The Weakness of the Dollar

[John Morrow]

Well, it's given me about a 10% freelancing pay cut since i started.

Yes, and if you demanded a raise, that would make American freelancers more competitive, which is bad for you but good for American freelancers.  That's why the Japanese kept their currency artificially low against the dollar for so long and why the Chinese are keeping their currency artificially low against the dollar now.  There are benefits for a country to devalue their currency.  People are upset because it's making the US less attractive to their goods but welcome to what the US has to deal with and learn to deal with US exports that are competitive, if not cheap.

[estar]

The dollar is weak, at least in part, because the Bush Administration wants the dollar to be weak.  Why?  

Sounds plausible on the face of it. But it falls apart when you look at what the Bush administration can do or has done to effect the US economy. Compared to the overall size of the US economy the budget deficit portion is far smaller than in the 70s or 80s.

The federal reserve is appointed by the President, but the federal reserve has not changed it pattern of altering interest rates compared to the first Bush and Clinton years. They tweak and wait, and then tweak again.

Perhaps there is a secret treasury order where Bush order the mint to print more money. But when you look at it (http://www.moneyfactory.gov/section.cfm/2/51) what the Bureau prints pales compared to the overall size of the economy. And those figures don't show the amount of currency destroyed because it worn out.

The fact is that there are several reasons for the blame for the weaken dollars. They can be either broken down to things that cause an oversupply and/or things that caused a weaken demand.

Likely much of the blame of the current weak dollar can be laid at the feet of the collapse of the housing market. Easy sub prime loans pumped a lot of dollars into the US economy. Various financial instruments were developed around real estate and the fact their values was continually growing. Foreign investors bought a lot of these and when the market collapse they sold before they lost everything. By selling it reduced demand for dollars.

Again the housing market collapse is not the sole cause. But definitely the tipping point that aggravated all the other factors.

Several things may happen because of this. Either demand will pick up, or supply will shrink until the price stabilized. Like most of the G8 countries the US economy has too many things going for it to have the floor dropped out from underneath it.

[John Morrow]

Sounds plausible on the face of it. But it falls apart when you look at what the Bush administration can do or has done to effect the US economy.

I'm not talking about the economy but about the dollar exchange rate and countries can and do manipulate exchange rates.  That the United States isn't taking any heroic measures to prop up the dollar is telling and bear in mind that the weakness of the dollar started long before the current collapse of the housing market.  In fact, I was a victim of it at the end of the 90s when I opted to have my salary in Japan based on dollars instead of yen.

Several things may happen because of this. Either demand will pick up, or supply will shrink until the price stabilized. Like most of the G8 countries the US economy has too many things going for it to have the floor dropped out from underneath it.

I don't expect the floor to drop out from underneath it.

[Consonant Dude]

I'm not terribly savvy with world economy matters.

Can anyone tell me if the US dollar is expected to remain at this level? Or go down further? Or go up?

I'm starting to see some changes here in Canada (Montreal) as well but it's far from widespread. I was eyeing a wristwatch the other day and it was still 27% more expensive here than by just crossing the border. When you are talking about hundreds of dollars of difference, that's fucking significant for me.

[shewolf]

Something to remember - it wasn't that far back that the exchange rate between the dollar and the pound was something like $5 to 1GBP.

Part of our problem is we're going through a correction - the housing market was going up for a long time, and now it has to drop. Plus, that banks were strong-armed into giving loans to people who had no business getting them, well, it was a recipie for a problem.

I figure a couple years and we'll be stable again. Keep taxes low enough that the common man can afford to save or spend, and companies can continue to hire.

But, I'm not an economist.

[Halfjack]

I'd be very curious to hear, if anyone has experienced comics, books or RPGs being cheaper now thanks to the declining dollar, and when they started noticing this.

My FLGS here in Vancouver, BC, is currently selling everything on the shelf at the US list price or lower.  It is, however, atypical.  For the most part stores are claiming they need time to recover the cost of the inventory they bought when the US dollar was strong.  In some cases US companies are flat out refusing to ship many items from the US to Canada citing "warranty issues" that didn't exist when the US dollar was strong.  I suspect this is because they are affiliated with Canadian distributers who are trying to keep the prices inflated.  Most electronics are still artificially as much as 50% higher than USD prices because of this.  I can't see it lasting much longer, though.

[shewolf]

Which ends up being a really good thing for the US - our stuff becomes cheaper to import, so other countries start buying US goods rather than say, China's, which will revitalize the dollar.

As people also become accustomed to purchasing US brands (I'll use Ford as my example) people will gain brand loyalty, which will encourage a continued purchase of US products as the dollar gains strength.

It hurts in the short term, but most things require a long term outlook.

[John Morrow]

Which ends up being a really good thing for the US - our stuff becomes cheaper to import, so other countries start buying US goods rather than say, China's, which will revitalize the dollar.

The problem is that I think the Chinese currency is currently is still pegged to a fixed exchange rate with the dollar, so that it's making Chinese goods cheaper too.  As I mentioned earlier, I think that part of the strategy is to shake the Chinese currency loose so that it floats against the dollar.

[Halfjack]

The problem is that I think the Chinese currency is currently is still pegged to a fixed exchange rate with the dollar, so that it's making Chinese goods cheaper too.  As I mentioned earlier, I think that part of the strategy is to shake the Chinese currency loose so that it floats against the dollar.

Chinese currency is pegged to a number of currencies (the American dollar is one) and is allowed to float within 0.3% of these.  These currencies include the yen, the euro, the Canadian dollar, and a host of others.  It hasn't been pegged rigidly and solely against the US dollar since 2005.

[John Morrow]

Chinese currency is pegged to a number of currencies (the American dollar is one) and is allowed to float within 0.3% of these.  These currencies include the yen, the euro, the Canadian dollar, and a host of others.  It hasn't been pegged rigidly and solely against the US dollar since 2005.

Good.  And I think that's at least part of why the dollar being devalued is a good thing.

[shewolf]

Chinese currency is pegged to a number of currencies (the American dollar is one) and is allowed to float within 0.3% of these.  These currencies include the yen, the euro, the Canadian dollar, and a host of others.  It hasn't been pegged rigidly and solely against the US dollar since 2005.

Explain this - I understand what John said, but adding extra currencies does what, make it less likely to fall when the dollar tanks? If so, I needs must call the NinjaPirateBears* to do some work


* I know, wrong forum. Sue me.

[Halfjack]

Explain this - I understand what John said, but adding extra currencies does what, make it less likely to fall when the dollar tanks? If so, I needs must call the NinjaPirateBears* to do some work

The Chinese are pretty closed-mouth about exactly how they calculate their exchange rate which leads me to believe they just wing it.  But I think the idea is that they maintain a "basket" of currencies that they will peg against using some formula (likely just the mean and a constant).  So one currency tanks it has limited effect on the whole formula unless they want it to have an effect.  Market fluctuations are then allowed within a tiny percentage of the fixed rate.

[John Morrow]

The Chinese are pretty closed-mouth about exactly how they calculate their exchange rate which leads me to believe they just wing it.  But I think the idea is that they maintain a "basket" of currencies that they will peg against using some formula (likely just the mean and a constant).  So one currency tanks it has limited effect on the whole formula unless they want it to have an effect.  Market fluctuations are then allowed within a tiny percentage of the fixed rate.

It's better than not floating but not exactly the adjustment the United States was looking for.

[shewolf]

Ok. Thanks. Makes sense, but seems like if things really go bad, then they are seriously fucked.