Saturday, January 08, 2005
The Decline of the greenbacks is o.k - The Current Account Deficit is not !!!
The US fed. Bank kept the interest rates low which, together with the current account deficit and the obvious non-willingness of the administration to stop the decline of the dollar is the main reason for the decline itself. Therefore, it is reasonable to say that the decline of the dollar is intended by the Bush-administration.
The dollar was probably over valued in the recent time due to the massive intervention of Asian national banks especially Chinas people bank. The tag their currency to the dollar at a very low price to keep their products cheap if imported to the US. On the first sight this sounds good for US customers yet you have to take into consideration that Chinese goods will compete with local manufacturers and this means unfair competition IMHO. Actually this behavior of china comes down to some kind of price dumping. This is not fair but the Chinese refused to float their currency freely.
The decline of the dollar puts china under pressure. They hold a lot of dollars which now start to loose their value. Its said, that china lost 1o billion $ so far due to the current devaluation of the dollar. Therefore China is pissed. If they continue buying dollars the keep the dollar up and the yuan down they thereby actually finance the war and the cut in taxes and the current account deficit of the US. If they stop buying dollari, the yuan will rise against the dollar and Chinese products will become more expensive in the US. Moreover their dollar reserve will devalue which will mean great looses for their bank. Both factors will lead to decrease the growth of their economy. Moreover their credits might turn bad because they are covered by the dollar reserve which turns out to be less and less worth. For china or Japan the falling greenbacks is a loose lose situation. Yet, it their own fault because to peg the yuan to the dollar isn't fair at all.
For the US the falling dollar is probably a win win situation. It might help to decrease the current account deficit and render US-products more competitive on international markets. Moreover their debts the have in foreign counties will decrease as the value of the dollar decreases. On the other hand If the Chinese government chooses to sustain the exchangerate between dollar and yuan they finance the account deficit of the US. Us can keep the interest rates low and this will promote the economy.
Strange enough that this works. Probably no other country in the world would be rewarded by buying its currency for having such a tremendous current account deficit. A currency of any other country would be worth nothing today. The reason why is that the dollar is the worlds reserve currency. So far the existed no alternative to the dollar as a reserve currency. So far the current account deficit didn't matter. But know things might be a little different since the introduction of the euro. The ECB has strict limits for the budget deficit of the participating countries of the euro zone which have to pay severe fines if they exceed this limits. ECBs duty is to grant the stability of the euro. This policy might render the euro an interesting alternative as a reserve currency to the dollar. The recently observed all-time high of the euro indicates that this interpretation is shared by many investors.
Moreover, most countries earning their money with oil hate the US because of the recent interventions of the US in the Orient and would love to sell their dollars if the had an alternative, which they now might have found in the euro.
Another drawback of the current account deficit is, that this actually means, that the US is selling itself to china and Japan, which basically finance the current account deficit, since a negative currenct account balance means that more foreign money is invested in the US than the other way round. To put it in a very negative way this would mean, that china, Japan and Saudi Arabia would own the US sooner or later. And then you will remember: No pain no gain.
In conclusion tough the decline of the dollar is good for the US economy and in part fair from a global point of view it should not jeopardize the dollar as a reserve currency and thereby the economic superiority of the US in the words by escalating the current account deficit and the budget deficit.
The dollar was probably over valued in the recent time due to the massive intervention of Asian national banks especially Chinas people bank. The tag their currency to the dollar at a very low price to keep their products cheap if imported to the US. On the first sight this sounds good for US customers yet you have to take into consideration that Chinese goods will compete with local manufacturers and this means unfair competition IMHO. Actually this behavior of china comes down to some kind of price dumping. This is not fair but the Chinese refused to float their currency freely.
The decline of the dollar puts china under pressure. They hold a lot of dollars which now start to loose their value. Its said, that china lost 1o billion $ so far due to the current devaluation of the dollar. Therefore China is pissed. If they continue buying dollars the keep the dollar up and the yuan down they thereby actually finance the war and the cut in taxes and the current account deficit of the US. If they stop buying dollari, the yuan will rise against the dollar and Chinese products will become more expensive in the US. Moreover their dollar reserve will devalue which will mean great looses for their bank. Both factors will lead to decrease the growth of their economy. Moreover their credits might turn bad because they are covered by the dollar reserve which turns out to be less and less worth. For china or Japan the falling greenbacks is a loose lose situation. Yet, it their own fault because to peg the yuan to the dollar isn't fair at all.
For the US the falling dollar is probably a win win situation. It might help to decrease the current account deficit and render US-products more competitive on international markets. Moreover their debts the have in foreign counties will decrease as the value of the dollar decreases. On the other hand If the Chinese government chooses to sustain the exchangerate between dollar and yuan they finance the account deficit of the US. Us can keep the interest rates low and this will promote the economy.
Strange enough that this works. Probably no other country in the world would be rewarded by buying its currency for having such a tremendous current account deficit. A currency of any other country would be worth nothing today. The reason why is that the dollar is the worlds reserve currency. So far the existed no alternative to the dollar as a reserve currency. So far the current account deficit didn't matter. But know things might be a little different since the introduction of the euro. The ECB has strict limits for the budget deficit of the participating countries of the euro zone which have to pay severe fines if they exceed this limits. ECBs duty is to grant the stability of the euro. This policy might render the euro an interesting alternative as a reserve currency to the dollar. The recently observed all-time high of the euro indicates that this interpretation is shared by many investors.
Moreover, most countries earning their money with oil hate the US because of the recent interventions of the US in the Orient and would love to sell their dollars if the had an alternative, which they now might have found in the euro.
Another drawback of the current account deficit is, that this actually means, that the US is selling itself to china and Japan, which basically finance the current account deficit, since a negative currenct account balance means that more foreign money is invested in the US than the other way round. To put it in a very negative way this would mean, that china, Japan and Saudi Arabia would own the US sooner or later. And then you will remember: No pain no gain.
In conclusion tough the decline of the dollar is good for the US economy and in part fair from a global point of view it should not jeopardize the dollar as a reserve currency and thereby the economic superiority of the US in the words by escalating the current account deficit and the budget deficit.
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