Ask Me Help Desk - Weak dollar: good, bad or ugly?

I'm putting this here because hardly anyone looks at the economics board, and all the smart people are here ;)

Sinking Currency, Sinking Country - HUMAN EVENTS

"A sinking dollar means a poorer nation, and a sinking currency has historically been the mark of a sinking country. And a superpower with a sinking currency is a contradiction in terms"

Do you think this is true?

Do you think there is a ideal range in which the dollar should be compared to other currencies?

Do you think a weak dollar helps trade if China and Japan purposely keep their currency value lower?

And no, this is not a homework question. :)

Hello In:

A weak dollar lowers the standard of living for all those who deal in dollars. It makes ALL imports more expensive, and that's just about everything we buy.

The dollar should be tied to GOLD - not other currencies. It was once, but they couldn't inflate then. They can now, and boy are they.

A weak dollar makes Chinese and Japanese goods less expensive for Americans. But it makes our goods MORE expensive for them.

A weak dollar is a sign is a declining economy. Bush has declared himself to be the "Decliner".

excon

PS> Now, let's see how one of the smart ones reply.

We have gone through cycles where the currency dropped before . I do not think a temporarily weak dollar is always bad or that a strong dollar is always good. For one thing it creates an environment good for American exports so the manufacturing sector should benefit ;creating more jobs . At the same time rising prices of imports eases pressure from US suppliers to cut prices.The trade deficit will begin to fall .American goods become competitive on the homefront. Companies who are competitive in the global markets and who export goods are booming since the weak dollar makes them even more competitive.
U.S.-built cars become a better deal related to European cars.California wine sales boom, while French wines become even less desirable.U.S. agricultural products sell better, and U.S. farmers benefit.For tourists from Europe and other places, the U.S. is a great place to visit and spend, spend, spend.

I look at the rise of the Japanese economy in the 1970s and early 1980s and I see a weak Yen . I look at the rise of the Chinese economy and I see them artificially deflating their currency. So perhaps by that model economic growth accelerates .

Yes there are disadvantages to a weaker dollar ;especially to consumers who look for the value of cheaper imports ;but it is not a chicken little scenario.

Quote:

Do you think a weak dollar helps trade if China and Japan purposely keep their currency value lower?

The way I've read it ,the Chinese have their currency artificially teathered to the US Dollar . There will in theory be no negative impact on US consumers who purchase Chinese goods . But the rate will not have an impact on the trade deficit with China. How this impacts China's economy ? I can only guess it is not good.

My guess is that the Japanese auto makers will increase production in their US plants .

Now I'll defer to the financial experts here to tell me why I am right or wrong .

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A weak dollar makes Chinese and Japanese goods less expensive for Americans. But it makes our goods MORE expensive for them.

I think you have that backwards . A strong dollar makes imports cheaper .

First of all, the dollar has had fluctuations before. We've seen periods of weak currency before, and it hasn't adversely affected the economy in the long run.

Second of all, excon commented about how the weak dollar makes it tougher for us to afford allo the stuff we import. That statement is essentially true, but not necessarily a bad thing. It will mean increased demand for domestically produced goods, which in turn means an increase in production, employment and economic growth. This is a GOOD thing.

The dollar will recover. It is still the most solid currency in the world because of the limited sovereign risk, and by-and-large people in most foreign countries would rather be paid in US dollars than their local curency because they know that the USA is going to be here tomorrow. They don't necessarily know that to be true of their country, especially in some third-world dink of a nation.

With credit tightening in the wake of the sub-prime lending non-crisis, we will start seeing a tightening of the availability of currency. When people can't borrow, the number of dollars in the market decreases. This will drive the value of the dollar back up over time.

I'm really not that worried. It's just typical market cyclicality.

Elliot

Quote:

Originally Posted by ETWolverine

Second of all, excon commented about how the weak dollar makes it tougher for us to afford all the stuff we import. That statement is essentially true, but not necessarily a bad thing. It will mean increased demand for domestically produced goods, which in turn means an increase in production, employment and economic growth. This is a GOOD thing.

Hello again, El:

Kind of – but not quite.

The lower dollar lowers the standard of living for ALL Americans. That's not good at all. In fact, that's really, really bad. Especially since we're used to our standard of living INCREASING.

However, out of all that badness, one good thing happens. You're right. Our stuff becomes cheaper to the rest of the world. Yes, that means they're going to buy more. But that's going to take two years or so before it filters down, and we NEVER get caught up completely. We get behind a lot – get caught up a little. Get behind a lot again, and caught up a little. We've been getting behinder and behinder since 1973, which not so coincidently, is when the connection between our dollar and gold was severed and the dollar began to float.

In addition to THAT piece of bad news, BECAUSE our fearless leader decided to borrow his $1.5 TRILLION for his war instead of raising taxes to pay for it, our dollar is going to drop further, and even further still. Our standard of living is going to continue to decline. Plus, that debt has been forced upon your children and your grandchildren.

I love it when supposed fiscal conservatives think that you can borrow like a drunken sailor, but everything is still rosy...

Or they could inflate and pay the debt that way. That's what they did to pay for Vietnam. That's what the “stagflation” of the 70's was about.

And, they ARE inflating at record levels. Don't take my word for it. I'm just a dumb exconvict. But, you can believe the gold market. It's exploding.

excon

Quote:

Originally Posted by excon

Hello again, El:

Kind of – but not quite.

The lower dollar lowers the standard of living for ALL Americans. That's not good at all. In fact, that's really, really bad. Especially since we're used to our standard of living INCREASING.

I haven't seen any evidence of a decrease in the standard of living. Can you show me any data that proves that?

Quote:

However, out of all that badness, one good thing happens. You're right. Our stuff becomes cheaper to the rest of the world. Yes, that means they're going to buy more. But that’s going to take two years or so before it filters down, and we NEVER get caught up completely. We get behind a lot – get caught up a little. Get behind a lot again, and caught up a little. We've been getting behinder and behinder since 1973, which not so coincidently, is when the connection between our dollar and gold was severed and the dollar began to float.

Not really. It filters down pretty quick. The guy who was unemployed who suddenly has a job is very quickly able to afford that which he could not afford before. It doesn't take years, it takes weeks.

The decrease in the cost of domestic products means that people who couldn't afford stuff before will suddenly be able to afford it now. It doesn't take years, it takes weeks.

Quote:

BECAUSE our fearless leader decided to borrow his $1.5 TRILLION for his war instead of raising taxes to pay for it, our dollar is going to drop further, and even further still. Our standard of living is going to continue to decline. That debt has been forced upon your children and your grandchildren.

Leaving aside the fact that historically speaking, the rising national debt has NOT resulted in any sort of decrease in the standard of living of Americans, I'm trying to figure out how borrowing $1.5T and allocating it for the war affects the value of the dollar or the standard of living. That doesn't make any sense. Please explain the mechanism by which this will occur.

Quote:

I love it when supposed fiscal conservatives think that you can borrow like a drunken sailor, but everything is still rosy...

You are still only looking at the balance sheet and ignoring the P&L statement. Worse, you are only looking at the liabilities, and not the assets or the equity. You can't point only to "debt" and assume that that gives you an overall picture of the financial condition of the country. It would be sort of like saying that Exxon Mobile has $8.3 billion in debt, therefore they are a weak company. Without knowing what their assets are, what their leverage is, what their earnings are, what their cash flow looks like, what their earnings potential is, what their liquidity is, what their rate of asset turnovers is, etc. how can you make that judgement? You really don't know what the US economy, the US "financial statement" looks like. You only know the debt figure.

Quote:

Or they could inflate and pay the debt that way. That’s what they did to pay for Vietnam. That’s what the “stagflation” of the 70’s was about.

And, they ARE inflating at record levels. Don’t take my word for it. I’m just a dumb exconvict. But, you can believe the gold market. It’s exploding.

excon

The price of gold is not an indicator of inflation. It is an indicator of the price of gold, and nothing else. The price of gold doesn't affect the price of milk or the price of tomatoes.

A true measure of inflation would take into consideration the prices of all goods. And the fact is that we are running at roughly 4% inflation per annum. Again, you are looking at ONE ITEM, the price of gold, and trying to draw conclusions based on that limited piece of data, without any other information. It can't be done. And I speak as a financial analyst, who's word on this CAN be taken.

Elliot

I'm not an economist but rather a philosopher. But for what it's worth... It is not so much that a currency is weak [to a point] as it is that it remains stable. A loss of confidence in the stability of a currency by the majority or all buyers and sellers will lead to barter and a failing government will likely follow.

I agree Elliot:
“We've all heard about the subprime mortgage crisis, falling home sales and the surge in housing foreclosures, record oil prices and the falling dollar.
What you haven't likely heard is that the economy grew 3.9% in the third quarter, while inflation-dampening productivity rose a hefty 4.9%.
Despite fears of a recession, the U.S. economy has created 1.25 million nonfarm payroll jobs since the start of the year, and 8.4 million since President Bush's tax cuts were put in place in 2003.
GDP is up 18.5% since the start of Bush's presidency, or about $1.8 trillion, after accounting for inflation. That 2.6%-a-year growth includes a downturn in 2001, making it even more remarkable.
Last month, reports that the economy churned out 166,000 jobs and that joblessness remained at a below-average 4.7% brought mostly yawns from the media — even though it contradicts much of the gloom-and-doom spiel.
What about the fearful "twin deficits" of trade and the budget? Both shrinking. The government's budget deficit has now fallen to just 1.2% of GDP, a level most economists consider to be negligible in an economy nearly $14 trillion in size.
This year, exports have jumped 12%, while imports have gone up just 4.3% — good news related to the weak dollar that trade-worriers can't admit.”

What you also haven't heard much about is the “Dramatic Turn For Better In Iraq”.

When looking at media bias, it's important to realize it doesn't crop up in one area. A review of coverage in just the last few weeks shows how it infests a wide array of issues — from war and foreign affairs to economics and science.
How could this be? It may well be because they neither see it in their daily newspapers, nor on the nightly TV news.”

IBDeditorials.com: Editorials, Political Cartoons, and Polls from Investor's Business Daily -- Dramatic Turn For Better In Iraq (Cue Sound Of Crickets Chirping)

DC,

Quote:

Originally Posted by Dark_crow

I agree Elliot:
“We've all heard about the subprime mortgage crisis, falling home sales and the surge in housing foreclosures, record oil prices and the falling dollar.
What you haven't likely heard is that the economy grew 3.9% in the third quarter, while inflation-dampening productivity rose a hefty 4.9%.
Despite fears of a recession, the U.S. economy has created 1.25 million nonfarm payroll jobs since the start of the year, and 8.4 million since President Bush's tax cuts were put in place in 2003.
GDP is up 18.5% since the start of Bush's presidency, or about $1.8 trillion, after accounting for inflation. That 2.6%-a-year growth includes a downturn in 2001, making it even more remarkable.
Last month, reports that the economy churned out 166,000 jobs and that joblessness remained at a below-average 4.7% brought mostly yawns from the media — even though it contradicts much of the gloom-and-doom spiel.
What about the fearful "twin deficits" of trade and the budget? Both shrinking. The government's budget deficit has now fallen to just 1.2% of GDP, a level most economists consider to be negligible in an economy nearly $14 trillion in size.
This year, exports have jumped 12%, while imports have gone up just 4.3% — good news related to the weak dollar that trade-worriers can't admit.”

I'll take it a step further.

The sub-prime market is roughly 2% of the overall real estate mortgage market. The real estate mortgage market is roughly 20% of the overall real estate industry. The entire real estate industry is no more than 10% of the overall economy. And the portion of sub-prime mortgages that are failing are roughly 1% of total sub-prime mortgages.

(The kicker is that it is up from 1/2% in 2006 and earlier. That's what all this fuss is about... a 50 basis point increase in sub-prime loan failures from 1/2% to 1%.)

So on the basis of 4/1,000,000ths (that's four divided by one million) of the overall economy having trouble, we're panicking like there's going to be a run food in the supermarkets tomorrow? Like it's Black Monday? Like it's the next SNL crisis?

Get a grip, people. The economy is fine.

Good article, DC. Thanks for posting it.

Elliot

Quote:

Originally Posted by Dark_crow

I'm not an economist but rather a philosopher. But for what it's worth...It is not so much that a currency is weak [to a point] as it is that it remains stable. A loss of confidence in the stability of a currency by the majority or all buyers and sellers will lead to barter and a failing government will likely follow.

Confidence and psychology.

Safe Haven | Gold - Harbinger of a Global Recession: At long last the fat lady sings

Trying to understand this stuff hurts my head :o

So the solution would be..

1] the government needs to cut spending
2] Iraq / Iran has to go well/better.
3] no bailout for banks and consumers that made risky choices.

Whaddaya think? ;)

Thanks in advance.

I am not so sure there is a simple answer to your questions. For a nation that is trying to get out of 3rd world status by exporting goods, strong currency may not be good. On the other hand, for some nations weak currency may hurt its economy.