Why has the dollar fallen?

[Supersport]

why hsa the dollar declined aginst most foreign currencies?

here's some plain English explanations:

http://www.economicshelp.org/2007/07/rea...ollar.html

in sum,

free trade has caused an uncompetitive US to have massive trade deficits. massive trade deficits result in massive supplies of dollars in foreign hands

trade deficits have caused low prices, job lossess and therefore we have low inflation. with low inflation and a declining economy, the US cannot possibly have higher interest rates without even more damage to the economy than trade has caused

a massive supply of dollars in foreign reserves coupled with low returns on US investments, and predictably, foreign demand for dollars and the price drops.

it is classic economic theory that trade defcits resutl in exchange rate declines that are supposded to eqilize the trade balance, but our production is still so much more expensive than China's that it isn't happening. it is irrelevant that China pegs their currency to the dollar. what is relevant and inescapable is that their goods are cheaper

I disagree that means Americans have a less valuanle dollar though. we're in a huge defaltion and you can buy substantially more assets of many types than for the same price than you could a few years ago

but basically free trade has resulted in half of what idealouges theorize: low prices, every day.

now the rest of the world has a boatload of dollars and is staring at having to invest them in a declining US economy. not quite how free trade was supposed to work in theory, but definitley how it has worked in reality

Quote:Reasons for Fall in the US Dollar.

Large Current Account Deficit:

This means that there is a net outflow of foreign currency. US imports are greater than exports. This outflow of currency puts downward pressure on the dollar. People are selling dollars to buy Chinese goods.

Fall in Demand for US Securities.

In the past the US current account deficit has been financed by capital inflows. Basically, the US has been importing goods, but China has been using its foreign exchange reserves to buy US debt - mostly government debt. This means that the capital inflows kept the dollar higher than it would have been. However, Asian countries are now starting to diversify away from the dollar. The dollar is no longer seen as the best investment, due to weaknesses in the US economy.

Housing Market Slump

The US housing market has suffered a severe reverse. Mortgage arreas have increased due to problems in the sub-prime market. Why the Roof fell in on the US housing Market

Problems in the US housing market are causing lower growth and discouraging foreign investors from buying dollars.

Fall In confidence

For many years the dollar was seen as the world's leading currency. The US economy was the undoubted superpower. However, there has been a shift in people's perceptions. Factors such as the Iraq war and the rise of China have indicated US hegemony will not last forever. Therefore, people are no longer willing to buy dollars for such a low return.

[Supersport]

http://www.marketwatch.com/story/fed-off...2009-11-16

Quote:"The prices of assets in U.S. financial markets do not appear to be clearly out of line with the outlook for the economy and business prospects as well as the level of risk-free interest rates," said Fed Vice Chairman Donald Kohn in a speech to the Kellogg School of Management at Northwestern University. Read the text of his prepared remarks.

Even if he's wrong -- a possibility Kohn readily admitted -- it would be wrong for the Fed to raise interest rates abruptly to prick a bubble, he said. Raising rates now could imperil the recovery, with no reason to think it would be effective.

"Tightening financial conditions at a time when an economic recovery has just begun, when labor markets are continuing to weaken, when inflation is below its optimal level for the longer run, and when significant strains persist in the financial system would incur a considerable short-run cost in order to achieve possible long-run benefits whose extent is, at best, quite uncertain," Kohn said, according to his prepared remarks, which were released in Washington.

[Salty Dog]

You still don't see the source of malinvestment do you? What you are failing to see...

Quote:Trade account deficits and monetary pumping

Consider an American counterfeiter who uses counterfeit money to buy goods from Japan. The money that he has exchanged is not supported by anything useful. The counterfeiter has produced nothing useful and is not expected to produce anything useful in the future. He is exchanging nothing for money and then he exchanges money for useful Japanese goods. The Japanese producer who gets the fraudulent dollars — unbacked by real-wealth dollars — will have difficulties realizing them for real wealth. The emerging US trade deficit is just an indication that Japanese producers were ripped off.

Obviously, if the Japanese happened to be the earlier recipients of the newly printed dollars, then they could secure American goods at the expense of some other American wealth producers. In this case the US trade account will be well balanced — because the Japanese have managed to import goods from America by exercising their dollar claims on real US goods. Consequently, some economists may even conclude that the net flow of savings is also in healthy shape. However, the story of the trade account here will be false and incomplete because the monetary pumping has been overlooked. American wealth producers are being hurt — prices of inputs are now rising faster than the prices of their products — their ability to produce and to export has weakened. As a result, the flow of real savings, all other things being equal, now comes under pressure. Consequently, as time goes by the trade balance moves into deficit.

Note that the trade deficit here is the result of printing dollars out of "thin air." It mirrors the weakening of the process of real wealth generation. What is then required is not the fixing of the trade deficit but the cessation of the activities of the money counterfeiter. (The economic effect of the central bank's loose monetary policies is exactly the same as that of the private counterfeiter). It must be stressed here that it is not trade deficits that undermine the process of wealth formation but rather the loose monetary policy of the central bank.

While the widening trade deficit is not the cause of the economic illness, it also doesn't lead to a fall in the currency rate of exchange as popular thinking has it. The fundamental determinant of the currency rate of exchange is its relative purchasing power, which in turn mirrors the relative average price in an economy. Here is why.

Price is the amount of money per unit of a good. The average price then will be the amount of money per unit of real stuff in an economy. (We are aware that such an average cannot be computed so we are using this term for illustrative purposes only).

Now, let us assume that there are ten units of real stuff that are traded between the United States and Europe. There are also ten dollars and ten euros — implying that the average price of the real stuff in dollar terms is $1 whilst the average price in euro terms is €1. Consequently, the rate of exchange between the dollar and the euro must gravitate to 1:1. Any deviation from this rate of exchange will give rise to arbitrage actions, which will bring the rate of exchange into accord with the average buying power of money in the respective countries.

If the amount of dollars doubles, and all else remains unchanged, then the average price in dollar terms is going to be $2. This in turn must lead to a rate of exchange of $2 per euro. Note that the state of the US and European trade accounts have no effect on the amount of the real stuff that is traded and it has no effect on the supply of dollars and euros. The trade account statement just records transactions; it doesn't produce or generate anything else.

So if the dollar falls as most economists are suggesting, it would have to happen not on account of the trade deficit but on account of the fact that the rate of dollar printing is going to be much faster than the rate of printing of other country's monies — all other things remaining equal. So far, however, this is not the case. According to the charts below the yearly rate of growth of American money AMS has been trending down since 2005. In contrast the growth momentum of Japanese and the Euro-zone, money AMS has been trending upwards since 2005. Thus in January 2005 the yearly rate of growth of money AMS stood at 7% in the United States, 10.8% in the Euro-zone and 4% in Japan. In December 2005 the yearly rate of growth stood at 2.1% in the United States, 12.2% in the Euro-zone, and 5.4% in Japan.

Our analysis doesn't imply that the US economy is in healthy shape - far from it. However, what we maintain is that the key factor behind the erosion of US fundamentals is not the widening in the trade account as such, but rather the policies of the Fed. During the reign of Alan Greenspan between August 1987 and December 2005, money AMS has increased by 173%. Greenspan's strong monetary pumping was accompanied by a massive artificial lowering of interest rates. The federal funds rate was lowered from 6.5% in 2000 to 1% in 2003. Obviously then such reckless policies must have severely undermined the process of real wealth formation. However, focusing on the trade account statements only diverts the focus of attention from the true culprit behind the erosion of US economic fundamentals.

The habit of pursuing economic analysis in terms of the so-called foreign debt adds another confusion. If an American, Mr. Jones, borrows money from an Australian, Mr. Smith, the entire transaction is their own private affair and is not of concern to any other. Both the American and the Australian are expecting to benefit from this transaction. Lumping individuals' foreign debt into the national foreign debt statistics doesn't make any sense. What is this total supposed to mean? Who owns this debt? What about all the individuals who do not have foreign debt, should they also be responsible for the national foreign debt? The only situation that Americans should be concerned with is if the government incurs a foreign debt. The government is not a wealth creating entity and as such derives its livelihood from the private sector. Consequently, every foreign debt the government incurs means that the private sector will have to foot the bill some time in the future.

Conclusions

Most economists are of the view that the ever-growing US trade deficit and the subsequent expanding foreign debt pose a threat to the well-being of Americans. What is then required, so it is held, is to set in motion policies that will help curtail the widening trade imbalances between the United States and the rest of the world. Focusing on the trade deficit as the supposedly major problem of the US economy only diverts the attention from the real culprit, which is the US central bank.

What matters for the process of wealth formation is the flow of real savings. The balance of payments statement doesn't provide such information. Consequently, it is not possible to determine the implications of a given state of the current account on the well-being of Americans without information regarding the state of the flow of real savings. Therefore various pessimistic assessments regarding the US economy, which are based on the state of the balance of payments, are likely to be without much foundation.

I doubt you'll read it in it's entirety but here the link for any interested.
Does the widening US trade deficit pose a threat to the economy?

[Supersport]

you could pick any point in that load of BS and it's just wrong. the author himelf repeatedly says 'most economists say "x" but they're all wrong and I'm right

and that's because, and you don't see, that this prinmary source of yours begins and ends with the absolute premise that free trade always results in a positive outcome for everybody and therefore all discussion must somehow eventually arrive at that conclusion one way or another, no matter how convoluted a process required, as this piece is

it's a joke

the net result of trade deficits, in isolation, is the equivilent of a household that continuously spends more than it earns and continuously builds debt

in addition in our case what we have done amounts to the household working less and less (outsourcing) so instead of earning money to buy goods, it increases borrowing. the debt is compounding and employment is decreasing

that's exactly what happened to the US

the temprary employment was all built on debt, not exchanges of assets, and now we're seeing the truth of eliminating all that US employment and borrowing from China to buy their goods instead: enormous debt and less employment

common sense out to tell you you can't work less and borrow more to consume more, yet that what you expect us to believe

it doesn't work for any single household or business yet we're supposed to believe it somehow magically works for the US as a whole

if China bought Treasuries with every dollar of trade deficit, which it nearly does, it amounts to government spending that compensates for the lost US GDP [trade deficit], because the govt spends the proceeds from the treasuries

[Tenmile]

Mebbe the Iranians are still printing bales of US dollars and flooding the market with them.

[Ahriman]

Salty Dog,


Your link makes no mention at all of unemployment.

FAIL!!!


Any person who comments on the dollar as of the end of 2009 without mentioning unemployment in any way is only displaying willful ignorance. Gedda grip on the documentable facts that drive a recession. When employment is nowhere to be found in any of your talk then your talk has nothing to do with present-day reality.

It's time to bring yer pitch up to date! Get started on it, baby!

[Byrdy]

Yes, ignore the fact that the fed lowered interest rates by 80% in the early part of this decade, then kept them there for over a year.

Yes, ignore the parts of the linked blog post that cite other reasons for the decline in the dollar.

Yes, by all means ignore what's happened since the post and that the dollar in fact spiked when the financial crisis hit as investors sought safety in the US economy. Yet our trade deficit persits.

Yes ignore the unprecedented amounts of money being borrowed and printed by the federal government in order to stave off the recession.

It just HAS to be China.

[Byrdy]

At least Salty posted something by a "real" economist.

[Supersport]

if we were on a gold standard all these hocus pocus arguments would be clearly irrelevant instead of just confused, as they are now.

the bottom line is that we transfer wealth for consumer goods, and we have to borrow it back

the only thing that fiat money introduces is inflation, but the net result is the same on a basis for teh US. if we were lockled on a gold standarsd we'd still be losing the same % of GDP and wealth

fiat money doesn't magically change the reality that China lives on a far lower standard of living in real terms such as food, housing, safety, environmental health, and on and on and we're borrowing money to try to keep our standards from falling to theirs

when you put an American out of work to buy a Chinese good because they live in a box and eat dogs, the American has to borrow money to live in a house and eat hamburger

[Byrdy]

(11-18-2009 02:29 PM)Supersport Wrote:  if we were on a gold standard all these hocus pocus arguments would be clearly irrelevant instead of just confused, as they are now.

the bottom line is that we transfer wealth for consumer goods, and we have to borrow it back

the only thing that fiat money introduces is inflation, but the net result is the same on a basis for teh US. if we were lockled on a gold standarsd we'd still be losing the same % of GDP and wealth

If we were on the gold standard we very well might be in a depression right now.

The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison

Quote:fiat money doesn't magically change the reality that China lives on a far lower standard of living in real terms such as food, housing, safety, environmental health, and on and on and we're borrowing money to try to keep our standards from falling to theirs

when you put an American out of work to buy a Chinese good because they live in a box and eat dogs, the American has to borrow money to live in a house and eat hamburger

So now it's China's fault that the US government runs a budget deficit. I'll add that to the list.

[Byrdy]

...and anyone on this board who wishes to maintain or better their current standard of living in the decades to come better hope the politicians don't listen to the likes of Supersport. China, and the rest of the developing world are the only shot you have given the demagraphics of the US, Europe, and Japan.