Is America's falling dollar a sign of worsening economic problems due to the national debt?
Mon Oct 29, 11:55 AM
By The Canadian Press
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TORONTO - The seemingly unstoppable Canadian dollar traded at a 47½-year high Monday, hitting 104.69 cents US late in the morning.
That’s a gain of three-quarters of a U.S. cent since Friday as the currency hit a level unseen since early 1960 - when John Diefenbaker was prime minister and Dwight Eisenhower was still in the White House.
The loonie has risen more than 18 cents US this year, as several factors converged to drive it to parity with its U.S. counterpart and beyond, including record-high oil prices and a weak greenback.
Another element hurting the U.S. dollar, in relation to the loonie and other currencies, is the likelihood that the U.S. Federal Reserve will cut interest rates again this week in an attempt to boost the American economy.
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The Federal Reserve controls the value of the dollar by how much, or how little, is in circulation. This is because the dollar was taken off the gold standard and in 1933 the american public was ordered to return any and all gold coin etc. to the government under penalty of 10 years imprisonment. It was the greatest robbery against the american people in history. The legislation that was drafted which created the federal reserve was written by bankers, not congress. it was voted on in secret while the rest of us were on christmas holiday. It is the small groups of international BANKERS that control the federal reserve, not the government. It is about as federal as Federal Express. They deftly control interest rates to meet their goals and objectives. In doing so, they guided and controlled the market crash of 1907, the depression of the 1920s, and the recession of the 1980s. And that is not all. The falling dollar will effect so much more than just the american economy.
The Way I see this is we can export now and we will have to employee people here to export things so it will help the economy in our manufacturing jobs, this long term service industry was a lie to begin with eventually you have to work.
Its a sign of a possible coming recession.
Welcome to Bush economics…
The recent decline of the dollar was triggered by nasty news about the American economy. New figures this week suggested that the housing market’s troubles are having a wider impact on the economy . Consumer confidence and durable-goods orders both fell more sharply than expected. In contrast, German business confidence has risen to a 15-year high. There are also mounting concerns that central banks in China and elsewhere, which have been piling up dollars assiduously for years, may start selling.
Ben Bernanke, chairman of America’s Federal Reserve, sounded unperturbed this week, suggesting that the economy will enjoy a soft landing (which would argue that interest-rate cuts are not imminent). This notion has underpinned the belief that the dollar will hold up because foreign investors will remain eager to buy dollar assets and so finance the country’s vast current-account deficit. But if the economy slows more sharply than expected, their enthusiasm for the greenback will shrink. And if house prices continue to fall, the risk of a recession will grow.
Yet cyclical factors only partly explain why the dollar has been strong. At bottom, its attractiveness is based more on structural factors—or, more accurately, on an illusion about structural differences between the American and European economies.
The main reason for the dollar’s strength has been the widespread belief that the American economy vastly outperformed the world’s other rich-country economies in recent years. But the figures do not support the hype. Sure, America’s GDP growth has been faster than Europe’s, but that is mostly because its population has grown more quickly too. Dig deeper, and the difference shrinks. Official figures of productivity growth, which should in theory be an important factor driving currency movements, exaggerate America’s lead. If the two are measured on a comparable basis, productivity growth over the past decade has been almost the same in the euro area as it has in America. Even more important, the latest figures suggest that, whereas productivity growth is now slowing in America, it is accelerating in the euro zone.
So, contrary to popular perceptions, America’s economy has not significantly outperformed Europe’s in recent years. And to achieve this not-much-better-than parity, America has had to pump itself full of steroids. Since 2000 its structural budget deficit (after adjusting for the impact of the economic cycle) has widened sharply, while American households’ saving rate has plunged, causing the current-account deficit to swell. Over the same period, the euro-area economies saw no fiscal stimulus and household saving barely budged.
America’s growth, thus, has been driven by consumer spending. That spending, supported by dwindling saving and increased borrowing, is clearly unsustainable; and the consequent economic and financial imbalances must inevitably unwind. As that happens, the country could face a prolonged period of slower growth.
As for Europe, the old continent is hobbled by inflexible product and labour markets. But that, paradoxically, is an advantage: it means the place has a lot of scope for improvement. Some European countries are beginning to contemplate (and, to a limited extent, undertake) economic reforms. If they push ahead, their growth could actually speed up over the coming years. Once investors spot this, they are likely to conclude that the euro is a better bet than the dollar.
Two countervailing factors, it is argued, will tend to support the dollar. First, emerging economies hold so many greenbacks that they fear the capital loss that they would incur if they encouraged the dollar to drop. Second, they want to keep the value of their currencies down to help their exports. But the longer they continue to pile up dollars, the bigger the eventual losses. That thought is likely to discourage them from buying even more dollars. And they may calculate that the greenback still has a way to fall. Talk of its weakness is greatly exaggerated: its real trade-weighted exchange rate against a broad basket of currencies is still close to its 30-year average. In other words, the dollar needs to fall by a lot more to make a significant dent in America’s external deficit.
Does a falling dollar, with its implications of American weakness, spell doom for the rest of the planet? Not necessarily. The world economy could well benefit from a gradual slide in the greenback. It would help to reduce global current-account imbalances and, by shifting production into America’s tradable sector, would cushion the United States’ economy as its housing bubble bursts. True, a weaker dollar would tend to hurt exporters in Europe and Asia. But the impact on those economies could be offset if central banks hold interest rates lower than they otherwise would, thereby boosting domestic demand—exactly what is required for global rebalancing. The current strength of growth in Europe and Asia will also help to prevent an American downturn from turning in to a worldwide slump.
If a steady slide in the dollar would be good news, a sharp plunge as investors take fright and run would be another matter. That could increase risk premiums and unnerve frothy financial markets around the world. A tumbling dollar would also add to inflationary pressures in America and so make it harder for the Fed to cut interest rates to cushion a collapsing housing market (Mr Bernanke gave warning this week that inflation remains “uncomfortably high”). Both America and the world would then pay a painful price for the long-delayed drop in the dollar.