits. There are also many other factors, but I have no idea what those might be.
The quickest way to slow the dollar's fall is for China to allow its currency to be controlled by the market. Right now, the Chinese government controls the currency very strictly. If China's exports are no longer undervalued, then the US trade deficit with China will drop, because Americans will buy fewer Chinese products and more American products (along with more from other major sources of US imports).
However, the dollar's fall is largely expected to be good for the US, as long as that fall is controlled. A crash, of course, is never good. Europe's fragile recovery, which may have ended already, will be slowed by the appreciating Euro. There is already evidence that the European recovery ended practically before it started, in which case the expanded European Union is off to a very bumpy start.
posted by Chris at
4:43 PM
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