Bloomberg reports that Fed chair Ben Bernanke warned that housing weakness will likely continue "somewhat longer" than expected and hold back the rest of the economy. As interest rates approach 5 percent, many investors are finding stocks less attractive now that their dividends are unlikely to follow interest rates higher. Even though the services sector expanded last month, the dollar continued its prolonged weakness, especially against the euro.
Now that equities in the United States have risen so strongly in recent months, many foreign investors are taking risk off the table by winding down the carry trade in the yen and the Swiss franc. For a long time, these investors took advantage of especially low interest rates in Japan and Switzerland by borrowing money there and then investing that money in the United States. The difference between prevailing interest rates has the effect of juicing profit margins, but if the carry trade acted as a force multiplier that drove the US market higher, it could also have a multiplied effect as it unwinds.
The dollar's decline against the euro in particular and most world currencies in general is at once a long overdue structural adjustment to reflect the growing economic clout of the rest of the world and also a repudiation of US economic leadership.
Oil prices around the world have risen dramatically in recent years, yet when the dollar's effect on dollar-denominated oil contracts is factored out, the price of oil in euros and yen has not grown nearly so much. While no one expects the oil sheiks to sell their product in other currencies, a much higher percentage of global commerce will be taking place in foreign currencies as time goes on.
Showing posts with label the Dollar. Show all posts
Showing posts with label the Dollar. Show all posts
Wednesday, June 6, 2007
Thursday, May 10, 2007
US Trade Deficit Keeps Growing
Reuters reports that the US trade deficit rose to $63.9 billion in March on the back of higher oil prices and massive imports. While higher oil prices were doubtless expected by anyone who has filled up their gas tank lately, the strong prices of imports were surprising.
The dollar is experiencing a period of extraordinary weakness, especially against the euro and the pound. Yet American consumers are not making the sorts of substitutions toward domestic goods that would be expected in these circumstances. The economic logic of buying less from expensive European manufacturers and more from domestic producers is apparently being overwhelmed by other considerations.
At the same time, the whole notion of the trade deficit is really just a statistical construction. What difference does it make if the US is purchasing goods from manufacturers in Arizona or China? Ultimately, the only aspect of the transaction that really matters is whether or not the consumer is happy with the deal. In an environment where China is purposefully depressing the value of its currency in order to encourage a shift in production towards its borders, it makes sense that Walmart is going to buy goods from China.
National borders are the great red herring of economic analysis. All wealth is ultimately held at the individual, not the national level. Now that everyone is off the gold standard, there is not even the visible transfer of gold around the world to reflect international trade flows. Goods and services are constantly moving across borders around the world, and given that there are typically much greater barriers to trade across borders than inside any given economy, the trade that overcomes these greater transaction costs is slightly more valuable than other trade. Yet international trade accounts for only about 20% of the US economy. Compared with many other smaller countries who routinely depend on the international marketplace for 70% of their production, the US is relatively unfazed by currency dips and booms.
Higher gas prices are bad for the consumers of energy and good for its producers. Sadly, most of those producers are countries with otherwise deplorable policies. But the ultimate shift away from fossil fuels is only likely to occur once the current energy infrastructure becomes too expensive. Rising energy costs are bad for consumption but fill a necessary role signaling the need for change. Once the US economy shifts away from its reliance on fossil fuels, historians will look back on this change as a net positive.
The dollar is experiencing a period of extraordinary weakness, especially against the euro and the pound. Yet American consumers are not making the sorts of substitutions toward domestic goods that would be expected in these circumstances. The economic logic of buying less from expensive European manufacturers and more from domestic producers is apparently being overwhelmed by other considerations.
At the same time, the whole notion of the trade deficit is really just a statistical construction. What difference does it make if the US is purchasing goods from manufacturers in Arizona or China? Ultimately, the only aspect of the transaction that really matters is whether or not the consumer is happy with the deal. In an environment where China is purposefully depressing the value of its currency in order to encourage a shift in production towards its borders, it makes sense that Walmart is going to buy goods from China.
National borders are the great red herring of economic analysis. All wealth is ultimately held at the individual, not the national level. Now that everyone is off the gold standard, there is not even the visible transfer of gold around the world to reflect international trade flows. Goods and services are constantly moving across borders around the world, and given that there are typically much greater barriers to trade across borders than inside any given economy, the trade that overcomes these greater transaction costs is slightly more valuable than other trade. Yet international trade accounts for only about 20% of the US economy. Compared with many other smaller countries who routinely depend on the international marketplace for 70% of their production, the US is relatively unfazed by currency dips and booms.
Higher gas prices are bad for the consumers of energy and good for its producers. Sadly, most of those producers are countries with otherwise deplorable policies. But the ultimate shift away from fossil fuels is only likely to occur once the current energy infrastructure becomes too expensive. Rising energy costs are bad for consumption but fill a necessary role signaling the need for change. Once the US economy shifts away from its reliance on fossil fuels, historians will look back on this change as a net positive.
Wednesday, April 18, 2007
Dollar at Record Lows, Europe Unconcerned
Reuters reports that the dollar has fallen to a 26-year low against the British pound sterling and is nearing the lowest levels against the euro in 2 years. The abrupt change in exchange rates has been driven by concerns about slowing US growth and the spectre of lower interest rates at home compared with higher rates abroad.
The Euro zone has been receiving much more cheerleading from the press of late. The New York Times and others have recently remarked on the resurgent strength of Germany - where unemployment may fall below 9% if the current strength continues. A recent article even went so far as to observe that Chinese entrepreneurs are forsaking America for Europe. Unfortunately, as even the most ebullient euro-boosters must note, Germany's recent spate of economic growth has been driven by wild successes in niche markets. Sensors for lasers and satellite parts for Boeing are certainly growth opportunities, but Germany as a whole and certainly no other large economy can base its growth on niche manufacturing.
The manufacturing lobby in the United States has been arguing hard for a sharply reduced currency to boost exports, but now that it has finally arrived they are strangely silent. Even in the face of such favorable economic conditions, no one seriously expects all those outsourced jobs to miraculously return.
Economists will tell anyone who listens that in the long run, fluctuations in the value of currency between widely held, freely traded alternatives are irrelevant to growth rates and have a neutral effect on the economy. But as journalists are so fond of quoting Keynes, "In the long run we are all dead".
The Euro zone has been receiving much more cheerleading from the press of late. The New York Times and others have recently remarked on the resurgent strength of Germany - where unemployment may fall below 9% if the current strength continues. A recent article even went so far as to observe that Chinese entrepreneurs are forsaking America for Europe. Unfortunately, as even the most ebullient euro-boosters must note, Germany's recent spate of economic growth has been driven by wild successes in niche markets. Sensors for lasers and satellite parts for Boeing are certainly growth opportunities, but Germany as a whole and certainly no other large economy can base its growth on niche manufacturing.
The manufacturing lobby in the United States has been arguing hard for a sharply reduced currency to boost exports, but now that it has finally arrived they are strangely silent. Even in the face of such favorable economic conditions, no one seriously expects all those outsourced jobs to miraculously return.
Economists will tell anyone who listens that in the long run, fluctuations in the value of currency between widely held, freely traded alternatives are irrelevant to growth rates and have a neutral effect on the economy. But as journalists are so fond of quoting Keynes, "In the long run we are all dead".
Subscribe to:
Posts (Atom)
