One of the dreadful experiences of understanding a little economics is to watch those approaching retirement vote against schools. They have dollars in the bank, their kids are grown, Why should they worry?
Another is looking at the enormous investment in housing. Homeownership is a beautiful thing, look at the employment and tax revenue coming in, How can we lose?
The May 2006 issue of Harper's has on its cover a man carrying a house on his back. The article is entitled "The New Road to Serfdom." In it there is a graphic I pray is not correct. It identifies 90% of debt since 2000 as being mortgage debt. That would mean only 10% of debt has gone to credit cards, college loans, and oh yeah, plant and equipment.
The current debt-driven economic activity is founded on housing investment. Investment creates jobs up front. Every kind of investment. But investment in essentially passive assets, like housing, does not generate economic well being down the road like productive assets do – education and equipment and so on. It generates interest payments.
The Harper's article is instructive, if a bit pat. It's great if you like charts, because that's what it is - a dozen charts with explanatory captions. It advises of a possibility that low interest rates lure people into enormous debt loads, possibly shackling the owner to his house for decades, making payments as equity shrinks, giving lie to his hope for a valuable asset at the end of his working years.
The situation is similar to the pension crisis. (See the Seattle Times 04.04.06 article.) For dozens of years people worked, in part, for the promise of an affluent retirement funded by the company's pension. Now, one after the other, the corporation's promise has been turned over to the government for fulfilment. The "self-made" men and women wait in line to see what can be salvaged of their expectations.
Bethlehem Steel, US Airways, Kaiser Aluminum, Pan Am, and locally Consolidated Freightways, Lamonts, and Longview Aluminum, have given up their pension obligations to the federal Pension Benefit Guaranty Corporation, which now has $56 billion in assets v. $79 billion in future liabilities.
The point I want to make is that today's sure bet is tomorrow's last place finisher. Do not look at dollars. Dollars are a great medium of exchange, but a lousy store of value. They're a good way to compare goods, as in eggs are expensive, cars are cheap, but it is wrong to assume that both are being measured by a standard unit which has value in itself. They are expensive and cheap relative to each other. The dollar is simply a medium to make the comparison.
If you want your house to be worth something, or your pension to be there, or your stocks to pay off, you need to build an economy that works, with workers who will be able and willing to pay the price you want. It is their demand, not some numbers on a bank statement, that ensures value. You can lock up your greenbacks and bury them in the ground, but without that growing economy, they'll turn to dust no matter how well you wrapped them. There is no "I've got mine, now you guys fend for yourselves." You can be robbed by inflation, crashing stocks, ballooning health care, etc., etc., etc., but at its root it will always be a weakening economy that could have been floated by sound investments and reasonable trade structures.
Taxes for schools will generate economically viable citizens and reduce unnecessary drains on public coffers in the future. These are the people who will buy your house, fund your pension (including Social Security) and make your stocks worth something.
Mortgage borrowing, federal debt, everyone a millionaire... It's a hoax that is often too disturbing to contemplate, so we don't. But someday we'll have to. Our hind ends will get blasted if we keep our heads buried in the sand.
P.S. - In my last post I forgot to mention that Paul O'Neill, the former Treasury Secretary under Bush, also termed "not acceptable" W's 1990 scam with Harken Energy that we covered earlier this year. "Did I ever do an untimely filing of Form F?" O'Neill said. "No. Any other questions?"
It's timely now because W's fellow travelers at Enron are in the dock this week.
Showing posts with label dollar. Show all posts
Showing posts with label dollar. Show all posts
Wednesday, April 26, 2006
Sunday, January 15, 2006
Is China dumping the dollar?
Reported in the Washington Post and picked up at Daily Kos with much alarm was the apparent intent of China to move some of its foreign exchange reserves away from the dollar. (All this by way of Pacific Views.)
Why? What does it mean? John Campanelli at DKos says, "In sum, we're screwed." (It was more descriptive yesterday, but has apparently been edited down.)
This was and is inevitable. "Trade" is trade of goods through the medium of exchange, the currency. It is not trade of the currency for the goods. It is supposed to be goods for goods. China can't eat all the dollars it has absorbed in its years of trade surplus with the US.
Standard economic theory predicts that in situations of trade imbalance, the currencies' exchange rates will adjust, making the goods of the surplus country relatively more costly and those of the deficit country more cheap. Standard economic theory, so far as I know, does not have an answer to why this has begun only after 30 years of immense US trade deficits -- if it is even happening now.
The dollar's value as de facto reserve currency may have made it valuable in itself. Remember, the last truly stable exchange mechanism went down with the collapse of the Breton Woods system under Nixon. Currencies have floated against each other since then, often to the detriment of the weaker nations. A notable exception is the aforementioned China, which pegs its ruan against the dollar and does not allow it to float.
Be that as it may, if as the Post report suggests, China is moving away from the dollar toward the euro, what is the catastrophe that will follow?
DKos put their finger right on it. The main problem is PANIC!
Markets operate on the principle of the herd. The currency market is a herd of rhinos. Too many people have too much money stuck in too many dollars. If they get spooked and the run starts, it could get ugly before it is over, as they try to get out before their investment loses value. This has been a worry of the Progressive Caucus of the US House for a decade. That group extrapolated a run on the dollar from the experience of the Asian currency crisis; they identified rogue speculators as the likely cause. There was some support at the time for the Tobin Tax, a tiny tax on currency transactions that would not hurt legitimate trade, but would multiply for speculators as they roam the world in search of small gains.
The cause of the dollar's demise will not be speculators, although George Soros and others stand to make a bundle from their short positions in the greenback. The dollar is the victim of decades of trade deficits, the renewed and now apparently unending federal budget deficits, and the myopia of the Federal Reserve.
A simple depreciation of the dollar which did not produce immediate panic might not be so bad. The goods of Boeing and other American manufacturers would be more competitive. It could ease our sea of red ink, since most of the debt is denominated in dollars. But it would be bad for prices. Imports would go up. American goods would be bid up by foreigners. A key commodity that we cannot avoid importing is energy, oil and natural gas. Some of the recent rise in oil prices is, in fact, not an increase in the price of oil but a decrease in the value of the dollar. Energy price increases would increase costs for manufacturers, and it would create a cost-push inflation.
Inflationary pressures will always cause an overreaction at the Fed. The Fed will panic. Anything over 5% will bring out the artillery. It doesn't matter that energy costs are reducing the purchasing power of American consumers, the Fed assumes that any inflation is to be snuffed out by higher interest rates. The distinction between cost-push and demand-pull inflation is invisible to Alan Greenspan, his successor and all the bankers who control monetary policy. Whenever they see inflation, they see an overheated economy and they apply the remedy, higher interest rates, tighter credit and higher unemployment. (Of course, you can't have people borrowing expensive dollars and paying them back with cheap ones, but you have to have some sense about it.)
I am not predicting the future, I am predicting the past. It has been the uniform, universal, continual and unchanging response of the Fed, when inflation rises, to pour water on the fire, even if inflation comes in the form of rain. It is not inconceivable that higher interest could lead to higher costs and thus to the dreaded "spiraling inflation." More panic.
The appropriate response to a significant depreciation of the dollar and consequent inflationary pressure is to take our medicine, which is the sea change in the price level. This will not be happy news to those whose non-indexed pensions lose their value, or to those workers whose wages do not follow the general rise in prices, or to those sectors who are left behind, or to those investors .... to a lot of people. But it is a return to reality and the inevitable result of a significant decline in the dollar.
But don't worry. That won't happen. The Fed most certainly will not allow a sea change in the price level without a fight. They will misidentify the cause and apply the nuclear remedy. Millions of unemployed will be the unwilling soldiers drafted into the battle. This will not lead to any other destination, but will make the road there a lot more volatile and dangerous.
A significant depreciation of the dollar would have one more result. Economists would have to pay attention to trade deficits again. During the Reagan years, trade imbalances were the big econom news. Economists explained them by pointing to the Reagan budget deficits, saying the higher interest rates needed to attract capital into bonds produced a higher dollar. The higher dollar disadvantaged domestic manufacturers. The period is often called the de-industrialization of America.
Unfortunately for economists, the budget deficit went away during the Clinton years, but it did not take the trade deficit with it. In fact, the trade deficit increased. Economists simply ignored their mistake and switched to the "they like us" model. Trade deficits were good because the capital inflows (the dollars returning to the land of dollars) meant the rest of the world thought America was a good place to invest.
Now we simply ignore it and pretend things are okay. After all, it's been like this for a long time.
Until now.
Why? What does it mean? John Campanelli at DKos says, "In sum, we're screwed." (It was more descriptive yesterday, but has apparently been edited down.)
This was and is inevitable. "Trade" is trade of goods through the medium of exchange, the currency. It is not trade of the currency for the goods. It is supposed to be goods for goods. China can't eat all the dollars it has absorbed in its years of trade surplus with the US.
Standard economic theory predicts that in situations of trade imbalance, the currencies' exchange rates will adjust, making the goods of the surplus country relatively more costly and those of the deficit country more cheap. Standard economic theory, so far as I know, does not have an answer to why this has begun only after 30 years of immense US trade deficits -- if it is even happening now.
The dollar's value as de facto reserve currency may have made it valuable in itself. Remember, the last truly stable exchange mechanism went down with the collapse of the Breton Woods system under Nixon. Currencies have floated against each other since then, often to the detriment of the weaker nations. A notable exception is the aforementioned China, which pegs its ruan against the dollar and does not allow it to float.
Be that as it may, if as the Post report suggests, China is moving away from the dollar toward the euro, what is the catastrophe that will follow?
DKos put their finger right on it. The main problem is PANIC!
Markets operate on the principle of the herd. The currency market is a herd of rhinos. Too many people have too much money stuck in too many dollars. If they get spooked and the run starts, it could get ugly before it is over, as they try to get out before their investment loses value. This has been a worry of the Progressive Caucus of the US House for a decade. That group extrapolated a run on the dollar from the experience of the Asian currency crisis; they identified rogue speculators as the likely cause. There was some support at the time for the Tobin Tax, a tiny tax on currency transactions that would not hurt legitimate trade, but would multiply for speculators as they roam the world in search of small gains.
The cause of the dollar's demise will not be speculators, although George Soros and others stand to make a bundle from their short positions in the greenback. The dollar is the victim of decades of trade deficits, the renewed and now apparently unending federal budget deficits, and the myopia of the Federal Reserve.
A simple depreciation of the dollar which did not produce immediate panic might not be so bad. The goods of Boeing and other American manufacturers would be more competitive. It could ease our sea of red ink, since most of the debt is denominated in dollars. But it would be bad for prices. Imports would go up. American goods would be bid up by foreigners. A key commodity that we cannot avoid importing is energy, oil and natural gas. Some of the recent rise in oil prices is, in fact, not an increase in the price of oil but a decrease in the value of the dollar. Energy price increases would increase costs for manufacturers, and it would create a cost-push inflation.
Inflationary pressures will always cause an overreaction at the Fed. The Fed will panic. Anything over 5% will bring out the artillery. It doesn't matter that energy costs are reducing the purchasing power of American consumers, the Fed assumes that any inflation is to be snuffed out by higher interest rates. The distinction between cost-push and demand-pull inflation is invisible to Alan Greenspan, his successor and all the bankers who control monetary policy. Whenever they see inflation, they see an overheated economy and they apply the remedy, higher interest rates, tighter credit and higher unemployment. (Of course, you can't have people borrowing expensive dollars and paying them back with cheap ones, but you have to have some sense about it.)
I am not predicting the future, I am predicting the past. It has been the uniform, universal, continual and unchanging response of the Fed, when inflation rises, to pour water on the fire, even if inflation comes in the form of rain. It is not inconceivable that higher interest could lead to higher costs and thus to the dreaded "spiraling inflation." More panic.
The appropriate response to a significant depreciation of the dollar and consequent inflationary pressure is to take our medicine, which is the sea change in the price level. This will not be happy news to those whose non-indexed pensions lose their value, or to those workers whose wages do not follow the general rise in prices, or to those sectors who are left behind, or to those investors .... to a lot of people. But it is a return to reality and the inevitable result of a significant decline in the dollar.
But don't worry. That won't happen. The Fed most certainly will not allow a sea change in the price level without a fight. They will misidentify the cause and apply the nuclear remedy. Millions of unemployed will be the unwilling soldiers drafted into the battle. This will not lead to any other destination, but will make the road there a lot more volatile and dangerous.
A significant depreciation of the dollar would have one more result. Economists would have to pay attention to trade deficits again. During the Reagan years, trade imbalances were the big econom news. Economists explained them by pointing to the Reagan budget deficits, saying the higher interest rates needed to attract capital into bonds produced a higher dollar. The higher dollar disadvantaged domestic manufacturers. The period is often called the de-industrialization of America.
Unfortunately for economists, the budget deficit went away during the Clinton years, but it did not take the trade deficit with it. In fact, the trade deficit increased. Economists simply ignored their mistake and switched to the "they like us" model. Trade deficits were good because the capital inflows (the dollars returning to the land of dollars) meant the rest of the world thought America was a good place to invest.
Now we simply ignore it and pretend things are okay. After all, it's been like this for a long time.
Until now.
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