Now that all the enthusiastic partying over that 300 point increase in the Dow has ended, it's time to get back to reality as most of the world sees it.
The Australian, out of Sydney, Australia, is among the first extra-national publication to declare that the US must pay the bill for a long luxury ride, and cites as justification The Wall Street Journal article which ruefully admitted, "the US could no longer keep running up a tab on luxury imported goods, electronics and, more importantly, oil, on the 'national credit card'."
Lost amid all the boisterous revelry over Fed Chairman Bernanke's abandonment of inflation control in favor of economic stimulus was the cost of the action: the dollar is collapsing relative to foreign currencies. This decline threatens the status of the American dollar as the favored reserve currency, and hastens the time when the world's central banks drive that last stake through the heart of the 1944 Bretton Woods Agreement and fly solo.
What this means in simple Texican lingo? The pricing of oil in dollars may be coming to an end - and with it American hegemony. But having more of a less-valuable currency - even if only on paper - conquers the understanding that such a fact requires. And they don't like any links to information, either.
For those who aren't sniggering behind their barbed-wire-bastioned Airstreamers over their inflated portfolios, several nations are considering delinking their currencies from the dollar. Some are doing so in order to keep exported American inflation from overheating their domestic economies as they no longer have any concern for their former economic master's welfare. After all, you aren't going to worry about your neighbor's barn burning down if your own roof is beginning to smolder!
But more ominous are the recent moves by Gulf States to convert their weakening and less-valuable dollars into tangible assets. Is it not an article of faith in the investor's world to sell an under-performing asset to allow purchase of one which holds far more promise of profit? As a result, Abu Dhabi bought 7.5 per cent of Carlyle Group, and Dubai and Qatar each bought large holdings in NASDAQ and the London Stock Exchange. Better to hold something of real value than to be stuck with the empty promises of a worthless promissory note.
Article comments
— go to most recent comments1 - Dave Nalle
It's late and I need to sleep, so I'll only explode one of your usual spew of silly theses.
Let's take a look at that devalued dollar issue, why don't we?
Ooh, the dollar is so weak, it's at an all time low, when it gets this low our economy falls apart and foreign countries come in and take over!
Utter bullshit.
You seem to be afflicted by short-term memory syndrome. When you raised this issue something just didn't ring right to me. I remembered living in the UK about 30 years ago and my recollection was that the dollar was as weak or weaker then against the pound than it is now.
So I did a little research with this handy site.
Seems that while the dollar is currently weaker than it was a decade or two ago, it's actually historically stronger against most foreign currencies if you go back farther than 20 years.
In fact, looking at the historic pattern, the high-value dollar of the 90s seems like more of an anomaly than a normal situation.
Today the dollar is worth about half a pound.
In the 1950s and 1960s when the US economy was booming and Europe was still recovering from the war, the dollar was worth only about a third of a pound.
The truth is that a weak dollar attracts investment in America and improves our balance of trade. If the dollar were strong and our balance of trade was shifting towards imports rather than exports as it is now, you'd be complaining that we were doomed because of our trade deficit.
And just one more thing. You don't seem to get the difference between Arab investors buying a share in NASDAQ and those investors buying interest in the companies which are listed on the NASDAQ exchange. Partial control in a company which just keeps track of stock values and trades is a far cry from owning the companies traded on that exchange. If the Arabs bought out a doctor's practice would they then own the doctor's patients?
dave
2 - Ruvy in Jerusalem
Dave, you can read this after you wake up and have had a cup of coffee.
While the pound has fallen against the dollar over several decades, the Deutschmark, Swiss franc, and lately the euro, have all risen against the dollar.
When I was a kid, the Deutschmark used to be worth 22½¢ - the Swiss franc was worth 23¢. If you check the futures page of the NYT or the WSJ, you can check what Deutschmark futures are against the dollar. The Swiss franc is now worth about 80¢. I suspect the Deutschmark futures have a similar value. Moving from theoretical currencies like the Deutschmark to the euro, we find that the euro, once established at near parity to the dollar in 1993, at first fell against it to 88¢, and then rose until it is now about $1.40.
3 - Christopher Rose
I believe you're mistaken about the Pound, Ruvy. In the early 80s it sank to within spitting distance of parity with the dollar but since then has risen steadily to be worth over 2 dollars today.
You may also be interested to learn that the Deutschmark no longer exists, not even as a theoretical currency.
4 - Ruvy in Jerusalem
Chris,
While the Deutschmark no longer exists as a currency, there is a futures market for it. I didn't believe it either when I saw it, but it is there. There is one for the French franc and Italian pound also. Thus, they are still "theoretical" currencies.
As for the English pound, you are right in terms of it coming within spitting distance of the dollar. If I remember right it went all the way down to $1.20 at one point. But I was taking Dave back over a five decade period. Immediately after WWII, sterling was worth $4.00; this was also the initial value of the Israeli pound. When I was a kid, it was worth $2.80, and as it lost value, the decision was made to go to a decimal currency. It didn't make sense to have 240 pence and 480 half pence in a currency where the penny was worth less than one cent, and the shilling was worth little more than a dime.
5 - Christopher Rose
Well, I've wasted 5 minutes of my life googling that, Ruvy, but can't find any contemporary evidence of these theoretical future currencies. Maybe you could provide a url?
The pound actually got lower than you remember, actually dipping below $1.10 for a while.
As to decimalisation, that was a plan that took a few hundred years to be achieved and I don't recall that it was done because of declining values, but rather for administrative and calculation convenience.
6 - Les Slater
The FED's half point cut was a panic move.
7 - Dave Nalle
The reason I chose the pound sterling for comparison is that it's a real currency which is still traded.
If you look at other currencies in comparison to the dollar in the period since the end of WW2, you will find that like the pound they have all had periods where they were stronger against the dollar than they are now, though they don't all follow the same pattern as the pound.
For example:
Danish Krone:
1947: 4.79/4
1957: 6.9/$
1977: 6/$
1987: 6.8/$
1997: 6.6/$
2007: 5.3/$
All time low: 5.2/$ in 1949
Japanese Yen:
1957: 360/$
1977: 267/$
1987: 144/$
1997: 121/$
2007: 115/$
All time low: 94/$ in 1995
And some countries ARE doing substantially worse against the dollar than they have ever done in the past, for example Brazil, whose Real is now at an all time low against the dollar at 1.86/$ or the Israeli Shekel or the Indian Rupee.
And more significantly, if anything Realist said were true, then the Chinese Yuan would be gaining dramatically against the dollar, and in fact it is a bit stronger than it was, but still fairly near its prior all time low against the dollar - 8.64/$ in 1994 compared to 7.5/$ today. It's weaker than it was against the dollar in 13 of the last 25 years.
Dave
8 - Clavos
"The FED's half point cut was a panic move."
Yeah, and investors (including Gasp!! Horror!! foreigners!!) panicked all the way to the bank.
The "weakened" dollar (which, BTW, is a cyclical phenomenon) makes American products cheaper abroad, expanding markets and securing and creating American jobs.
You've indicated that your primary economic concern is for the workers, Les. You should be happy with a devalued dollar.
The past thirty years have seen enormous strides in the technology of communications, with the crown jewel being the internet.
Enhanced, instantaneous communication is the engine driving the globalization of business, and it's already well underway, even in areas where there are no treaties facilitating it. Eventually, it will prove to be the great "leveler" spreading wealth currently concentrated in a few areas much more evenly around the globe. It's already happening in places like India and China.
Eventually, globalization of commerce will even make war obsolete.
9 - gonzo marx
the US dollar and the Canadian Loonie hitting parity this week...that is an interesting bit to consider
how this will all shake out in the long run..i am not certain
but i do think that when dealing with fiat currencies which have NO intrinsic value save what the market infers holding huge deficits and continuously spending money that you don't have has got to weaken confidence in said markets, and thus influence the value of said fiat currencies
i cannot see how this can be a good thing for any whose well being is dependent on said currency
time will tell, i guess...but yer gonzo is investing heavily in canned goods and shotguns...just in case
Excelsior?
10 - Les Slater
"Yeah, and investors (including Gasp!! Horror!! foreigners!!) panicked all the way to the bank."
You mean 'from the bank', don't you? It was a bail from their bad investment practices.
"You've indicated that your primary economic concern is for the workers, Les. You should be happy with a devalued dollar."
Higher prices are not in the interest of workers.
11 - Clavos
"You mean 'from the bank', don't you? It was a bail from their bad investment practices."
No, I meant exactly what I said; that 335+ jump in the Dow made money for a lot of people.
It was a bail for the banks stupid enough to lend money to people who were not credit worthy, but the Fed's move (and the weeks leading up to it) presented lots of other opportunities as well.
"Higher prices are not in the interest of workers."
They are when they result in more jobs.
you're making the same mistake bad investors make: looking only at the short term effects of changes.
12 - Dave Nalle
We have higher prices? News to me. Theoretically, since prices have remained stable, with the dollar devalued, everything actually costs less in objective terms.
Dave
13 - gonzo marx
really?
so the devaluation of the dollar has made it so that $3 a gallon gasoline is actually cheaper than the $1.15 i paid in 2000?
news to me
i still stand by the loaf of bread, gallon of milk and gallon of gas index...how much of each can one hour of minimum wage purchase
try that and then come back and say we are doing better
Excelsior?
14 - Les Slater
"you're making the same mistake bad investors make: looking only at the short term effects of changes."
Long term? Things have not been getting better for most of us.
15 - Dave Nalle
so the devaluation of the dollar has made it so that $3 a gallon gasoline is actually cheaper than the $1.15 i paid in 2000?
You paid $1.15 for gas in 2000? Did you get arrested for stealing it shortly thereafter?
The average nationwide price in 2000 was $1.56 and Maine tends to average slightly higher than the rest of the nation. Adjusted for inflation that's about $2.10 in 2007 dollars.
So yes, the price of gas has gone up, but the price of many other consumer goods has gone down and the overall inflation rate is under 2% which is remarkably good.
i still stand by the loaf of bread, gallon of milk and gallon of gas index...how much of each can one hour of minimum wage purchase
Well, with the minimum wage increased you can probably purchase more of all of them than you could 7 years ago. But the point is that the price of bread is down, milk is about the same and gas is up. It all balances out.
Dave
16 - gonzo marx
no it doesn't..all three are up, the raise in the minimum doesn't even cover the inflation between the last rise and this one
check your numbers..compare 2000 to now according to the index i laid out... your assertion is factually incorrect
Excelsior?
17 - Moonraven
Right, Nalle: The US dollar is in such great shape that it is now par with the Canadian dollar!
And the Euro is currently at $1.41.
While you try to impress us with what a high roller you are, maybe you should be getting that tinny trailer ready for the coming Texas winter.
You are toast, cowboy.
18 - Lumpy
There are good and bad aspects to the dollar being low. It's great for our balance of trade and for tourism and for employment. Not so good for investors and consumers, though hardly a disaster. But npne of this is dire. Back in the 70s the dollar wasn't worth wiping your ass with and it recovered.
19 - gonzo marx
fair point, Lumpy
but if you notice, the ration to the Canadian dollar was NOT parity...
not to mention the debt/deficit was nowhere NEAR what it is now
let's look at it in the same vein as the sub-prime mortgage market right now...
everyone agrees part of the fault lays on both consumer and lender for making loans in shady circumstances...
now, if you were the lender, and saw the U.S. balance sheet, would you consider it a good loan?
that's the Question national banks are asking themselves, and why the dollar will most likely not be the world's standard for much longer
the impact of that, we will see...
(side note, false comparison mentioning the yuan earlier, the Chinese bank keeps it artificially low to keep their balance of trade favorable to them, as even our own government acknowledges)
Excelsior?
20 - RJ
"the great "leveler" spreading wealth currently concentrated in a few areas much more evenly around the globe."
Right. In other words, wealth will move FROM places like the US and Canada and Europe and Australia and Japan - and TO places like Nigeria and Iran and Red China and Pakistan and Ecuador. In other words, a massive, global wealth transfer from "us," to "them."
Sounds like something I'd vote for! (Of course, the input of people like myself is not exactly sought after when such decisions are made...)
"Eventually, globalization of commerce will even make war obsolete."
Only if you believe that wars are fought SOLELY over disparities of wealth. (ProTip: They aren't.)
21 - RJ
"You paid $1.15 for gas in 2000?"
It was 98 cents per gallon in Florida around 1998 or 1999...
22 - Clavos
"In other words, a massive, global wealth transfer from "us," to "them.""
That statement assumes that the totality of the world's wealth is a zero sum in stasis, when in fact, as history has shown, wealth grows with the size of the market. Opening hitherto poverty-stricken areas to participation in world commerce increases the overall market available.
Mr. Ford was famous for being one of the first industrialists to recognize that point, and to institute it on a large scale, when he decided to pay the then highest wage in the auto industry in order to enable his workers to buy his product.
This is actually going on (vigorously) in China and India; both countries are becoming significant producers and significant consumer markets.
"Only if you believe that wars are fought SOLELY over disparities of wealth"
I don't. Wars are fought over power and territory. Wealth, in fact rarely figures in the equation.
However, I believe that as we (nations) become increasingly interlinked in commerce, buying and selling from each other, the incentives for war will lessen.
Case in point: a scant 65 years ago, the USA and Japan were at each other's throats. Today, we are each other's best customers and neither country would even contemplate attacking the other; we're to interdependent and too important to each other.
23 - gonzo marx
"Wars are fought over power and territory. Wealth, in fact rarely figures in the equation."
i completely disagree...
wars are always about Wealth
territory = more land/farmers for taxes, natural resources, peasants/workers = Wealth
power = ability to acquire and/or hold/manage Assets = more Wealth
always about Wealth...it's couched in jingoism, religion, revenge or whatever...but it's all about Big Money, imo
nuff said...
Excelsior?
24 - bliffle
The Euro is becoming a replacement for the dollar in international trade, and here's how they stack up historically (from nalles citation):
These tables present the price of one United States Dollar.
Europe, 2000 - 2005
2000 € 1.0832 Euro
2001 € 1.1171 Euro
2002 € 1.0578 Euro
2003 € 0.8833 Euro
2004 € 0.804 Euro
2005 € 0.8033 Euro
(We did not have data for Europe for every year 2000 to 2007.)
Since then the dollar has dropped to about .70
25 - troll
Clavos - gonzo beat me to the correct response to your #22...but here's the alternate link covering this
...not saying that economic interdependence is a bad thing though