The dollar fell to a 14-month low against other currencies Thursday, intensifying a trend that the Obama administration has publicly suggested it opposes — but which it appears prepared to tolerate quietly.
Many of America’s trading partners, however, are pushing the other way. In Asia, traders said central banks in South Korea, Taiwan, the Philippines, Thailand, Indonesia and Hong Kong again intervened to slow the dollar’s fall against their currencies.
Asian officials fear that the dollar’s fall could crimp their export-driven economies. “The [Thai] baht has appreciated a little too rapidly compared with our fundamentals,” said Suchada Kirakul, assistant governor of the Bank of Thailand.
Another reflection of Obama’s complete economic incompetence, something that would have been exposed by an objective media during the campaign–along with his military incompetence.
#1 – why is a weak dollar such a bad thing? If anything, insisting on a strong dollar is to insist on government intervention.
JVJ – right now it looks as if lots of countries want to move to the Euro. But letting the dollar fall puts a lot of pressure on those countries that benefit from a strong dollar. The consequence of them trynig to move to the euro for political reasons, means that the value of their own holding goes down.
Second, when there is a weak dollar it means the more foreigners can buy American goods. It also means that Americans will buy more American goods (because we won’t buy as many foreign items).
A weak dollar sounds bad because we instinctively don’t want to be “weak.” But it’s a descriptive term, not a normative one. If anything, it shows that Obama is a far sighted leader, not one who reacts at the slightest complaint or warning trumpted by a ill-informed media.
But look, Like plenty of others, I wish that the bailout had gone directly to taxpayers of various stripes rather than banks. I also hope that the banks begin lending soon. Still, I’m always perplexed by those who would blame Obama for that, given that his main flaw seemd to be trusting the captains of industry who got us there in the first place, and then upon receiving taxpayer money, proceeded to do nothing.
Re # 2
John Wilkins,
A weak dollar is bad because it is a reflection of two things. First that United States has an untenable debt level and secondly that we are printing money out of thin air.
The US debt level is currently approaching $12 Trillion. Much of that debt is held outside the United States. Because our debt has reached levels where we can not reasonably expect to pay it off we are dependent on borrowing more money in order to keep servicing the interest on our existing debt. Most of the money we borrow has been coming from foreign countries.
Let’s say you are China. Your central bank owns hundreds of billions of US Dollars mostly in the form of Treasury bonds. This stash constitutes the core of your bank’s financial reserves and it is collecting an average interest rate of around 5%. Those bonds are backed by the full faith and credit of the United States.
In order to pay you (China) the interest we (the USA) owe on those bonds however we have to borrow more money. Thus we go back to you (and other countries with deep pockets) and we sell you more bonds. We then use some of the money we borrowed this time around to pay the interest on the bonds we already sold you and we use some in the form of “stimulus” to encourage people to go out and buy things.
In the meantime the debt grows bigger.
Now let’s say that people start doing the math and begin to realize that there is no way in #$%& that the United States can actually pay off a $12 Trillion debt. We are basically running a giant ponzi scheme similar to what just got Bernie Maddoff sent to prison for life for, except of course we are doing it on much grander scale.
Now add to this the fact the Federal Reserve is printing money. Remember our money is only worth what someone is willing to accept it for. There is nothing backing our money at all. And one of the most basic laws of economics is the more you have of something the less it’s worth. The money supply has jumped exponentially over the last year.
You ask what’s so bad about a weak dollar? The answer is that when the dollar weakens then you (China) are getting screwed (pardon my French) because those US Treasury bonds you bought are loosing value. You are getting 5% on those bonds. But the US Dollar Index has dropped 15% over the last six months.
Translating this into simple terms; you (China) just lent the United States Government hundreds of billions of dollars for which you are getting a -10% interest return. You have lost 10% on your investment in just six months.
Now how enthusiastic are you about making further loans to someone when you are likely going to loose your money?
If you (China) decide to lend the US anymore money (a very big IF) my guess is you are going to demand a much higher rate of interest in order to protect the value of your investment. You are also likely going to stick to short term bonds and not the long term (10 and 30 yr) ones making it much more difficult for the US to keep up with payments on the interest of our debt. This will of course all further add to the principal of the debt and the amount we will owe in interest. Which means we will need to borrow even more money to keep up with things the next time around.
Now back to the Federal Reserve again. In order to help out and keep us from having to pay too much interest on our bonds they decided to buy some Treasury bonds themselves. The Federal Reserve of course can buy anything they want to because they own the government’s printing press.
So Mr. Bernanke pushes a button and poof there is another couple of hundred billion dollars created out of thin air which he lends to the Treasury by purchasing their bonds at a very reasonable interest rate. The technical term for this is “quantitative easing.” That’s a fancy term meaning the government is printing money and buying its own bonds. This also means there are now hundreds of billions of more dollars in circulation which is likely to drive down the value of the dollar and further erode the willingness of people to lend us money.
OK. So let’s say that you (China) have figured out the scam we are running and decide enough is enough. You are going to cut your losses and stop lending us money. If a significant percentage of our usual lenders reach the same conclusion then the US is in deep trouble because we have no one left to borrow money from to pay the every growing interest rate on our national debt.
Back again to the Federal Reserve. So what is to stop the Fed from just printing all the money we need to pay everyone off? As a matter of history this is in fact what nations who got too deep in debt have done in the past. But while it sounds like a great idea to just print $12 Trillion and tell China etc. “here you go and thanks for the loan” this has big downsides to it, starting with…
INFLATION
If you put that kind of money into circulation you are going to debase your currency to the degree that it will be worth less then a cheap roll of toilet paper. And in fact you don’t need to put anywhere near that kind of money into circulation to create inflation. When the FED cut interest rates and the government went on a spending spree back in the 1970’s we had double digit inflation. A strong argument can be made that we have already set ourselves up for a sharp spike in domestic inflation because of our high debt level and the printing of money that has already occurred.
So when do we need to start worrying?
Peter Bernholz (a Swiss professor of economics nominated on several occasions for the Nobel Prize for Economics) has made a study of the 28 historic inflations of the last century or so. In his most recent book [b]Monetary Regimes and Inflation: History Economics and Political Relationships [/b] he analyzes the 12 great hyper inflations that have occurred and concludes that the tipping point comes when government deficits exceed 40% of GDP.
According to the Office of Budget Management (OMB) this year’s (2009) projected deficit is going to be $3.653 Trillion. That cones out to slightly over 43% of GDP.
How much money do you make? Do you want to pay a thousand dollars for cheeseburger at your favorite fast food joint? What do you think severe inflation will do to people who are retired and living on a fixed income? Retirement savings will be wiped out. Investments in anything other than hard assets will be destroyed. And this will plunge the country into an even deeper depression.
That in short, is why a weak dollar is bad.
In ICXC
John
Speaking of the loss in value of the dollar, since 1913 when the Fed was established the dollar has lost over 90% of its value. Hows that for a fall in value. Kill the Fed.
TGS,
Actually the date you are looking for relative to the 90% is 1933. That was the year the US went off the Gold Standard. The value of our currency has depreciated by about 90% since then.
It is technically correct to say 1913 if you wish. You could also say 1915 or 1925. That’s because prior to 1933 there was very little fluctuation in the value of our money due to its being pegged to gold.
John in # 2 some of the arguments about the danger of a weak dollar are here
http://new.kendallharmon.net/wp-content/uploads/index.php/t19/article/25776
The problem with this policy is that in the short term there are some advantages, but in the medium and long term it can be really bad and even disastrous. The U.S. is increasingly playing with fire in this area.
Historically, large economic crisis are often followed by fiscal/budget crises and sometimes currency crises (a point made repeatedly recently by numerous commentators). Anyone who is discounting the serious risk of this at the present time is in denial.
http://new.kendallharmon.net/wp-content/uploads/index.php/t19/article/23724
There is one astute commentator, Harvard’s Niall Ferguson, about the issue of fiscal crisis and the dollar being a potential problem