The Falling US Dollar

[softwareNerd]

The central bank debt-as-money system may come apart soon. Moody's apparantly may cut debt ratings on the Federal Government within the next few years if it can't control itself.

This does not mean the system will come apart. It removes one of the factors that underlie the current account deficit. Firstly, the trust that foreigners place in the US government's creditworthiness and in the US $ has to be seen relative to other options. Given the way Europe, India and China are going, the US will probably have less of an edge in this area, even though a collapse is highly unlikely. To the extent that this change decreases the relative desire to hold dollars and US government debt, it will tend to push down the capital account surplus, thereby also pushing down the current account deficit. This would be an example of a lowering of the trade deficit being symptomatic of the US appearing less desirable to foreigners.

[adrock3215]

This does not mean the system will come apart. It removes one of the factors that underlie the current account deficit. Firstly, the trust that foreigners place in the US government's creditworthiness and in the US $ has to be seen relative to other options. Given the way Europe, India and China are going, the US will probably have less of an edge in this area, even though a collapse is highly unlikely. To the extent that this change decreases the relative desire to hold dollars and US government debt, it will tend to push down the capital account surplus, thereby also pushing down the current account deficit. This would be an example of a lowering of the trade deficit being symptomatic of the US appearing less desirable to foreigners.

It doesn't mean the system will necessarily come apart, but I am simply stating it may. The rest of world accepts US dollars in much the same way Gold was accepted during other historical eras. Oil is denominated in dollars, effectively linking the two. With the dollar slipping in value because of the Federal Reserve's printing and the US government's welfare state growing out of control, OPEC countries are becoming less enchanted with the prospect of receiving revenues in dollars. There is a limit to demand for the dollar, and a downgrade of US debt ratings can only contribute to limiting that demand. If OPEC decides to switch the denomination of a crude oil barrel from the dollar to...the euro for example, it would put great inflationary pressure on our economy. There is nothing the government can do within the current system to prevent a problem of this nature from occuring, other than switching to a full gold standard and abolishing the current banking system. It is possible that, when faced with the prospect of rampant inflation and a worthless currency, the American people may come to accept the necessity of the gold standard, and I am hopeful that there could be some sort of change in the financial system.

[softwareNerd]

...There is nothing the government can do within the current system to prevent a problem of this nature from occuring, other than switching to a full gold standard and abolishing the current banking system....

If the government were to curtail spending, and do something to curb future spending on "entitlements", there would be little reason for people to lose faith in the $. It would be different if some other huge country were to adopt a gold standard; but, as things are, all it takes is to be relatively sound. That is how the U.S. has kept it's position for decades, without a gold standard. I agree, though, that the U.S. loses its relative edge with every decade.

I agree with the basic point you're making, that if OPEC and others started to use other currencies, or if the US debt was downgraded, we would see a reversal, with the "exported" dollars coming back to the U.S. to cause a price-rise.

Other than trust in the relative fiscal and monetary discipline of the U.S. government, another extremely important factor (perhaps more important) is that investors trust U.S. private investment channels. The U.S. boasts a rule of law and a degree of freedom that is not matched by other countries. This makes the U.S. a favorable destination for investment dollars, raising the capital account surplus and the trade deficit. Here too, each passing decade will see an erosion of the U.S.'s relative advantage.

The U.S. has long been an investment magnet -- better government, better rule of law -- and still retains it's edge. Even while the U.S. has slowly increased regulation over the decades, it has still retained the advantage, because Europe regulated even more, and China and India were communist/socialist, going from bad to worse. This led to a net investment (capital account) surplus, that was balanced by a net trade (current account) deficit. Now, in the last decade or so, there have been radical changes in China and India. These economies will probably head to the European model, with mixed economies that are much more free than their past. They will likely stay less attractive (in terms of freedom and rule of law) compared to the U.S.. Still, even though they may never close the gap with the U.S., they will narrow it significantly.

For the U.S., the solution is to become an even more attractive place for business. Unfortunately, confronted with this erosion of supremacy, people in the U.S. might fall back on the wrong "solutions". Already, we see increased calls for protectionism, and an anti-immigrant feeling that is symptomatic of a defensive, self-doubting attitude. Therefore, the odds are that the U.S. will slowly move from a clear top dog to more of a "first among equals". This can take a long time, because the U.S. already has a huge lead.

However, in the context of this thread, such a reversal will (ceteris paribus) be accompanied by a reduction in the trade deficit.

[adrock3215]

Trade War Loometh?

[Moebius]

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.

Last I checked this philosophy is supposed to be about reality.

[~Sophia~]

Trade War Loometh?

From that article:

...Chinese and Arabs are grabbing U.S. infrastructure at a rapid pace...

...Just China’s $1 trillion on hand alone … is enough to buy a controlling interest in all 30 of the Dow Jones industrials...

Isn't that something to be worried about? If not, why not.

(my concern is rooted in the fact that American government is not exactly an Objectivist government).

I would like to hear what you think.

[Inspector]

Last I checked this philosophy is supposed to be about reality.

All I can say is... it is. Not empiricist, concrete-bound reality, but the actual reality. The reality described by Objectivism - the one in which philosophy is a prime mover - that is the reality in which we live.

[softwareNerd]

Isn't [Chinese and Arabs are grabbing U.S. infrastructure at a rapid pace] something to be worried about? If not, why not.

There are two parts to this. One is the nature of the owners; the second is the size of these foreign inflows ("grabs").

Nature of the investments: These owners are typically governments or people who are just like governments (in the sense they run their countries like monarchs). These governments aren't exactly trustworthy friends. There is also a risk that some mullah will take over some of these countries some day, and control some of these assets. So, there is some security risk involved. This risk is fairly independent of the size, in the sense that relatively small sums (just a few tens of billion dollars) can buy control in U.S. companies that would be considered a security risk. Ostensibly, the government has some way to vet such investments. Many of the really large and public investments by these countries are not in areas that raise any security issues, and appear to be business investments with ordinary business objectives -- e.g. the recent huge investments in Citibank and Merrill Lynch.

Size of the investments: While the numbers are huge (net inflows of $600bn - $800bn), they are dwarfed by the total size of the U.S. economy (total wealth in the $70,000bn range and rising by over $1500bn every year).

[Caveat: All numbers in this area are merely approximations.]

[Moebius]

All I can say is... it is. Not empiricist, concrete-bound reality, but the actual reality. The reality described by Objectivism - the one in which philosophy is a prime mover - that is the reality in which we live.

There is only one objective reality. And it is not a "reality as described by Objectivism" nor a "empiricist, concrete-bound reality". Reality simply is.

[agrippa1]

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

There's no moron here, just a wannabe tyrant. Buffett is saying this because he doesn't need to rise to through the ranks to get his. He has his and he's willing to pay extra to keep the rest of us down. There are three types of collectivists, those who want to rule, those who want to be ruled, and those who want both (academia).

[Moebius]

Buffett is saying this because he doesn't need to rise to through the ranks to get his. He has his and he's willing to pay extra to keep the rest of us down.

Well I mean, he doesn't have to rise through the ranks because he already did. And in any case what he said was that the wealthiest people should pay extra -- which doesn't normally include people that are "rising through the ranks".

[Inspector]

There is only one objective reality. And it is not a "reality as described by Objectivism" nor a "empiricist, concrete-bound reality". Reality simply is.

Yes, that's what I said. And Objectivism correctly describes it, while your methods do not.

[agrippa1]

Well I mean, he doesn't have to rise through the ranks because he already did. And in any case what he said was that the wealthiest people should pay extra -- which doesn't normally include people that are "rising through the ranks".

I see you understand the concretes. Going to the conceptual level, you do agree that it steepens the slope for everyone below him, right?

This is altruism unmasked - Buffett, the great humanitarian, wants to give more to the IRS. That's such a great and noble thing for him to do, therefore, let's make all rich people give more. Thus the false concept of altruism, i.e., giving willingly to that which you value, is warped into the true concept of altruism, i.e., an unaccountable gov't taking from those who produce and giving it whatever it whims (or whatever profits the pull-mongers). And thus, the professed love of man (philanthropy) is revealed as the hatred of man.

If Buffett wants to give more to the federal government to squander on pork and payoffs, then he's welcome to it. Less for the rest of us to pay. While he's at it, maybe he can convince Soros, who made all of his money off the blunders of central planners, to give, too. There's another wannabe tyrant waiting to rule.

BTW, just curious, I assume you have a job. Is the man who created that job, wealthy?

I assume you own a house, a car, a television (etc.) are the men who created that house, car and television, wealthy?

Edited January 16, 2008 by agrippa1

[softwareNerd]

... Buffett ... Soros, ...

Buffet and Soros are wrong. However, your psychologizing accusation about them -- assuming that they want to put others down and rule etc. -- is unsubstantiated. I don't want to take the discussion off topic; but, after multiple posts saying this, I just had to point it out.

[adrock3215]

Isn't that something to be worried about? If not, why not.

(my concern is rooted in the fact that American government is not exactly an Objectivist government).

I would like to hear what you think.

In my estimation, it is something to be wary of, although I am certainly not losing sleep every night because of it. As you indicated, my concern is also rooted in the fact that the American government is not an Objectivist government. If America embraced true laissez-faire policy, and America and the nations of the world were on a true gold standard, I would have very little concern about it. Nevertheless, in the context of today's policies, it seems as if each soverign wealth investment needs to be looked at seperately to determine if there is a security threat posed by the investment. In my judgement, with the Dubai Ports deal, there was obvious security concern and reason to stop the deal from occuring. Now, I certainly understand that free-trade and the free flow of capital is important for all countries of the world. But I am strongly opposed to the nationalization of private industry by our government. So I am, of course, skeptical of any attempt to nationalize private industry by a foreign government.

[KendallJ]

Isn't that something to be worried about? If not, why not.

(my concern is rooted in the fact that American government is not exactly an Objectivist government).

I would like to hear what you think.

I think that this is the same concerns everyone had in the 80's about the Japanese taking over US interests. That threat never materialized.

As SNerd pointed out, 30% of the 30 Dow Jones industrial companies is a drop in the bucket of the value of the US economy.

Also, one should consider why most foreign companies / individuals want to invest in the US. It is because the US is still the best most vibrant economy, and they want a return on their money. THis implicitly means they want the system to keep working, but for them as well. The minute men have money, the better of them will start worrying about property rights (nominally their own of course, but it's a start). I think this is a good thing.

Next, investors have to bring something to the operation of these companies or else they function merely as passive investors.

It is an indictment of foreign economies when they do not have vibrant enough investment vehicles to keep their money in house. This is hte case in the Arab countries which are rich off of oil wealth but have no other aspects to their economy. Some savvy arab businessman who has an intent to build up his own country's economy, and learns why it is that the US economy is as good as it is, will be the best internal champion for capitalism within his country.

My company just did a JV with the Kuwaiti's, effectively selling off a portion of our assets for cash and a stake in low cost feedstock (oil) source. In a way, that is a US company getting Arabian oil for cheaper than market prices, which benefits the US company, and helps to stabilize that oil supply.

I don't pretend that there aren't complexities and issues here, but I don't see that as the looming specter that many do.

[agrippa1]

Buffet and Soros are wrong. However, your psychologizing accusation about them -- assuming that they want to put others down and rule etc. -- is unsubstantiated. I don't want to take the discussion off topic; but, after multiple posts saying this, I just had to point it out.

Maybe you object to the use of the word "tyrant." Okay, how about this: Soros and Buffett endorse the use of force against men to make them do their (Soros' and Buffett's) will.

Soros is clearly a tyrant one of these other-people-forcy things, as his manipulations of monetary systems and of our political process [sic] has shown. He may not want to rule from a state-sanctioned office, but he clearly wants to have a great controlling influence on the lives of his fellow man. Whether he believes that desire is a moral obligation or if he just wants to rule his fellow man is the subject of psychologization (?). The result is the same.

Buffett, by saying that he believes he should pay more taxes, rather than just paying more taxes (he can, you know) and keeping his mouth shut, is obviously implying that everyone else should also pay more in taxes. This universalizing of his personal moral code is a classic collectivist/altruist attitude, and implies a willingness to have force used against his fellow man to make him comply with Buffett's will. Again, Buffett knows that he needs not sit in office to wield power in a statist nation, which is what his pronouncement supports.

But, you're right, we digress...

[John McVey]

Isn't that something to be worried about? If not, why not.

(my concern is rooted in the fact that American government is not exactly an Objectivist government).

I would like to hear what you think.

From a purely economic perspective, the foreign buyers who take controlling interests can operate them two ways: get the businesses to run as profitably as possible, or any other way of running them that is not intended to lead to that result. If they do the former it is no problem because it is exactly the same thing that US investors would do. Government intervention in this case would be pure national chauvinism, would be quickly identified in the media as such, and I don't think it would fly too well even if inferior competitors tried to take advantage of xenophobia. If instead the foreign buyers try anything of the latter, they're going to get hammered in the marketplace as they will open the door to their competitors - especially now that those who had previously operated these businesses have become flush with cash and in search of somewhere to put it! The biggest economic issue isn't that foreigners are buying control of the assets but that the getting hammered by less-profitable action will cause disruptions and temporary job losses. That certainly does bring the issue of the state of government into consideration, as there would then be a much stronger pretext for more insularity and general regulation "to preserve jobs and income" etc.

The political worries are more to do with particular businesses and the particular assets they hold. The catch-all "infrastructure" doesn't help much as that includes things like utilities and privately owned/operated tollways where questionable behaviour is liable to get stomped on before the foreign powers' political objectives are achieved. It is particular items, such as the security issues at international boundary points like ports as Adrock pointed out, that are problematic. There are also other businesses and assets I would be concerned about that aren't subsumed under the infrastructure concept. In the same vein as the ports, unfriendly control over financial institutions can lead to a variety of undesirable outcomes (not just greater facilitation of money laundering and identity theft, but also industrial espionage on business accounts and similar market-related improprieties). Likewise, purchases of certain industrial businesses could be ways to circumvent the intent of restrictions against the export of sensitive technologies with military applications - one of the major Clinton scandals was a similar issue. Another class of businesses that may be of worry are resources. The unfriendly foreign governments may want to redirect the supply of resources to their own countries, even though this is less economically valuable than selling to the highest bidder, because the political benefit they see is stronger support from and greater nationalist fervor in their own people.

One thus first has to ask what the actual motivation of the buyer is: to invest and make a profit just like any other investor, or subvert the activities away from economic ends and towards political ends? Then, since your concern is rooted in the lack of proper government: what are our governments likely to do (especially for the latter class of scenarios)? As a positive, I have no doubt that people in government will start taking a closer look at particulars of purchases of technology or finance businesses, and then try to nix bad moves on genuine rights-defence grounds - but that try is open to being thwarted by higher office (again see Clinton). So, what happens next depends on who takes control of the White House. As another negative, there is no doubt in my mind that governments will make excuses for intervention, just as they have done before. What counts for this one is the answer to the first question, and added to by the actual nature and consequences of any political agendas behind purchases. The more obvious that there are improprieties afoot, the greater the backing for more general intervention and less weight behind opponents of intervention. The ball on that one is therefore in the foreign buyer's court - which means, what do you think the medium and longer term political prospects for bad governments in places like China are? I am in no position to speculate much on that one.

JJM

[softwareNerd]

Of the various factors that influence the current-account deficit, there is one that I do worry about: the savings rate in the U.S. (see this topic).

In a free market economy, I would not worry, as long as I knew that I was saving enough. If others were not saving, they would hit retirement and be really poor, live off their kids, etc. However, with our mixed-economy, when the chickens come home to roost, the government will hand them some of my grain!

Two specific aspects of this concern me:

• Social security and Medicare: These two are not sustainable in the long run. Though many people say they're concerned, they aren't really pressing legislatures for a solution.
  
• Federal Deficit: The government keeps spending more than its tax receipts, running up debt.
  

Given the size of the U.S. economy, these two problems are manageable today, but grow a little worse with every passing year. My fear is that there will be a reluctance to take the punch bowl away, and that no action will be taken until the problems are staring us in the face, and the "solutions" (i.e., taxing away more of my money) is really painful. While I hope that my kid never has to support me, it is likely that my kid will have to pick up the bill for some other kid's parents.

[updated to add: As explained in the linked topic, I do not know that this is a problem; if it is, then it could hurt.]

Edited January 17, 2008 by softwareNerd

[adrock3215]

Not sure if anyone else is watching, but the stock market is going to collapse today. Fed decided to cut the Fed Funds rate in reponse by 0.75% between meetings this morning. Could cut again at their meeting next week. This means: further devaluation of the dollar! Right now these goofs at the Fed are just being led into decisions by the stock market.

[Moebius]

Not sure if anyone else is watching, but the stock market is going to collapse today. Fed decided to cut the Fed Funds rate in reponse by 0.75% between meetings this morning. Could cut again at their meeting next week. This means: further devaluation of the dollar! Right now these goofs at the Fed are just being led into decisions by the stock market.

Yeah I am trying to decide if I should stay up just to follow the US market. My market (Taiwan) crashed today and fell by almost 6%, effectively wiped out all my January earnings. Right now Europe with the exception of Germany is looking like they're temporarily halting their skid.

[softwareNerd]

Right now these goofs at the Fed are just being led into decisions by the stock market.

The message from the Fed is clear: they will play by the Keynesian book; other actors are advised to act accordingly.

[KendallJ]

I just blogged about this topic last night. Stunning, infuriating, stupid, boneheaded! What are they thinking?!!! @#$%(*&#$)(*!!!

[aequalsa]

I just blogged about this topic last night. Stunning, infuriating, stupid, boneheaded! What are they thinking?!!! @#$%(*&#$)(*!!!

Same thing they've been thinking since 1913 or so.

[adrock3215]

The message from the Fed is clear: they will play by the Keynesian book...

To tell you the truth, I believe Bernanke plays by more of a Chicago School-Milton Friedman-Irving Fisher book. Of course, this book shares a chapter with the Keynesian school titled 'Monetary Policy.'