Another (way to reduce a current account deficit) is to have the value of a country's currency decline, so that its exports become cheaper on world markets, its imports become more expensive and gradually the trade deficit shrinks.
AND our standard of living goes down! Hey is that what the federal politicians have in mind? After they have those EXTREMELY generous pensions locked in? While many, many rely upon their Social Security checks tied into COLAs? Their check amounts added to the debt of the US?
1. Concerns Rising With Dollar's Continued Fall Analysts Fear Rates Will Climb, Recovery Will Stall
By Jonathan Weisman and John M. Berry Washington Post Staff Writers Friday, December 26, 2003; Page D08
With the economy expanding smartly, interest rates low and inflation in check, President Bush is sailing into the presidential election year with perhaps only a single dark economic cloud on the horizon: the shrinking U.S. dollar.
Whether that cloud produces a nourishing rain shower -- in the form of swelling U.S. exports and a recovery of manufacturing jobs -- or a deluge of rising interest rates and soaring budget deficits is the subject of increasingly heated economic debate.
Recent news of rapid third-quarter economic growth, rising consumer spending and climbing personal incomes did little to budge the dollar from its record lows against the 12-nation euro. The dollar has fallen about one-third against the unified European currency over the past three years -- 15 percent this year alone. In the past 23 months, the dollar has slid 11 percent against all the world's currencies, according to Stephen S. Roach, chief global economist at Morgan Stanley & Co.
Currency analysts expect the trend to continue well into next year, if not beyond.
For now, economists say, the decline has on balance been a boon to the U.S. economy, pushing the price of American-made goods and services lower on the international market, stimulating exports while trimming imports. Indeed, the economic forecasting firm Global Insight Inc. has calculated that the dollar's decline has saved as many as 700,000 manufacturing jobs since the slide began in earnest two years ago. And as long as inflation stays low, there will be little pressure on the Federal Reserve to raise short-term rates from their historic lows.
But concerns are growing, especially on Wall Street, that the dollar's slide will inevitably drive up long-term interest rates, and some analysts think the decline could even force the Fed to raise the rates it targets. That could slow the nascent economic recovery, swell the already-record federal budget deficit and possibly resurrect an economic problem unseen for nearly 20 years: inflation.
In that scenario, foreign investors abruptly stop buying the ever-weakening dollar, interest rates soar to lure them back, and the budget deficit explodes as the government struggles to pay the interest on the $4 trillion debt held by the public.
"To this point, the [currency] adjustment has been about as smooth as one could expect under the current circumstances," said Daniel K. Tarullo, a Georgetown University law professor and former international economic adviser in the Clinton White House. "But is there a residual risk? Yeah, there's a residual risk."
Charles L. Minter, a mutual fund manager at Comstock Partners Inc. in Yardley, Pa., was more emphatic about a looming surge of interest rates: "If people don't want to own the dollar, they will have to be paid more to own the dollar. We're very concerned."
The nation's twin deficits -- a trade gap approaching $500 billion for 2003 and a federal budget shortfall nearing the same mark for the current fiscal year -- will inevitably bring pain, in the form of rising interest rates and slowing increases in the standard of living, they say.
"A lasting recovery cannot be built on a foundation of ever-falling saving rates, ever-widening current-account and trade deficits, and ever-rising debt burdens," Roach wrote in his year-end economic analysis.
But for now, foreigners -- especially governments in Asia -- continue to buy U.S. stocks, bonds and dollars, financing the two deficits and keeping the U.S. government afloat. Foreign governments and investors now own $2.5 trillion more in U.S. assets than Americans own of foreign assets, Warren E. Buffett, chairman of Berkshire Hathaway Inc., said in a recent analysis in Fortune magazine.
Foreigners bought $27.6 billion more U.S. stocks, bonds and other assets than they sold to Americans in October, a 560 percent leap from the $4.2 billion the month before, according to the Treasury Department. And that surge came just as dollar fears were coming into focus.
As long as foreigners keep buying, the day of reckoning will be postponed, probably until later this decade, and certainly well after the 2004 presidential election, many international economists say.
"Everyone agrees these deficits are unsustainable; at some point, something has to give," said Nouriel Rubini, an international economist at New York University's Stern School of Business. "I'm not sure if it's in two years or three years, but it will be in the medium term, not around the corner."
In truth, the big question about the U.S. dollar is not necessarily why it has fallen to a record low against the euro, but why it remained so strong for so long while the United States was racking up a widening trade deficit.
Typically, one way to reduce a current account deficit is to have a recession in which consumption and investment fall, and so fewer goods and services are imported. Another is to have the value of a country's currency decline, so that its exports become cheaper on world markets, its imports become more expensive and gradually the trade deficit shrinks.
Economist Edwin M. "Ted" Truman of the Institute for International Economics, a former senior official at both the Federal Reserve and the U.S. Treasury, said it is impossible to predict with any precision what will happen to the dollar.
"The question is, how much of a correction do you need to have?" Truman said. "If the adjustment is $500 billion, and it all comes through the exchange rate, then there is a long way to go. Take the standard rule of thumb, a 1 percent decline [in the value of the dollar] gets you about $10 billion. If we have done 10 percent, then there's another 40 percent to go.
"That doesn't have to be a problem, either for the United States or the rest of the world," Truman continued. "We went through this before, in the late 1980s. . . . But it's not a free lunch. With a $500 billion adjustment, that would be $1,750 per capita we have to give up in consumption. [But] some will come in the form of reduced . . . capital investment, and that reduces economic growth."
For politicians entering an election year, the question is when. There are pessimists who believe the fallout has already begun. Super-investors Buffett and George Soros have already begun snapping up foreign currencies in anticipation of a continuing dollar slide, something Buffett said he has not done before in his 72 years of life.
Jes Black, a currency strategist at MG Financial Group, a currency trading firm in New York, said copper and gold are trading at eight-year highs, and the precious metal palladium is at a 23-year high. That is evidence, he said, that foreigners may be selling dollar-denominated assets such as stocks and bonds and buying more durable commodities. Earlier this month, the Saudi Arabian oil minister suggested that OPEC raise the price of dollar-denominated oil because the international price of oil has been hammered by the weak dollar.
"Why do people want to keep buying the dollar?" Black asked. "It's been living off the vapors of its past credibility. This is mass psychology, and once everyone agrees there's a problem, there's a problem."
Thursday January 1, 10:35 am ET By Glenn Somerville
WASHINGTON (Reuters) - The U.S. dollar's steady decline in value against the euro and other key currencies may cause agony in European capitals but there is little sign it is rising to the level of a major policy concern in Washington. Analysts say the steady depreciation not only remains orderly but also carries the potential to help America get its whopping trade and current account deficits, which are widely criticized in Europe, back into better balance.
"I think on balance there are far more positives for the United States in what is going on in currencies than there are negatives," said economist Greg Valliere of Schwab Washington Research Group.
The euro broke above a $1.25 barrier for the first time on Monday and late on Tuesday was trading at around $1.2550. The euro's strength, and the dollar's dive, comes ahead of a Feb. 6-7 meeting in Boca Raton, Fla., of Group of Seven finance ministers where currency issues always are discussed. The G7 consists of the United States, Britain, Canada, France, Germany, Italy and Japan.
SHIFT IN RHETORIC
In just under a year since taking office last January, Treasury Secretary John Snow has toned down the former hard-line U.S. commitment to a "strong dollar," effectively endorsing the fall by saying the its value "reflects the fundamentals of the demand and supply for currencies." Snow replaced former Treasury Secretary Paul O'Neill, who resigned under White House fire before Christmas last year. "Long term, the weakness of our trade and current account imbalances meant we had to reverse course (on currency policy) so what we're seeing is a natural process and not something that should cause a lot of alarm," said Greg Mastel, an international trade adviser with Washington law firm Miller and Chevalier.
"It makes sense, given that inflation has been low and interest rates are at low levels, so under those circumstances a logical response would be to favor a weaker dollar," Mastel added, since it means there is little or no risk of importing price pressures and a better chance of boosting U.S. exports.
Economist Allen Sinai of Decision Economics Inc. in Boston wrote this week that the Bush administration had an evident policy of "benign neglect, if not outright approval" of a cheaper dollar.
WEAKNESS MASKS STRENGTH
He added the U.S. stance was a legitimate one.
"It is patently clear that the administration does not mind a declining dollar, so long as it is 'orderly'," Sinai said. "At this stage, a lower dollar should increase exports, help manufacturing, increase U.S. economic growth, not be a problem for inflation and if financial troubles occur, they would only do so from time to time," Sinai said.
Valliere similarly said that he saw no indication of official unease over the dollar weakening, possibly because there seemed to be no likelihood of a surge in inflation as can happen when a cheaper dollar makes imports more costly.
"The more relevant point might be whether the Europeans or Japanese start to cry 'uncle' and ask for coordinated intervention or for Snow to at least say the dollar slide has gone far enough," Valliere said.
"But frankly, I don't see any sign that this is becoming a major issue for Washington," he added.
Richard Russell Dow Theory Letters Jan 6, 2004 Extracted from the Jan 5, 2004 issue of Richard's Remarks
Question -- Should I hold gold coins? Answer -- Yes. If we have a world crisis, if the dollar collapses, if US consumers pull back on their buying, if the bear takes over again, if "everything goes," then one thing is certain -- gold will still be money. Gold is the one item that cannot go bankrupt -- it can't go bankrupt because it depends on no group, no plan, no nation to say it's money. Gold is pure intrinsic value, accepted as money everywhere at any time over thousands of years.
Gold is the ultimate insurance. If everything else goes, if the current monetary system falls apart, gold will still be money. Therefore, everyone should own some gold, even though gold pays no interest. The safer the item, the less interest it must pay. Since gold is totally safe, it needs to pay no interest. With short rates at a 45 year low, the "opportunity cost" of owning gold today is at a minimum.
Question -- Should I own gold and silver stocks? Answer -- I would, and I do, but remember, the stocks are not the metal. The stocks have the leverage, but they also possess risks that the metal does not.
Question -- Should I own assets denominated in foreign currencies? Answer -- I recommend it. Many of the smartest investors in the world (Templeton, Soros, Buffett) have moved into non-dollar assets. You can buy CDs denominated in other currencies through Everbank on the net. You can buy German notes denominated in euros. You can buy euro futures, although this is more of a professional play. Gold is another easy way of buying and holding "non-dollar" money.
Question -- What's the psychological difference in investing say in euros vs. investing in gold? Answer -- Excellent question. Note that when you read the magazines or newspapers or listen to the advisories, they have no objections to diversifying out of dollars into euros or other currencies. But not so with gold. No, we hear, gold is dangerous and volatile.
The real difference is that when you diversify into euros, you are "playing" within the central banks' paper money system. And that's OK. Even the central banks themselves diversify into euros if they believe they have too many dollars. BUT -- when you diversify out of dollars into gold, you THREATEN THE CENTRAL BANK PAPER CURRENCY SYSTEM! If investors start to move out of paper, any paper, into gold, the whole basis of the central bank paper currency system is threatened, and that is something the central banks can't abide. Gold is international. It depends on no government or central bank to state that gold represents wealth. Gold is independent of the whole central bank system, and as such it represents a danger to the paper system.
Question -- Will the US outlaw the possession of gold by Americans? Answer -- I can't see it. The US is issuing gold coins for its citizens to buy and accumulate. Gold is now being distributed to people around the world via ETFs and by other proxies. Many Americans own gold in foreign accounts. Gold ownership by its people is being encouraged by China and other Asian nations. I think it would be nearly impossible for the US to outlaw the ownership of gold. It would be too difficult, too embarrassing, and above all it wouldn't make sense. And what about gold stocks? Would the US outlaw ownership of US gold stocks, foreign gold stocks? It's all too ridiculous -- I don't see it happening.
Question -- Russell, what do you make of the stock market's reaction to the sinking dollar? Answer -- The current reaction to the lower dollar is obviously bullish -- a lower dollar makes US goods cheaper and more attractive to foreign buyers. But if the dollar CONTINUES to decline, at some point the decline will frighten our foreign holders of US securities. If this happens (it's already happening in a "polite" way) foreigners will panic out of US bonds, rates will rise in the US, and that in turn will put pressure on the huge mountains of US debt. At that point, the squeeze will be on stocks and US business.
More follows for subscribers . . . Richard Russell
By David Ignatius Tuesday, January 6, 2004; Page A17
The new year begins with a financial mystery: Why have China and Japan continued to accumulate large dollar surpluses -- financing the U.S. trade deficit in the process -- even as the value of those dollars has continued to plummet?
The Asian dollar hoard certainly looks like a stupid investment. The dollar, after all, fell about 20 percent against the euro last year because of worries about U.S. trade and fiscal imbalances. And many analysts (me included) have warned that a further sharp slide is likely this year as China and Japan begin to dump their surplus greenbacks. Among the leading worriers is the International Monetary Fund, which warned in its latest "World Economic Outlook" in September that a further decline in the U.S. currency is likely and that "a disorderly adjustment -- or overshooting -- remains an important risk."
But let's consider a contrarian answer to our New Year's financial puzzle: Perhaps the Asian nations are pursuing an entirely rational strategy -- one that seeks to maximize domestic employment rather than financial return. If that's so, then financial traders can stop fretting so much and applaud a dollar that's playing much the same stabilizing role it did 50 years ago, during the golden days of Bretton Woods.
This counterargument was presented to an IMF forum two months ago by Deutsche Bank economist Peter Garber. If an abstruse economic theory can be said to be generating "buzz," that has happened with Garber's work.
Garber argues that Asia's seemingly irrational accumulation of surplus dollars is the inevitable consequence of its export-led development strategy. To increase domestic employment, the Asians keep their exchange rates artificially low and sell cheap goods to the United States -- in the process accumulating those ever-larger surpluses of dollars. "The fundamental global imbalance is not in the exchange rate," Garber told the IMF forum in November. "The fundamental global imbalance is in the enormous excess supply of labor in Asia now waiting to enter the modern global economy."
Garber estimates that there are 200 million underemployed Chinese who must be integrated into the global economy over the next 20 years. "This is an entire continent worth of people, a new labor force equivalent to the labor force of the EU or North America," he explains. "The speed of employment of this group is what will in the end determine the real exchange rate."
Garber likens the global labor imbalance to the collision of two previously independent planets -- one capitalist and one socialist. "Suddenly they were pushed together to form one large market," he says. The best way to restore equilibrium is for the former socialist economies to pursue export-led growth -- and for the United States to act as a buffer and absorb the world's exports.
If this all sounds a bit like the world after 1945, that's the point. What's really going on is a revival of the Bretton Woods financial system that created the IMF, Garber and two other economists noted in a paper that was published in September by the National Bureau of Economic Research. "In the Bretton Woods system of the 1950s, the U.S. was the center region with essentially uncontrolled capital and goods markets," they write. That, in effect, is the sort of world that has now returned, contend Garber and his fellow authors, Michael P. Dooley and David Folkerts-Landau.
Without realizing it, the authors argue, we have returned to a fixed-exchange-rate world, with China and other Asian developing countries keeping their currencies artificially low by pegging them to a falling dollar. The Asians today are like the Europeans after World War II -- using cheap exports to the United States to power their economic revival. And the wonder of it is that this neo-Bretton Woods system works as well as the old one did.
"In spite of the growing U.S. deficits, this system has been stable and sustainable," Garber and his co-authors argue. They cite the 1965 comment of French analyst Jacques Rueff about why the United States prospered under the old Bretton Woods regime despite its big trade deficits: "If I had an agreement with my tailor that whatever money I pay him returns to me the very same day as a loan, I would have no objection at all to ordering more suits from him."
To be sure, this perpetual motion machine can't continue forever. At some point, those 200 million Chinese will find jobs, and China will graduate to parity with the United States. At that point, we'll have a real dollar crisis. Along the way, we're sure to have more political protests from American workers who fear their jobs are being sacrificed in this neo-Bretton Woods world. But for now, perhaps Wall Street should be less gloomy about the dollar.
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