Wednesday, April 13, 2005

How strong is the dollar?

This one bothers me.
I came across it yesterday on Boing Boing, of all places, who couldn't resist saying "...the imploding American Peso is shrinking fast."

Who knows? Maybe I'm being a hand-wringing, paranoid old fart because I remember double-digit inflation and lines at the gas pumps.

I also remember a season or two that the Japanese were buying up all the hard maple in North America to build bowling alleys and there was a shortage for those of us who needed to use it for counter tops. I also recall reading that there is a cement shortage going on - partly because of tariffs, but partly because the Asian economy is consuming so much cement that the market is tighter than it used to be. And didn't I read something about petroleum prices? Hmm?

This is all too much for my simple old head, but this little piece from the New Yorker catches my eye. Yeah, I know, it's not the Wall Street Journal or the NY Times. If it were really important the financial people would be all over it, right?

In the past three years, the value of the dollar has fallen by more than fifty per cent against the euro and twenty-five per cent against the yen, and, a recent rally notwithstanding, most analysts say that the dollar is only going to get weaker in the months to come. Europeans now routinely fly across the Atlantic to go shopping, and they have also started to nose around in the American real-estate market. You know the dollar’s in trouble when our puffed-up real estate starts looking cheap.

The dollar has fallen for a simple reason: Americans spend a lot more than they save. American consumers, of course, are known for living on credit, and they buy hundreds of billions of dollars’ worth a year of foreign goods—cars, TVs, T-shirts, khakis. In addition, since 2001 the American government has been running giant budget deficits, thanks to the magical combination of tax cuts and spending increases. We don’t have enough money at home to pay for all this spending, so we borrow from foreigners to make up the difference. Because we keep piling on this foreign debt—more than three trillion dollars so far—and have no clear strategy for paying it back, people are made anxious about the United States economy; this anxiety encourages them to sell dollars, and that drives down the value of our currency.

Doomsayers have been predicting for a while that the profligacy will lead to serious trouble. So why hasn’t it?

One answer is that Asia won’t let it. Last year, Asian countries invested almost four hundred billion dollars in the United States, mostly in government bonds. China is effectively taking most of its excess national savings and lending it to the United States. The Japanese, who despite their creaking economy remain flush with savings, bought a quarter trillion dollars of American debt last year, even though the interest is lousy and the assets themselves are losing value. More than any other nation in history, the United States depends, economically, on the kindness of strangers. Right now, Asian investors appear very kind.

...The Japanese, who despite their creaking economy remain flush with savings, bought a quarter trillion dollars of American debt last year, even though the interest is lousy and the assets themselves are losing value....China needs to go on selling Americans hundreds of billions in exports in order to keep its economy humming. A weaker dollar makes that harder.

Japan buying into "American debt."
China using its savings by "lending it to the United States."

These two big Asian economies are not built on credit, you know. They are accustomed to doing things the old-fashioned way, with cash. Communism, remember, wasn't too big on banks and banking. And Japan's economic underpinning has been a national nest egg somehow connected with the postal system there, starting way back in the Colonial era and surviving two world wars, the second of which virtually anihilated everything else on that island nation.

It frightens me that this "debt" that we are discussing is the same "debt" that the president refers to as "worthless IOU's" when explaining why the Social Security system is headed for trouble. Those same bonds that will cause trouble when they have to be honored are dipped from the same well that sells bonds to foreign investors.
Go figure.

Here is a "money quote" from the article...

To paraphrase John Paul Getty: If you owe the bank a hundred dollars, you’ve got a problem. If you owe the bank three trillion dollars, the bank’s got a problem.


1 comment:

Deborah said...

You are not paranoid. Your fears are realistic, I'm sorry to say. Just as your mortgage note holder in essence owns your home, China and Japan now own us. And just as your mortage note holder can call in the debt and even foreclose, so can holders of US debt. That is no longer either exaggeration or overreaction.

The Bush administration has engaged in, and Congress has permitted, an orgy of undisciplined, unfunded spending like the world has never before witnessed. And the American people will be held responsible for its repayment, perhaps sooner rather than later.