Dear Dr. Denayer,
My original post, reflected the current stand point of the US Dollar
today, and had no bearing on its strength in the future. I will make
other points to reflect its strengths, but I will also point out
where your points also have validity.
Second, I would like to make a comment to Neil George's post
concerning the US $ - also with respect, I would beg to differ. I
said that the $ nowadays is rather weak and I predict that it is
going to get weaker over time.
Actually what you said was :-
Excuse me for saying, but this doesn't make any sense. The US $ is
not strong, actually it is rather weak - and, fluctuations
notwithstanding, this will be the long term trend, given the
skyrocketing enormous American debt.
For the past six years, America’s great export has been not goods
but debt, therefore you are correct in that the debt is skyrocketing.
Foreigners sell us oil, cars, computer components, and other goods.
In return, we sell them debt and other financial
instruments-government bonds, corporate bonds, and securities backed
by the mortgages of American homeowners-for which foreigners have
seemed to have an almost insatiable appetite. From 1997 to 2002,
imports of goods and services increased by a third, while exports of
goods and services were flat. By further swapping their ever growing
holdings of dollars for our real assets, means that foreign
companies etc are buying U.S. patents, brand names and the rights to
make economic choices. In other words, foreigners are using our $1
billion per day trade deficit to buy up American firms. For the time
being at least, it is in their best interest to keep the dollar
strong.
At one time, we were on the so-called “gold standard.” For about
forty years, from 1933 until 1971, our money was backed by gold
bullion which meant that an ounce of gold bullion could be purchased
by a central bank or foreign government for $35. We went off the gold
standard because the amount of money in circulation was overwhelming.
There was no way we could honor that commitment. Today, the dollar is
essentially the gold standard. As the strongest currency, all other
currencies are measured against it. This used to drive the French
crazy, and Charles DeGaulle once tried unsuccessfully to get everyone
back on the gold standard. Perhaps the most important thing
therefore, is that the dollar today, is the world’s reserve
currency. It is the world’s money and has taken the place of gold in
central bank vaults. In addition, in many countries the dollar is not
only the preferred currency for daily transactions but also the
required one for major purchases. Countless individuals in foreign
lands keep their savings in dollars. Therefore, the conclusion is
that, until there is something to replace the dollar as the
standard, then it has hope to maintain the course with some
stability.
Therefore the dollar is not only strong, but at least today it is
still a sign of strength. However, fluctuations in the market is a
given, and further it is driven by supply and demand. For example, if
a bank in France is cashing a lot of American travelers checks, it
will wind up with too many dollars and fewer French francs. If this
actually is, or would be the case, then dollars will drop in franc
value and francs will increase in dollar value based upon this supply
and demand. Overnight, this will be reflected in currency markets.
There is a market for currencies based upon supply and demand that
works just like the market for stocks. Underlying these daily reasons
for fluctuating values will be the power of the country as a
strategic element in sustaining a currency’s value. Today’s
politicians are tempted to act like the princes of the 1500’s by
increasing the public money supply and using inflation to pay off
debts. When this happens, the country’s currency drops in value
relative to that of the rest of the world. Currency traders try to be
one step ahead by anticipating what they think politicians will do,
and prices change accordingly. Therefore, this will demonstrate that
the dollar can weaken or strengthen at any given time, but the key is
balance. Therefore the dollar can be weakened at any given time, but
not necessarily controlled by debt.
Therefore you would be correct in that the dollar could in fact
weaken on any given day, but it could also stay the course or even
get stronger. Many factors can cause a currency to fluctuate, and it
is not necessarily governed by debt. Granted, Debt is one of those
criteria’s, however it is in reality but one part of the whole
puzzle.
For what concerns the first point, I remember that, when the Euro
was introduced, one US $ was equal 1.04 Euro. However, when we
were in Ireland in July, the US $ was equal to 88 Euro cents. At a
certain point - I don't remember exactly when - the $ had been
losing almost 25 % in regards to the Euro. In the meantime, the gap
is not as wide anymore. However, I don't think that this has
anything to do with American policy whatsoever. I think it is
entirely due to the recession which seems to hit Europe harder than
anyone had expected.
Having defended my thoughts on the fact that today the dollar is
strong, I will also point out where the weakening of the dollar could
come from, using the Euro as an example.
As long as the dollar remains the dominant currency, especially in
oil trade, it is difficult to see how the U.S. can be dislodged from
its position as the world’s dominant economic power. However, a small
crack appeared in 1999 when Iraq, at France’s persuasion, agreed to
accept payment for its oil in euro. At first this seemed unwise as
the euro was selling well below the dollar. But all of a sudden
because of this agreement in part, and the fact that it hit a premium
in value because of the fact, Iraq reaped a huge profit. This made
other oil producers take note of Iraq’s success. Iran started
thinking about switching too; Venezuela, the 4th largest oil
producer, began looking at it and has been cutting out the dollar by
bartering oil with several nations including America’s bete noire,
Cuba. Russia is seeking to ramp up oil production with Europe
(trading in euros) an obvious market." It is probably not accidental
that the U.S. put pressure on Iran by naming it a member of the “axis
of evil,” and tried also to destabilize the democratically elected
Venezuelan government with the help of business interests friendly to
America.
The U.S. seems belatedly to have sensed the potential threat posed
by the euro. The greenback’s grip on oil trading and consequently on
world trade in general, was under serious threat. If America did not
stamp on this immediately, this economic brushfire could rapidly be
fanned into a wildfire capable of consuming the U.S.'s economy and
its dominance of world trade. This probably overstates the case, but
the recent decline in the value of the dollar against the Euro
indicates that the threat is real. A long term weakening of the
dollar due to its slipping hold on the world oil trade can have
serious consequences for American prosperity and also its capacity
to finance its military expenditure through deficit financing. That
is to say, the euro threatens America’s economic power as well as its
military power.
This may help explain why the U.S. abruptly shifted its attention
from the war in Afghanistan to a major war in Iraq. Its goals, are to
safeguard the American economy by returning Iraq to trading oil in
U.S. dollars, so the greenback is once again the exclusive oil
currency. The war in Iraq may be a war for oil, but at a deeper level
it is a war for the defense of the continued control of the world oil
economy through the dollar.
Therefore, it is clear that the issues pointed out by the good
Doctor, certainly have cause for concern, and that the threat is
real. I am open to look at both sides of the argument, and there are
solid grounds for both sides of the argument. In saying that, is the
good Doctor right and I am wrong?, or is it the other way around?. I
say neither, because the reality is that there are way too many
factors to take into consideration, and way too many complex issues
that do not follow the standard rules of engagement in relation to
economics. The reality is that there are deeper issues that try to
manipulate situations that are not readily apparent. This is why, I
mentioned in a previous discussion, that I do not care at the end of
the day what the so called experts have to say on the subject,
because who at the end of day knows the outcome. I certainly cannot
control what happens, therefore I can only do what I can do and
nothing more. The dollar weakness against the Euro is peanuts when
gauged against its strengths against the other currencies that we do
more business with such as Japan and China. Which explains why the
dollar is strong today. The Euro may very well change that, when, I
have no idea. I have opinions but no idea 
Therefore you are
correct in that, against the Euro, the dollar is weak, but you left
out the other 90% of the trading partners and their situations in
relation to their weakness in relation to the dollar. Therefore, by
percentage against all currencies world wide, it is strong. I agree
that the real question is how long can this go on for, and personally
I have no idea, but the truth be told is, there are too may issues
and other controlling interest in currency values that take it out of
the realms of clear understanding.
Then there is the second - and more serious - point of my
prediction that the US $ will get weaker. Neil George disagrees
with me and he uses good arguments to make his case. Unfortunately,
the same arguments can be made to my make case too.
Only a month ago a joint report of the Committee for Economic
Development, the bipartisan Concord Coalition and the Center on
Budget and Policy Priorities concluded that under current
policies, the American federal debt would rise by $5 trillion over
the next decade. $ 5 trillion ... This will coincide with the
generation of baby boomers starting to collect benefits. At that
time, debt will stop to grow and start to explode. Neither business
leaders, industrialists or politicians address this problem - but
it *will* come and it will hit us (hard). Neil writes about the
Japanese and the Chinese and he is right to do so as these days,
strange as it may sound, in reality the American federal budget and
the value of the dollar depend on massive purchases of Treasury
Bills by the governments of (basically) these two countries. One
day - and no one knows when, the creditors will want their money
back and no one trusts a debtor with a *lot* of debt ... It's not
difficult to see the direction in which all of this is going: there
will be higher import costs, a cutback in spending on cheap foreign
goods (most of them are Asian), rising inflation, perhaps chaotic
financial markets and, don't doubt it, a lower standard of living
for the American worker and less money for needy people. You don't
have to take my word for it. Paul Krugman - an economist and a
human being I admire - explained exactly the same a couple of days
ago in 'The New York Times'.
The point that I made that contradicted yours, was that as of
today the dollar is strong. Your point was that the dollar was weak
and I disagreed with you on that point. There is no dispute on my
part that the bubble will burst. Just a question of when.
Cannot everyone see that a situation like this is unstable? It's
basically like me owing you a lot of money. For the time being, you
don't need it back, because you can give my friend a proof of my
debt and, on the basis of this, he will do things for you, in other
words, I am creditworthy. However, it is all too obvious that if my
debt continues to grow, the day will come that my friend is going
to refuse to do anything for you unless you pay him (in a good
currency), which is to say that, at that moment, you will want
your money back. Then I will be in big trouble.
I did not say it was right or wrong but I will add this, which may
collaborate your views on what’s to come.
If the foreign demand for U.S. debt abates, the strength of the
dollar will no longer be determined by money flows as it is today. It
will be determined by trade flows. That means the dollar will decline
until those flows come into something approaching historical balance:
a current account deficit of about 1 percent of GDP or less.
Returning to historical balance is going to be difficult because of
changes in the American overseas investment position. In the 1980s
trade crisis, the US could count on the enormous investment cushion
earned from a century of past trade surpluses. But the money that
previous generations earned has been spent and much more in the past
20 years. Therefore, the current account deficit is going to be
larger than the trade deficit in goods and services, and getting
back into balance will be all that much harder. Conservatively, this
implies the dollar will fall until the trade deficit in goods and
services declines from today’s levels of about 4 percent of GDP to
under 1 percent of GDP. The economic shock would take political
stability with it, as politicians scramble to offset declining
incomes with more income redistribution programs. Third World
countries will add to the political pressures. Politicians will
further squeeze the incomes of those Americans who hold the shrinking
supply of productive jobs, not yet moved offshore.
What is the solution? There might not be one. If crisis arrives, it
is a good bet that Washington will have no clue.
Doctor, as usual, your points are noted and are surely worthy of a
good debate, I believe that the conclusion derived, is that we are
all walking a very thin line and are constrained within restricting
boundaries governed by policies that you or I have no control over.
Does it really matter one way or the other what you or I may think?,
I say not. However it does make for a good discussion. Always a
pleasure.
Very Best Regards.
Neil George
954-572-5829