A Falling Dollar, After All
The dollar has fallen to historically low levels, and yet the current account deficit has continued to climb to historically high levels. It seems very unlikely to me that our present trade deficits should be attributed to the wonders of the US economy. Instead, it seems more likely that the artificially cheap credit of the early 2000s fueled various wealth bubbles, leading Americans to consume their capital without realizing it. In short, after reviewing more of the data, I now largely agrees with the conclusions (though not the arguments) of pessimists such as Peter Schiff. FULL ARTICLE
Comments (31)
Peter Schiff always makes sense. Robert P. Murphy has my vote for the next Chairman of the Federal Reserve. I think he would be brilliant in charge of the Fed. :).
Published: August 13, 2007 9:35 AM
Ah, if only we had "run out" of money for export to foreigners back at the beginning of the trade deficit. In fact we did! So Nixon reneged on the gold-dollar. Running out of money to export forces trade balance to be maintained. Rather than shutting down the factories, we'd have built more of them to produce exportable products to pay for imports. Instead, the government redefined the dollar such that we can never run out, dooming it to hyperinflation. It just took a few decades for foreigners faith in the dollar (a faith earned through production and thrift by our ancestors) to be spent down.
Published: August 13, 2007 9:56 AM
Mr. Spellman, being an author on a Mises.org site, and therefore an Austrian Economist, I suspect that Mr. Murphy would prefer to see an abolishment of the Fed rather than being the Chief of it.
Published: August 13, 2007 11:10 AM
Problem would be resolved if we adopted the euro as our national currency.
Published: August 13, 2007 11:30 AM
Indeed I am sure the author would like to see the end of the Federal Reserve system - as would I.
Even before the Federal Reserve Act of 1913 banks (under the National Banking Act)played all sorts of book keeping games to try and expand credit beyond real savings - and this led to booms and busts. However, the Federal Reserve system certianly made things worse (for example the credit money expansion antics of Milton Friedman's favourate - Ben Strong of the New York Federal Reserve who expanded the money supply to support the false exchange rate of the British Pound to the American Dollar).
As for the gold Dollar. For all the faults of Richard Price Controls Nixon, it was not him that destroyed it - that was F.D.R. in 1933.
For all the talk of a Dollar being 35 to an ounce of gold, the government would not actually give people an ounce of gold in return for 35 paper Dollars.
Indeed the government actually stole (took by threats) privatly owned gold and voided private contracts that laid down payment in gold. And the Supreme Court (in 1935) simply declared such blatently unconstitutional actions constitutional.
As for the modern situation:
Contrary to what some people round here think I am not a supporter of George medicare-extention and no-child-left-behind Bush (I did not think the Iraq war was a good idea either), but one must bare in mind that in recent years the money supply of the British Pound and the European Union Euro has actually grown more than that of the American Dollar.
Sooner or later that is going to have an effect on the exchange rates.
So, if you want a relatively safe place (one can not talk of a "safe place" when one is dealing with fiat currencies - which they all are these days) the Pound and the Euro are not places to go.
People might try the Swiss Franc - I do not know. Or they might try gold or some other commodity - but careful with these also.
Published: August 13, 2007 12:36 PM
doctor murphy,
good article and it is never to late to change one mind.
however, I strongly disagree with this statement in your article;
"and financial markets are far more sophisticated at handling risk."
financial markets have no clue of the risks they are managing. for example:
when on last week BNP - Paribas announced their refusal to redeem some credit funds they manage (that prompted the European Central Bank 200 billion US intervention in the market) it wasnt because those funds didnt have any value or were bankrupt no, it is something even more shameful than that, it was because they didn't know how to "value them" in practice so they couldn't come up with a redemption price whatever it is.
this speaks loudly on the situation many money managers are in today finance that base their NAV on some "theoretical" values that in times of redemptions (crisis like todays) they have serious problems honoring in practice (liquidating their assets in the real market). and this is a consequence of how messy or crooked modern finance has become.
todays, Wall Street and financial markets in general have little to do with capitalism and more to do with a high finance-government alliance of evil to suck the real savings of all the productive people around the world . it is time to recognize this.
olmedo
Published: August 13, 2007 1:59 PM
I completely agree that Mr. Schiff has some technical issues out of whack. And I understand the point Mr. Murphy is attempting to make.
I do not believe Mr. Schiff is talking about "a" trade deficit. He is talking about "This" trade deficit. Mr. Schiff is not standing in front of a bunch of 1st year econ students. He is an business man trying to offer services to people to help them protect and enhance their wealth in a economic environment that can only be described as insane. And yes he is promoting a book as part of his marketing strategy. We should have some regulations to quash runaway entrepreneurs like Schiff. The audacity of him to bring ideas and products to market in an attempt to make profit. Next thing you know we will find out he is not being totally altruistic. E-gads!
At the end of the above article Mr. Murphy claims that the financial markets are far more sophisticated at handling risk than they were 30 odd years ago. Duh? I guess he believes a few billion (I can't comprehend trillions yet.) dollars in derivaties that are "Marked to Market" are sophisticated? Ask the headmasters at Bear/Stearns what their current thinking is of the computer models that their hired PHD guns cooked up for them. But if we print enough money to bail them out I guess that will prove the sophistication. So much for Austrian economic theory. Things have changed to a more sophisticated handling of risk.
Is Mr. Murphy defendig the convoluted idea that you can cut a rotted fish into lots of pieces and by passing it around with a smell rating of AAA make it low risk for getting sick when consumed? And then we prove it true by not counting the dead bodies at the morgue? Based on his attack of Mr. Schiff I guess we can make that assumption.
I do not know Mr. Schiff and do not use his products (although my personal financial ship is rigged and hedged for rough waters with similar products) and I do not know Mr. Murphy. While I acknowledge Mr. Murphy's technical point I simply do not see the benefit of ignoring context and kicking at someone in such a ridiculous manner to get there.
Published: August 13, 2007 2:31 PM
"Marked to Market" should read "Marked to Model". They do not have a market to mark to.
Published: August 13, 2007 2:34 PM
Ouch.
Published: August 13, 2007 2:55 PM
Can we really be sure that there is a trade deficit? It seems to me a conceit of mainstream economists to think that they can possibly measure this number accurately, particularly given the trade in services which is a major export of the United States, and which nobody can really hope to keep track of.
Published: August 13, 2007 2:57 PM
excellent article and I liked Mr Shiff's article too. and his (shiff's) analogy about the 5 asians and one american on the island is great. It's not difficult to picture the big fat american waiting for them to finish working and make his supper.
Published: August 13, 2007 6:39 PM
Dr. Murphy, your betrayal of the pro-trade-deficit camp hurts immensely! (just kidding) Though wounded, I'm not surrendering yet!
Mises clearly believed that the trade deficit had no impact on the exchange rate, as he writes in his article on the German inflation. Also, I have an excellent text book on international trade that says no existing econometric model can predict exchange rates, and those models include trade figures and much more.
The graph Mr. Murphy provides is a visual example of regression analysis. The graph regresses the trade deficit on the exchange rate. A calibrated eye-ball might think it sees a correlation there. But I'm pretty sure that if you perform an actual regression, and test for a spurious correlation, you'll find that the supposed correlation is an optical illusion.
Statistically, the best predictor of exchange rates is the long run (say 20 year) average. The exchange rate tends to revert to the mean, though the adjustment may take years. My money is on a strenghtening dollar over the next couple of years, regardless of what the trade deficit does.
The trade deficit is likely to change toward the positive, although Austrian economics says that is not an improvement. But when it does, it will not be because of the exchange rate. More than likely it will be because the Chinese economy has hit a brick wall or because Americans don't see anything more in the Chinese market that they would like to buy. Or because the price of petro has fallen. If Americans hold the $ value of imports at a constant amount and the economy grows, imports as a % of GDP will naturally decline.
Published: August 13, 2007 7:18 PM
Makanmata, good point. Where does anyone actually get the numbers? I don't recall seeing this stated in the article, just that the author has spent some time being hip-deep in them. At some point, I would think the numbers have to come from some government agency. Who else really is even counting? If the government says it is, and does it for free, would any private company even try to count? Maybe the numbers are just made up.
And if they do come from the government, why should we trust them? They’re not exactly the bastions of truth.
Ok, so I’m no expert, but wouldn’t the ultimate exchange rate come from the supply and demand for each currency relative to each other. And the supply would simply be how much each is counterfeited, err, printed, err, elastisized, err, I give up let’s just say how much each is increased (or, hah, decreased) relative to the other.
And the demand, can that be measured, or is it determined by just looking at the exchange rate?
And likewise, what’s counted in the trade deficit?
I hate to quote Milton Friedman here, but I did like what he said about that: “What are they going to do with all those green pieces of paper? Eat them?” Seems evident that they either eat them or spend them. If they eat them, we should sell them as much as they can stand. After all, they didn’t cost anything to create.
Published: August 13, 2007 9:57 PM
If the money stock expands quickly, the result will be both a trade deficit and an eventual lowering of the value of the dollar (see brookesnews.com). The root cause of both is the expansion of the money supply.
Published: August 13, 2007 10:41 PM
olmedo wrote:
for example:
when on last week BNP - Paribas announced their refusal to redeem some credit funds they manage (that prompted the European Central Bank 200 billion US intervention in the market) it wasnt because those funds didnt have any value or were bankrupt no, it is something even more shameful than that, it was because they didn't know how to "value them" in practice so they couldn't come up with a redemption price whatever it is.
olmedo,
You need to understand this comment about valuation. Paribas could not find a valuation becasue there were not buyers and sellers in the market. As Mises points out concerning Socialism there can be no valuation without buying and selling. When a market becomes frozen for what ever reason there can be no valuation. Paribas was caught in a Catch 22, their were no buyers or sellers to value their products so they could not buy or sell, and so there were not buyers or sellers.
The reason for the injecton of liquidity was an attempt to stimulate the market of buyers and sellers.
Just as a comment this is not to agree with the FED and it is not to say that earlier FED action has not contributed to the problems. I do believe they have created their own problems. This was not a market problem but an intervention problem that he FED was attempting to correct by more intervention.
Published: August 14, 2007 6:47 AM
This essay clearly illustrates a total misunderstanding of how a media of exchange works. A media of exchange that operates as a function of supply and demand of that media is being mismanaged.
The governing formula for managing a media of exchange is:
DEFAULT = INTEREST + INFLATION
Media should be supplied (created and distributed) at whatever level the trading activity requires. The requirement manifests itself in the form of demand for loans. The money is borrowed; the trade is made; money is derived from the trade; the money borrowed is repaid. If more traders choose to be active at any point in time, they shouldn't have to wait for existing media to make this cycle. Media supply should never affect trading activity. Traders should be able to trade at their discretion and obtain the media they need on demand.
As long as the trader returns the media after the trade (i.e. doesn't DEFAULT), he should get use of the media at zero INTEREST. To the extent that DEFAULTS are not "mopped up" by INTEREST charges, the media manager causes INFLATION.
It's not rocket science but as long as people keep writing these essays suggesting the media of exchange should not be in free supply, it might as well be rocket science.
Todd Marshall
Plantersville, TX
Published: August 14, 2007 11:59 AM
Todd: "Media should be supplied (created and distributed) at whatever level the trading activity requires."
Here's another Real Bills guy. This really gets tiresome.
Published: August 14, 2007 12:51 PM
Gabriel: "If the money stock expands quickly, the result will be both a trade deficit and an eventual lowering of the value of the dollar.."
There's some truth to that. But the US money supply must increase faster than that of the trading country, or the rest of the world. For most of the past half century, the US has inflated less than the ROW. And just a few years ago, the dollar was at all time highs.
During the 19th century, the US ran huge trade deficits under the gold standard. So other things besides inflation can cause trade deficits. As Ricardo wrote, it's mostly comparative advantage.
Published: August 14, 2007 12:56 PM
Better late than never, Dr. Murphy... Unfortunately, some libertarians require a severe stock market crash, before they start listening to the warnings of the Austrian Business Cycle Theory.
It's a shame that you still focus on Peter Schiff, instead of bona fide Rothbardian critique of artificially induced overinvestment/malinvestment in capital goods (which is recorded as an inflow in capital account balance sheet) - and simultaneous underinvestment in final goods (which contributes to the current account outflows).
As I have written in my correspondence with Dr. Sudha Shenoy http://blog.mises.org/archives/006487.asp :
- The basic premise of Austrian theory of business cycle is following: lower interest rates (higher prices in higher stages of production, i.e. increase in demand of future goods) must lead to overinvestment in higher stages of production and underinvestment in lower stages (less remote in time of finalization). That's based on simple economic axiom that rising prices attract the supply (the prices in higher stages, in this case) Since consumers' spending has not go down - foreign goods naturally replace it (they are now more competitive) and people don't have enough savings (future consumption) to support this large build-up of future goods.
In Rothbard's words:
"Let us assume that the time-preference schedules of the people remain unchanged... Production now no longer reflects voluntary time preferences. Business has been led by credit expansion to invest in higher stages, as if more savings were available. Since they are not, business has overinvested in the higher stages and underinvested in the lower... As soon as the consumers are able, i.e., as soon as the increased money enters their hands, they take the opportunity to re-establish their time preferences and therefore the old differentials and investment-consumption ratios. Overinvestment in the highest stages, and underinvestment in the lower stages are now revealed in all their starkness...
If some readers are tempted to ask why credit contraction will not lead to the opposite type of malinvestment to that of the boom—overinvestment in lower-order capital goods and underinvestment in higher-order goods—the answer is that there is no arbitrary choice open of investing in higher-order or lower-order goods. Increased investment must be made in the higher-order goods—in lengthening the structure of production. A decreased amount of investment simply cuts down on higher-order investment. There will thus be no excess of investment in the lower orders, but simply a shorter structure than would otherwise be the case."
...
Or as I wrote in the response to your funny analogy about "selling cow to buy milk" http://blog.mises.org/archives/006431.asp :
..."if we imagine our economy as a household, it is perfectly logical what Rothbard said... We can easily imagine a farmer who forsakes his present production of goods and services, (he buys more than he sells in dollar value -- with money going out of his pocket in that respect) and also reduces his present consumption, BECAUSE he wants to invest his saved money on revolutionary new technology that will improve production of final goods -- and with inflow of investment he is able to compensate for that outflow of money from trade.
HOWEVER, imagine that this farmer did not reduce his consumption and actually spent more money on goods and services than before -- on credit. At the same time, imagine that his investment in new technology did not come from his savings (he is a lousy saver), but from artificially created credit. Imagine that he spent this easy "money" on investments not really needed for future consumption (there is no increase in savings), simply because an asset bubble made him think it is very profitable... Suppose that neighboring farmers (foreign investors) were also lured by that artificial growth in value of his capital and factors of production, which further fuels that malinvestments and neglects his production of consumers goods (which further increases his current account deficits)...
Do you see how these scenarios are completely different? Do you think that America is more like that careful farmer, who uses his genuine savings (reduced consumption) to invest in higher stages of production.... OR do you think we resemble more to this carefree farmer, who doesn't sacrifice his consumption (far from that) and he fuels investments with fraudulent credit, investing in something that's not really needed for the future consumption -- but he actually got lured by artificially increased prices and profits?
Think about it..."
Published: August 14, 2007 2:23 PM
"...since 2002 there has been an unprecedented divergence between the two lines. The dollar has fallen to historically low levels, and yet the current account deficit has continued to climb to historically high levels. It seems very unlikely to me that our present trade deficits should be attributed to the wonders of the US economy. Instead, it seems more likely that the artificially cheap credit of the early 2000s fueled various wealth bubbles, leading Americans to consume their capital without realizing it."
"Let's study this chart for a few moments, because it beautifully illustrates the standard theory but also why (in my opinion) the fears of a crisis might be justified this time around.
"The first thing to note is that usually, the two lines move in sync."......i couldnt gather much (the in-syncness)from the 'two lines' except for the noticable divergance since 2002.
has a sustained falling dollar and continued increasing trade deficit been a past indicator of a broad (or developing)economic problem?
Published: August 14, 2007 3:49 PM
I think instead of showing it as a percentage of GDP, it should be shown as a percentage of what we produce (=30% of GDP currently).
As the percentage of production to GDP declines, our dependence on the generosity of strangers increases , and I think adding out gluttonous overconsumption blurs the picture.
Published: August 14, 2007 4:03 PM
Sasha: "Do you think that America is more like that careful farmer, who uses his genuine savings (reduced consumption) to invest in higher stages of production.... "
I don't think either example fits our situation. The subject is the trade deficit and trade requires another party to trade with. The current situation with the US might be likened to a dairy farmer who makes his own boots, but he's not that good at it, so they take him a long time to make. A foreigner comes along and offers to sell him a better pair of boots that will last longer, be more comfortable and cost less than he can make them himself. But the farmer has no cash. So the foreigner offers to exchange the boots for ownership in the cow. Or, another foreigner comes along and has cash he wants the farmer to keep safe for him. So the farmer takes the foreigner's cash and buys another cow with it.
Published: August 14, 2007 6:54 PM
scott: "has a sustained falling dollar and continued increasing trade deficit been a past indicator of a broad (or developing)economic problem?"
My understanding of economic history is that neither a falling nor a rising dollar is a good or bad sign; neither is a rising or falling trade deficit. They don't mean anything.
Published: August 14, 2007 6:56 PM
It's more likely, in my view, that the dollar gets stronger if the liquidity crisis becomes more substantial.
Published: August 14, 2007 8:03 PM
Dr. Murphy:
"In short, after reviewing more of the data, I now largely agree with the conclusions (though not the arguments) of pessimists such as Peter Schiff."
With all due respect, this is a cop-out, first by agreeing (finally) with Schiff's conclusions, while not refuting his arguments, and second by referring to those who have long seen this coming as "pessimists." On the contrary, Ayn Rand nailed it when she said: "We can evade reality, but we cannot evade the consequences of evading reality."
Yes, it has taken 36 years for this massive fraud to begin to unwind, but that's only because it has been so deftly (read: diabolically) perpetrated. But as the Fed and its fellow conspirators have promised to "inject liquidity" (translation: counterfeit money) without limit, be assured that the "dollar" will soon be toast and that the Chinese, recogizing the futility of vendor-financing the export of their lead-laced toys and poison-packed toiletries, will accordingly pull out of the US bond market.
When they do, that will be that for the house-of-cards US economy. And as I've said numerous times before, it will happen before the FRN reaches its hundredth birthday.
That said, thanks for at least acknowledging that we "pessimists" were right. I look forward to your further acknowledgement that our arguments (especially Schiff's) were too.
Published: August 15, 2007 7:13 AM
JIMB:
"It's more likely, in my view, that the dollar gets stronger if the liquidity crisis becomes more substantial."
That was then; this is now, as you're talking about a "flight to quality" that will soon have nowhere to flee but to the real thing. Yes, so-called "high-grade bonds" might be a haven in the short run, but eventually they will reveal themselves as no better than mortgage-backed CDOs. Thus:
In Gold We Trust.
Published: August 15, 2007 7:23 AM
RogerM said:
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"I don't think either example fits our situation. The subject is the trade deficit and trade requires another party to trade with...
The current situation with the US might be likened to a dairy farmer who makes his own boots... But the farmer has no cash. So the foreigner offers to exchange the boots for ownership in the cow. "
-------------------------------------------------
U.S. had no cash (U.S. dollars) compared to the rest of the world? Still, you made an excellent example and I'll deal with it with great respect.
Your hypothetical farmer (the U.S.A.) is selling his more expensive cow - in exchange for some less expensive good (we assume that he runs a current account deficit, similar to the United States, basically loosing dollars in his trade activities). On the other hand, our farmer (the United States) has a capital account surplus, due to the net inflow of investments.
In a purely free market economy, farmer may forego his present monetary gain in trade of present goods for the gains in trades of future goods (inputs of production of capital goods). The foreign investors earn their interest income, therefore, by supplying the services of present goods to owners of factors (the farmer) in advance of the fruits of their production, acquiring their products by this purchase, and selling the products at the later date when they become present goods. Thus, capitalists supply present goods in exchange for future goods (the capital goods), hold the future goods, and have work done on them until they become present goods.
Our farmer's loss of dollars in trade of present goods is financed through foreign investments. This free market farmer shifts his focus toward the production of future goods, where he records a net inflow of cash from abroad. So we are completely in accord when it comes to free market situations.
(*note that large current account deficits over long periods of time are unsustainable, because they suggest that foreign goods continue to be more attractive and that something is seriously wrong with our larger domestic investments in those future goods)
========
Operating in our libertarian utopia, a producer would choose between the alternatives of production (whether he'll focus on future or present goods) based on REAL, unhampered market signals which inform him about cost and benefit of his economic decisions.
HOWEVER, we don't have genuine market signals as RogerM's example suggests. The FED banking cartel falsifies the rate of interest (which becomes the ratio between the prices of goods in different stages of production, i.e. return on purchase of unrealized future goods at present day). In other words, we are misinformed regarding the consumers willingness to save more (consume less) at present day in order to increase tomorrow's consumption.
To quote Rothbard:
"When credit is created out of thin air, businesses are able to acquire the money at a lower rate of interest, enter the capital goods’ and original factors’ market to bid resources away from the other firms. At any given time, the stock of goods is fixed, and newly created currency is therefore employed in raising the prices of producers’ goods. The rise in prices of capital goods will be imputed to rises in original factors.
The credit expansion reduces the market rate of interest. This means that price differentials are lowered, and lower price differentials raise prices in the highest stages of production, shifting resources to these stages and also increasing the number of stages. As a result, the production structure is lengthened".
As you remember from your introductory economics classes, an increase in prices attracts suppliers. In net terms, more investments are coming into the United States than coming out. Since our resources shift to seemingly more profitable capital goods, our production of (now less profitable) present goods stagnates and we allow foreigners to serve us more in this market (production structure remains equally wide, since the spending did not go down).
BUT here is the catch... this massive build-up of capital and the withdrawal from present goods market is not based on real consumer's preferences. Increased credit was not based on higher saving rate (increased future consumption). When all those wonderful remote-in-time-of-finalization projects finally produce those future goods, demand is not as high as originally anticipated. Huge malinvestments are revealed...
=====
ANYWAY, you cannot logically separate the story of our current account deficits from our artificially boosted capital market. Artificially increased prices in the highest stages of production (largest rate of increase under the credit inflation) play a clear role in our overinvestments in our high-order goods (and our underinvestments in lower-order goods, which we increasingly import). It's the law of supply.
Published: August 15, 2007 3:50 PM
Robert Murphy's arguments would appear to be in basic agreement with the Austrian view of the business cycle: artificially low credit creating malinvestment. Perhaps in the current scenario, malinvestment primarily occurred in the mortage market?
Published: August 16, 2007 11:09 AM
Sasha: "Your hypothetical farmer (the U.S.A.) is selling his more expensive cow - in exchange for some less expensive good..."
Actually, the farmer sold a share of ownership in the cow, not the entire cow. The share of ownership would equal the value of the purchase of the foreign boots. Why would the farmer do that? Because the foreign boots are cheaper and better quality than he can make them himself. In the real world, the US buys from foreigners things we can't make ourselves, such as oil, or that foreigners can make cheaper than we can, such as consumer products. But we don't have the currency the foreigner needs (such as Yuan)so to finance that purchase, we sell them shares in our companies.
Sasha: "Artificially increased prices in the highest stages of production (largest rate of increase under the credit inflation) play a clear role in our overinvestments in our high-order goods (and our underinvestments in lower-order goods, which we increasingly import)."
I'm sure some of this is happening, but it doesn't explain the entire trade deficit. As I mentioned before, the US has run large trade deficits for long periods of time under a gold standard before the creation of the Fed. The primary reason for our trade deficit is oil and Chinese made consumer goods. It would be plain silly for us to try to live on just the oil we can produce, or to purchase more expensive US-made consumer goods in place of Chinese-made ones. By purchasing cheaper Chinese-made consumer goods, we free up wealth to purchase other things, such as tickets to a football game.
I doubt that consumer goods production has gone to Asia because of the Fed. Textiles, for example, have a long history of moving to cheap labor because it's a labor-intensive business that is difficult to automate. It started out in New England, went to the American South after WWII, then overseas. China is just the latest recipient.
Published: August 16, 2007 12:44 PM
Ben Bernanke has engineered a bail out of the mortgage industry by injecting $38 billion into the market. And this morning there is news of the Fed lowering the discount rate. This infusion of liquidity into the market is another attempt to bring calm to increasingly panicky Wall Street and it may have a short, although superficial, effect. Can another dose of inflation undo years of credit manipulation and the malinvestment?
The problem here is that todays ‘’bust’’ in real estate is consequence of the real estate ‘’bubble’’ that Fed created in 2001 when it drove interest rate into the ground. Artificially low interest rates encouraged debt and discouraged savings, thus depriving the U.S. economy of genuine capital. Many Americans grew accustomed to borrowing in order to continue consuming and became inured to debt. Indeed, the perverse policies generated by the Fed caused many Americans to perversely see debt as wealth. Consumers used their homes as virtual ATMs. Confident in future appreciation, homeowners cashed out their equity and went on a spending binge. But America’s bacchanalia had to end at some point. The Fed began to take notice of the dollar’s plunge and it brought the curtains down on the party by steadily increasing interest rates. This credit crunch has caused real estate prices to fall and has revealed unsound investments throughout the U.S. economy . Of course, the prudent thing to do is to weather the storm and allow liquidation. This would not only check inflation by restraining money expansion but would also result in future economic growth as higher interest rates encourage savings and sound investments.
But now, as America reaps what she has sowed for the past six years, the Fed reverses policy and lowers rates. One gets the sense that it is Bernanke and his colleagues at the Fed who are panicking. Another round of artificially low interest rates will likely spark inflation as foreign central banks and depositors begin to disgorge themselves of U.S. paper.
A government cannot continue to increase the supply of its currency without having that currency suffer devaluation. What of the almighty dollar? There is nothing in the US government’s current fiscal policies to justify confidence in its future. The dollar is likely to go the way of all paper currencies, oblivion. Governments inflate because they can. It’s much easier than taxing and when bill comes due in the form of higher prices, the politicians can and do blame others. And the U.S. government has been able to get away with massive inflation because its currency, the U.S. dollar, has enjoyed the privilege of being the de facto reserve currency for the world since the end of World War Two. This has allowed the Federal Reserve to function as a virtual global central bank funneling cash to Uncle Sam as needed.
The dollar reserve standard can be fairly called a system of imperial finance, or tribute if you will, that enables the United States to claim resources and goods on the international market and it is the foundation for the American Empire.
The dollar’s demise could be the beginning of the end of ‘’Pax Americana’’ and may result in the return to a gold or commodity based monetary system. However, the empire may not end peacefully. Will our political leaders and the special interests allow the dollar to collapse and along with it their powers and privileges? Or will a run on the dollar be the excuse for our government to become even more bellicose in defense of ‘’our way of life.’’ It is important to note that prior to his being removed from power by the U.S. invasion, Saddam Hussien had been talking about ending policy of denominating oil sales in U.S. dollars. Similarly, Iran has been flirting with dropping the dollar in favor of the Euro or some other currency. Incidentally, the U.S. government has become more bellicose towards Tehran. Coincidence?
Published: August 18, 2007 10:56 AM
The dollar, as predicted is being crushed. We are now at Par with the Canadian Dollar, the Loonie as it is called. This was all so predictable. You cannot run an 800 bilion dollar trade deficit and have your currency in demand. We have a lot farther to fall. Within 5 years from 2008 we should see the Canadian Dollar worth 25 % more than the U.S. dollar. The Euro at 1.40 now, should move to near 2.50, as China buys more and more of the Euro.
The pound at 2.04 as I write this will be near 3.00. Be ready for CHINA. When they finally let their currency float it will appreciate 70% over a 36 month period. The US trade deficit will be cut in half and then some by 2020.
Published: September 20, 2007 8:51 PM