Monday, May 14, 2007

Exports are Up: Will It Now Be A Fiat Currency Race to the Bottom?

An article today in the New York Times by Jeremy W. Peters tells us that the days of the current account deficit may start to recede in our memories pretty soon, because the falling US dollar has made American products and services more appealing to foreign purchasers.

extreme mountain biking
[Thanks to all.blogs.com for the photo.]

The tone of the article suggests that a weak dollar may actually be a good thing, as contrasted to the "old days" when a strong currency was a sign of a country's economic health. As he says:

"Rather than hurting many American companies, a weak dollar is actually providing a strong lift. The exchange rate difference stokes profits from earnings generated abroad...."

'“The old notion that if the dollar’s bad, corporate profits have to go down is no longer correct,” said Howard Silverblatt, a senior analyst at Standard & Poor’s. “There’s a lot of growth going on in the rest of the world, and companies have to be there if they want to participate. There’s a lot to be sold.”'

'“What is clear is that even if the U.S. economy slows down, the rest of the world appears to be able to grow,” he said. “If you are able to sell to those parts of the world successfully, then you’re not tied down to one central bank, one economy.”'

So the message seems to be: Let's get that dollar down so we can become competitive.

But wait just a second. Aren't we forgetting something?

There is only this phrase -- "And there is always the risk that the dollar could suddenly plunge and set off a global economic crisis" -- to remind us that a stable value of a unit of currency might be important, that in fact global economic chaos could result from a lack of it, especially when it comes to the US dollar.

The other minor detail we are forgetting is that there are millions of innocent citizens, and even whole countries, who are depending upon a strong dollar. My heart goes out to all those on a fixed income, and all the emerging economies who have put a lot of their nest eggs into dollars and dollar instruments -- China, Japan, the Arabian oil countries, to name a few.

Now, I know that these countries should have known better and/or shouldn't have tried to prop up exports by manipulating their own currencies. In fact, we could say they started this whole game, except that the US has been doing it for almost 100 years. But that doesn't change the fact that you above-mentioned victims of inflation and devaluation, innocent or not so innocent, are collectively the sacrificial lambs in this story.

You are the ones who will have to put up with the disappearance of your savings and a reduced standard of living, perhaps even the collapse of your economy, so that companies like Caterpillar, General Motors, Ernst & Young, et al. can bring in the big profits from their cheaper exports. You are the ones who will have to put up with a 3 to 5% yearly increase in prices, i.e. with a 3 to 5% decrease in your purchasing power.

While the large economies of the world are racing each other to see who can devalue their currencies the fastest while keeping their respective populations from noticing the excessive inflation it takes to get there, you victims will have no voice in the matter. As my Dad used to say, "Prepare yourselves, little sheep, to be shorn."

I have said this before: The notion that a country can inflate their currency indefinitely and maintain a "low" (is today's 5% really low?) CPI at the same time is a crock full. At some point, some country somewhere is going to start a run for gold. At that point, the major economies' central bankers will have to either fess up or try to find a way to explain how their currency ended up with the losers in the trash compactor.

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1 Comments:

Blogger David Wozney said...

A “Federal Reserve Note” is not a U.S.A. dollar. In 1973, Public Law 93-110 defined the U.S.A. dollar as consisting of 1/42.2222 fine troy ounces of gold.

12:43 AM  

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