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adrock3215

The Falling US Dollar

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We know the causes: loose monetary policy, welfare state, strong emerging markets across the world, shortsighted domestic policy, tariffs and taxes on trade, foreign policy, demand for oil (priced in dollars), US trade deficit, etc.

Is anyone else on here concerned about this?

A total collapse may help people realize that the central bank concept doesn't work. Or it may be used to provide justification to the theory that markets don't work, and they need to be regulated. Regardless, how long can the "money as debt" theory be sustained?

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Absolutely, in fact, take a look at a chart of the dollar versus gold, which gives you an objective measure of value:

http://www.savagerepublican.com/index.php

That chart goes from January 2000 to September 2007, and shows that gold has more than doubled in value against the dollar, from $300 dollars per ounce, to $700 dollars per ounce. This means a dollar today is worth half of what it was in 2000, which means that your bank account has halved in value. A dollar from 2000 is today worth 43 cents! So much for savings!

This is what happens when the Fed inflates currency. A thief in the night would be more honorable.

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Much of the dollar's weakness can be seen in relation to the Euro and the Canadian dollar. They are more welfare statist than we are, so what are they doing different than us?

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Much of the dollar's weakness can be seen in relation to the Euro and the Canadian dollar. They are more welfare statist than we are, so what are they doing different than us?

The US economy is largely based on consumer spending. When people stop buying things, it slows the economy down. The US is a net importer with enormous trade deficit.

Canada is a net exporter. The rise of the dollar over the last 24 months and the expansion of the economy is driven by global demand for what Canada has to offer: minerals, resources, oil and gas, wheat, technology. As the world demand for natural resources continues to grow Canada will prosper.

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The US is a net importer with enormous trade deficit.
Sophia, "trade deficit" is a false concept, and a contradiction in terms! The only way a deficit can occur is if one party steals from another, because in all other cases, a "trade" is an even exchange of value. Both parties agree mutually, no matter whose goods are traveling across the Atlantic in exchange for money traveling the other way.

Furthermore, it is when people stop producing things, not buying them, that overall an economy slows. This is for two reasons: consumer spending doesn't actually create anything, and consumer spending is actually backed by production; everyone works somewhere, producing things, in order to spend.

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Would it be more worthwhile, until an objective standard of money is applied, to hold onto our loose change which is worth its value in the material it consists of?

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Sophia, "trade deficit" is a false concept, and a contradiction in terms! The only way a deficit can occur is if one party steals from another, because in all other cases, a "trade" is an even exchange of value. Both parties agree mutually, no matter whose goods are traveling across the Atlantic in exchange for money traveling the other way.

Trade deficit has a definite meaning, and it is a legitimate one. A trade deficit means the people of one country are importing more money's worth of goods than they are exporting. This means that in sum they are paying to others more money than they are receiving from them for those others' goods, which in turn means that the people of the net importer are drawing down their total cash holdings while the people of the net exporter are increasing theirs. Though it is not a good, money is a real entity in its own right with its own movements. It is not a neutral arbiter of value whereby one can just refer exclusively to flows of various goods and then toss in money as a mere medium of exchange. One of the positives of Austrian economics was to draw explicit attention to that fact.

Under the gold standard, cash balances went up as gold was both produced and received as payment (for both trade goods and capital), and went down as it was used for non-monetary purposes and tendered in payment (again for trade and capital). As the holdings of foreigners goes up, the purchasing power of their holdings in relation to domestic productions goes down, and vice versa. When there is a global and properly run gold standard, the only thing you will see is that the same types of goods will (after adjusting for transport and the like) be more or less expensive in one country than another primarily because of the amount of gold in circulation in those respective countries. When we're free, the mechanism is smooth and seamless.

Under a fiat currency, the balance thing is exactly the same, except that the fiat dollar is made of paper and electrons instead of gold. The big difference is that with national fiat currencies there is an exchange rate between two different currencies. A shift in exchange rates is a reflection of changes in capital holdings, and today moved primarily as a result of people shifting their capital holdings in and out of various currencies. These moves are influenced by how various countries inflate their respective currencies plus views on the directions of trade deficits and surpluses and other sociopolitical matters (eg wars and rumours of wars...). The mechanism is not smooth and seamless but heavily influenced by politics and opinions in all manner of both direct and indirect ways. It is more complicated than just the physicalities and numbers involved, and I am not an expert in this.

Back when the US was on a gold standard the US economy regularly ran trade deficits, which were actually a good sign at the time, because it was a producer and exporter of gold. People in the US then bought consumer and production goods with the money minted from that gold, increasing their standards of living and ability to increase them yet further. Today, the cash balance reduction effect is commonly offset by the people and government of the net exporter increasing their holdings of capital issued by various entities from the net importer country, which the people in the exporting country pay for with the cash they get from the people in that net importer. The chief source of new holdings is inflation by governments rather than mining by free people. Similarly, a significant destination of these holdings is into the coffers of other governments buying the cash with their own inflated currencies rather than into the pockets of actual producers of goods. Governments of major exporting countries, such as China, have built up massive holdings of US treasury instruments in this way. The difference between the US and other countries is that the other countries governments are building up capital while the US government is squandering it both directly and indirectly (other commentators whine about US consumers being spend-thrifts, but this is only because the US government is messing with market signals and other issues that would people would read and change their habits in response to).

The US printing presses producing the new dollars had always been running, but Greenspan jacked up the speed in the wake of the dotcom bust. The speed of printing has since been turned down under Bernanke, but that enormous build-up under Greenspan has a lot of momentum behind it and will push the value of both the US dollar itself and debt denominated in it much lower when the various holders start disposing of those US dollar assets. This has been rumoured for a while now, and has allegedly started. Bernanke and the Fed are supposedly following a policy of "benign neglect", that of deliberately not doing anything to stop the US dollar slowly falling in value because the alternative is having it undergo a sudden crash. Either way, the USD will fall in value and interest rates will rise, but the difference is that slowness means ability to adjust more calmly.

Furthermore, it is when people stop producing things, not buying them, that overall an economy slows. This is for two reasons: consumer spending doesn't actually create anything, and consumer spending is actually backed by production; everyone works somewhere, producing things, in order to spend.

This is true, but don't forget about flows of capital. No national economy is a closed system.

JJM

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Trade deficit has a definite meaning, and it is a legitimate one. A trade deficit means the people of one country are importing more money's worth of goods than they are exporting. This means that in sum they are paying to others more money than they are receiving from them for those others' goods, which in turn means that the people of the net importer are drawing down their total cash holdings while the people of the net exporter are increasing theirs. Though it is not a good, money is a real entity in its own right with its own movements. It is not a neutral arbiter of value whereby one can just refer exclusively to flows of various goods and then toss in money as a mere medium of exchange. One of the positives of Austrian economics was to draw explicit attention to that fact.

But doesn't the notion that trade deficits are harmful assume that wealth is static? The US is still engaged in production. The fact that its people buy more from people of other nations doesn't change the fact that the US is producing wealth.

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Much of the dollar's weakness can be seen in relation to the Euro and the Canadian dollar. They are more welfare statist than we are, so what are they doing different than us?

I'm speculating here (and I'm no expert in monetary policies) but I think the European central bank is more independent from politics than the Federal Reserve Bank and the countries in the EU watch more closely what the central bank does. I guess we will see in the future that some of the regulations will be dropped and with the EU tying the countries more closely together, creating more power on the federal level, the central bank will become more dependent on politics and the value of the euro will drop, too.

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Very good post John McVey.

To address LaszloWalrus, I am going to quote from an article written by Warren Buffet on the subject, as he has already written extensively on it. The article can be found here and is much longer than what I quote below.

"To understand why, take a wildly fanciful trip with me to two isolated, side-by-side islands of equal size, Squanderville and Thriftville. Land is the only capital asset on these islands, and their communities are primitive, needing only food and producing only food. Working eight hours a day, in fact, each inhabitant can produce enough food to sustain himself or herself. And for a long time that's how things go along. On each island everybody works the prescribed eight hours a day, which means that each society is self-sufficient.

Eventually, though, the industrious citizens of Thriftville decide to do some serious saving and investing, and they start to work 16 hours a day. In this mode they continue to live off the food they produce in eight hours of work but begin exporting an equal amount to their one and only trading outlet, Squanderville.

The citizens of Squanderville are ecstatic about this turn of events, since they can now live their lives free from toil but eat as well as ever. Oh, yes, there's a quid pro quo--but to the Squanders, it seems harmless: All that the Thrifts want in exchange for their food is Squanderbonds (which are denominated, naturally, in Squanderbucks).

Over time Thriftville accumulates an enormous amount of these bonds, which at their core represent claim checks on the future output of Squanderville. A few pundits in Squanderville smell trouble coming. They foresee that for the Squanders both to eat and to pay off--or simply service--the debt they're piling up will eventually require them to work more than eight hours a day. But the residents of Squanderville are in no mood to listen to such doomsaying.

Meanwhile, the citizens of Thriftville begin to get nervous. Just how good, they ask, are the IOUs of a shiftless island? So the Thrifts change strategy: Though they continue to hold some bonds, they sell most of them to Squanderville residents for Squanderbucks and use the proceeds to buy Squanderville land. And eventually the Thrifts own all of Squanderville.

At that point, the Squanders are forced to deal with an ugly equation: They must now not only return to working eight hours a day in order to eat--they have nothing left to trade--but must also work additional hours to service their debt and pay Thriftville rent on the land so imprudently sold. In effect, Squanderville has been colonized by purchase rather than conquest.

It can be argued, of course, that the present value of the future production that Squanderville must forever ship to Thriftville only equates to the production Thriftville initially gave up and that therefore both have received a fair deal. But since one generation of Squanders gets the free ride and future generations pay in perpetuity for it, there are--in economist talk--some pretty dramatic "intergenerational inequities."

Let's think of it in terms of a family: Imagine that I, Warren Buffett, can get the suppliers of all that I consume in my lifetime to take Buffett family IOUs that are payable, in goods and services and with interest added, by my descendants. This scenario may be viewed as effecting an even trade between the Buffett family unit and its creditors. But the generations of Buffetts following me are not likely to applaud the deal (and, heaven forbid, may even attempt to welsh on it).

Think again about those islands: Sooner or later the Squanderville government, facing ever greater payments to service debt, would decide to embrace highly inflationary policies--that is, issue more Squanderbucks to dilute the value of each. After all, the government would reason, those irritating Squanderbonds are simply claims on specific numbers of Squanderbucks, not on bucks of specific value. In short, making Squanderbucks less valuable would ease the island's fiscal pain.

That prospect is why I, were I a resident of Thriftville, would opt for direct ownership of Squanderville land rather than bonds of the island's government. Most governments find it much harder morally to seize foreign-owned property than they do to dilute the purchasing power of claim checks foreigners hold. Theft by stealth is preferred to theft by force.

In the late 1970s the trade situation [in the US] reversed, producing deficits that initially ran about 1% of GDP. That was hardly serious, particularly because net investment income remained positive. Indeed, with the power of compound interest working for us, our net ownership balance hit its high in 1980 at $360 billion.

Since then, however, it's been all downhill, with the pace of decline rapidly accelerating in the past five years. Our annual trade deficit now exceeds 4% of GDP. Equally ominous, the rest of the world owns a staggering $2.5 trillion more of the U.S. than we own of other countries. Some of this $2.5 trillion is invested in claim checks--U.S. bonds, both governmental and private--and some in such assets as property and equity securities.

"

Edited by adrock3215

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Buffet is a mercantilist, Keynesian, fool. Here is a much better perspective on "trade deficits." If you want a second opinion, try Richard Salsman, here.

And it's not just Objectivists who know this; it's really anyone who has a modicum of sense in economics - see Walter Williams here.

The real danger here is that the rapidly inflating dollar will kill this "trade deficit," which Salsman aptly said should properly be called an investment surplus. When foreign capital starts to flee this country, thus ending the "trade deficit," then we have a problem.

For more on this, see my post here.

Warren Buffet. I mean, come on.

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And it's not just Objectivists who know this; it's really anyone who has a modicum of sense in economics - see Walter Williams here.

Are you saying that Warren Buffet has no economic sense?

Serious?

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Buffet is a mercantilist, Keynesian, fool. Here is a much better perspective on "trade deficits." If you want a second opinion, try Richard Salsman, here.

And it's not just Objectivists who know this; it's really anyone who has a modicum of sense in economics - see Walter Williams here.

The real danger here is that the rapidly inflating dollar will kill this "trade deficit," which Salsman aptly said should properly be called an investment surplus. When foreign capital starts to flee this country, thus ending the "trade deficit," then we have a problem.

For more on this, see my post here.

Warren Buffet. I mean, come on.

No sir. I never said that a "trade deficit" was bad. You seem to have your own agenda you want to push here, judging from the hostility of your post. I simply pointed to the fact that it is a contributing factor to the declining value of the dollar. This is a natural occurence in a fiat monetary system. While Buffet's economic views may not be ideal, he nevertheless understands that a trade deficit under the current monetary system will lead to a devaluation of the currency. He has used Berkshire to make large bets on foreign currencies vs. the dollar and been right.

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But doesn't the notion that trade deficits are harmful assume that wealth is static?

The idea that deficits are of themselves harmful does assume that, yes. I am only saying that of themselves they say nothing either way, that they can either be a good sign or a bad sign depending on other issues, and that in the context of a fiat currency their continued existence arises from continued inflation by the central banks. That's where the problem lies, in the existence of a fiat currency and what central banks do with it, not the trade side as a primary. Simplifying a fair bit, as the number of dollars is continually increased by the central bank so there is a tendency for the value of each dollar to fall. Part of the consequence of that is a fall in the number of units of other currencies that one dollar buys, where the particular mechanism of this change in exchange rates is convoluted and not at all neat & tidy in operation.

The US is still engaged in production. The fact that its people buy more from people of other nations doesn't change the fact that the US is producing wealth.

Indeed - but it still doesn't stop the concept of the trade deficit from being a legitimate one, even if those who make much of it are exaggerating its importance and are failing to see where the harm to the economy actually comes from.

Whether people of the US are in producing more or less than they are consuming is another matter. Investors' thoughts on this are just one set of issues amongst a whole slew that influence exchange rates via these investors' actions.

JJM

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You seem to have your own agenda you want to push here, judging from the hostility of your post.

I thought I made it pretty clear what my "agenda" was: Keynes is just about the most horrible thing to ever happen to economics.

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I thought I made it pretty clear what my "agenda" was: Keynes is just about the most horrible thing to ever happen to economics.

Great point.

Within the context of a fiat monetary system, a trade deficit will cause a devaluation of the net importers currency. Buffet being a Keynes advocate is a seperate issue, and does not detract from his statement that a trade deficit will devalue the US dollar. Whether or not he recognizes that a hard currency is the solution to the problem of the worthless dollar, he nonetheless recognizes what is occuring right now within the context of the current system, which suits his needs as an investor well.

So, congratulations on the terrific point. His economic beliefs mean nothing to me. I bought Berkshire A stock at 41,000. It is now trading near 140,000. He clearly understands economic matters, albeit from a mistaken viewpoint.

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Are you saying that Warren Buffet has no economic sense?

Serious?

He thinks he should pay higher taxes, so he's got some moron in him somewhere.

Edited by K-Mac

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He thinks he should pay higher taxes, so he's got some moron in him somewhere.

Yep. That's in fact one of the things I was alluding to.

he nonetheless recognizes what is occuring right now within the context of the current system, which suits his needs as an investor well.
\

Is that the context from which we are making statements here? As investors?

No, this is a philosophy forum. The purpose here is to identify the proper causes and solutions to the problems. In the context of this forum, Buffet is wrong, wrong, wrong. "Trade deficits" are not the problem and his statements only serve to perpetuate Keynesian idiocy.

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He thinks he should pay higher taxes, so he's got some moron in him somewhere.

Well, it means that he's got some socialist in him anyhow. That doesn't quite make him a moron.

And it certainly doesn't mean he has no economic sense.

Is that the context from which we are making statements here? As investors?

The context here is reality. The point of economic theories is to predict reality, not to discuss how people ought to act. Warren Buffet may be wrong philosophically about some things, but he obviously is very talented in predicting future trends.

Edited by Moebius

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Well, it means that he's got some socialist in him anyhow. That doesn't quite make him a moron.

Hmm... I don't know about that one.

The context here is reality. The point of economic theories is to predict reality, not to discuss how people ought to act. Warren Buffet may be wrong philosophically about some things, but he obviously is very talented in predicting future trends.

I've already been over your rejection of the Objectivist theory of history. Apparently, you don't accept the importance of philosophy in other areas as well. I'd say just read the philosophy and see if it doesn't change your mind.

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