I just feel a perverse need to throw chum in the water.
Some folks can find negative economic news no matter what’s going on. Unemployment low? Watch out for inflation! Stock market up? Wait for the correction! Country richer than ever? Not everyone is getting wealthier at the same rate!
Late last week, in the midst of several non-sequitur responses to this post, the fact that the dollar was falling against overseas currency was offered to me as Proof of Something Ominous Having to Do With Bush. Relying on my background in economics (one semester of 101 in plebe year, I believe) I replied in part:
Now that the dollar is lower against the euro, our production is more affordable over there, which will help us rectify the current accounts deficit. Or did you have some other point about the “strong dollar” being an unequivocal good? Because it’d be fun to hear that one.
For my pains I was sternly abjured that the currency markets should not be allowed to move in both directions. Or words to that effect. And yet, just in time, along comes a WSJ article entitled, “Dollar Lifts Exporters, Blunting Housing Bust.”
(AS) long as the dollar’s decline is gradual, most economists see it as a modest plus overall. Joshua Feinman, chief economist at Deutsche Asset Management, wrote in a recent note to investors that the export upswing is one of the factors “poised to help cushion the impact of the housing correction.” Real exports have grown faster than real imports for nearly two years, notes Mr. Feinman, and he expects this trend to continue. U.S. exports rose 2.7% to a record $137.68 billion in July, according to the Commerce Department. Mr. Feinman estimates stronger exports have contributed a half percentage point of added growth to gross domestic product since 2005.
There are enough caveats in the article to prevent us from popping champagne corks in the street over the dollar’s fall. A freefall could cause inflation to spike, and overseas investors may decline to further subsidize our spending if doing so means a declining investment. Not all economic sectors are poised to profit from greater overseas trade.
But it’s also a reminder that markets work. That it’s better sometimes to be lucky than good. And that every golf shot pleases somebody.
the only thing i remember from college econ is that if the guy next to me packs his lip with a half can of Copenhagen and spends the entire class swallowing, then i can somehow manage to stay awake from second hand fumes and not wanting to miss it if he washes some back up in a projectile manner.
oh yeah, and something about some guy laughing at a curve.
There have already been reports that this holiday season will be a bad one… I just thought you should know. *grin*
Reasonable bait . . . worth a bite.
In most every dark cloud, one can find a silver lining – like cheaper exports and a better balance of trade with our weakening dollar. Likewise, there are also similar but opposite trade-offs in a strengthening dollar, with some US economic sectors benefiting while others are penalized.
The ideal is a stable dollar neither strengthening nor weakening too quickly or by too much.
Although our weak dollar may have benefits for some – exporters, multinationals and our tourist industry – it increases consumer costs for the little guy in higher mortgage rates and more expensive foreign goods, and it is inflationary. It is why the price of gasoline has risen so much here, but is now cheaper than before in Europe and elsewhere as the dollar falls.
But perhaps more importantly than the mixed results of a weak dollar is that it is a result of, and an indicator of much more serious and fundamental problems – a weakening economy, a huge trade imbalance, and a massive federal deficit. Initially, the Bush administration spoke of fiscal responsibility and of supporting a strong dollar, but their actions have been the opposite.
For many years the U.S Dollar has been the safe and stable currency in an unstable world. That is now being questioned.
43% of our national debt is held by foreign countries and foreign investors. (Indeed foreigners are substantially funding our war in Iraq.) When the dollar weakens, they lose money. Indeed a number of Middle East nations have already dumped US Treasury Bonds and invested in Euros. If that continues to happen on a large scale, interest rates will have to rise, money will be tight, and our stock market will fall precipitously…. and our national economy will be on the rocks.
An even greater worry for me is if the dollar falls to far, oil might no longer be pegged to the dollar as it now is, which would cause a worldwide economic crisis, but would enrich the oil producing nations at our expense.
Even more worrisome is the possibility of “economic warfare” in the future, as China has recently hinted. With a weakened dollar, a weakened economy, and continuing huge federal deficit, we leave ourselves very vulnerable to economic perfidy.
Politically, the Gray Lady weighs in Here
It’s funny, but I’ve one of those jobs that doesn’t really produce much of anything. I make the 1’s and 0’s line up and go where they’re supposed to, I make your telephone calls connect, I make water come out of your tap, power come from your outlets and in most cases bridges to carry you over obstructions. But I don’t produce anything. I’m not a farmer or a miner, so I create no wealth. All I do is add value to something that already exists.
Clearly the economy would be better off if we were all miners and farmers and none of us engineers? No, that can’t be the lesson.
Oh! I know! Trade deficits are bad because I’m spending more than I’m selling to a single entity. That’s the ticket. Because I look at the trade deficit I have with the power company, the telephone company, my local grocery store… I’ve a trade surplus with my employer, but a trade deficit with at least a dozen different entities. Nah, that can’t be it either.
Maybe I was chewing Copenhagen during Econ or something, but I respect the opinion of Dr. Walter Williams on the subject and he opines that trade deficits are not to be worried about, as do I. It’s when trade doesn’t happen that economies start to break down.
Anybody else remember when 6% unemployment was declared to be full employment? Anybody else remember when home mortgages were at 18% fixed APR? Compared to a certain nuke-school grad the present administration is doing one masterful job of keeping a stable economy with the only tool it has, the prime rate.
That doesn’t mean one can’t complain and pontificate and speculate and otherwise yammer on about how Our Team Could Do Better, but compared to other countries the shock of our housing bubble is but a pittance in overall change.
– Max
MaxD –Oversimplified, a trade deficit means our wealth is being transferred/spent overseas. On the other hand, a trade surplus means foreign wealth is coming to us. Which would you prefer”
Currently, we have a huge trade deficit – especially with China, and our country’s wealth is flowing to the Chinese economy, unbalanced (not to mention, also to OPEC and others) . Personally, I don’t think that is a good thing. Do you?
Comparing Pres. Carter’s economy with Pres. Bush’s, or anyone’s’ is irrelevant and water over the dam. The future is what is important. And current – not past – policies dictate our economic future.
Good economics and good politics are usually, and unfortunately, at cross purposes.
With a massive trade deficit, another growing federal budget deficit, and a burgeoning national debt, compounded with growing federal expenses and decreasing tax revenues in the shadow of extraordinary war expenses, the sub-prime problem, hedge-fund failures, foreclosures, potential $100 oil, foriegn investors’ growing skitishness etc., the future is not promising.
This “team” – indeed Bush and all of Congress on both sides of the aisle – are ignoring a potential, economic collapse. With many counterbalancing checks long in place, a collapse shouldn’t happen…. But it seems our current ‘leadership’ is surely trying to screw it up, big time!
It’s one thing to tax & spend. It’s quite another to not-tax, and then spend like a drunken sailor! (Wives may do that at the Mall, but your government should not with taxpayers’ billions.) Compound that with poor fiscal policy, and you set up an economic disaster scenario.
It is wise to never make a political point with economics; and the converse I think. Pettiness and confusion if not bitterness are often the result… but no increased knowledge….meanwhile, our country is in a growing, economic bind.
I get paid in dollars but have to spend in euros. The dollar’s slide against the euro definitely sucks!
I don’t know, it seems to me that as much as every golf shot might please somebody, it also gives someone else something to complain about. I tried to stay awake in Economics, honest. I did manage to get a minor in it but…
I always thought a weak dollar was suppose to be the bad guy. Turns out now that Canada’s dollar is almost on par with the US, people are complaining about that… now our dollar is too high! Imports, exports, something tells me you just can’t win. Just my simplistic response.
Filterman-
Seems the ethos of the electorate is I want something for nothing. I base this on all the calls for government spending on housing, the markets, the war, etc. The how to pay for these things is never or rarely mentioned. If you transmit that ethos up the political chain eventually reaching the Prez you have the dynamic we have now. Simplistic I know but seems to account for the broad dynamic.
fliterman…”Although our weak dollar may have benefits for some – exporters, multinationals and our tourist industry – it increases consumer costs for the little guy in higher mortgage rates and more expensive foreign goods, and it is inflationary” But if the “little guy” works at Boeing or Caterpillar, or is a famer, the benefit he gets from increasing export strength probably outweighs the higher-priced consumer goods associated with a lower dollar. If he is in a service job, on the other hand, the negatives probably outweigh the positives.
The consequences of economic policies and events do not always line up on a “class” basis.
My Goodness Lex, I really did not mean for you to grab your fishing rod and go out TROLL_ing.
It was kind of soft jab at your rant about European’s, after all, one really has to worry when you consider their Intelligence Services irrelevant. (To those who did not fallow the previous thread, our ever-incisive correspondent, Our Paul, raised two points: (1) There is sufficient evidence that the Administration, from the get go, wanted to invade Iraq, and nothing was going to dissuade them. (2) The main reason for lack of European support was that their Intelligence Service did not believe the WMD threat.)
As to what the falling dollar really means, I am going to leave that to Fliterman. But perhaps a simple test would be helpful. Take any train in the United States and compare it to the same experience in Europe. Falling dollar, falling bridges, falling international reputation, crappy infrastructure… Hell, the only thing that is going up is government private contracting, and the national debt.
Lex, I did try that old “chumming” trick when I queried your opinion on the increase in background chatter on Iran and the threat it poses. Strikes me we kind of got a problem, as this chatter parallels the Iraq foreplay. There are those, including Our Paul, who posit that Israel will air strike, the U.S. will “retaliate” when Iran comes back at our forces in Iraq. Tell me Lex, is this potato to hot to bait a hook with?
Got to go, time to visit the dentist. Lost a couple of fillings after my last train ride, wonder why…
I nominate Lex as the next Fed Chairman!
Our Paul-
I’ll wager IS has a “time to go clock” based on when/where they will strike Iran and tracks the time elapsed as the Iranian Self-Nuclear flagellation attempt to build a “bomb” cont8inues to go forward…..
I really doubt they consult the United States on their attack timeline……or on the metrics used to feed the formula of “when”…
BTW, your fillings are falling out because of that horrible socialized European dental care which is worse than that in rural West Virginia! If you are in the UK, it’s even worse than the rest of Europe…Talk about failing infrastructure! LOL.
b2
OP, you are persistent. This is I suppose a virtue. When those poor Kurds suffered a gas attack at Halabja, some must have though it a consequence of exotic foods.
When Jaques Chirac stated, “of course Saddam has WMD” he must have been going against the advice of his European security services. Oh, and Germany. These two represent the Global Test. Rather than unenlightened self-interest disconnected to any sense of larger responsibility.
Well, they will moan as peoples are put down. Moral high ground, and all that. When we join in the chorus with them it enhances our international reputation. Doesn’t do much for the poor wogs getting slaughtered, but you know: One does what one can, up to a point. Mustn’t dirty the hands.
US public transport hasn’t been the peer of Europe since we helped them re-build their system after they busily spent World War II destroying it. We prefer to drive automobiles, you know, while declining to let 11,000 elderly perish during heat waves because to bestir ourselves would spoil les vacances.
And anyway AMTRAK always was a PR-driven money sump. Sort of like the “war on drugs.”
Europe has a wonderful social safety net. That they built on the back of the US defense of their continent during the Cold War. That they will not be able to sustain because they can’t be bothered to breed. Which requires them to import cheap labor from abroad. Which comes with its own social costs. Which you may have heard about. But at least they’ve got lovely trains! Good thing. They’ll need them.
When you complain that the national debt is going up it might (or might not) interest you to learn that the amount of GDP spent on defense is at or near historic lows, even as the cost of such mandatory spending as social security, welfare and other transfer payments continues to consume more of the budget.
Did I miss anything? Besides wondering about Iran and Israel? Because I believe I already mentioned that I haven’t a clue what’s going to transpire there – so much depends upon the actions of actors who do not behave rationally. Nor do I think, as you apparently do, that it would be better if we just stopped talking about it.
Mmmm…. did all these threads really prove is that the US and the EU each have their own issues?
No, I’m not trying to exempt any other country from that comparision, I’m just saying that it sounds a bit like one of those …. what’s that french phrase Lex uses? Anyway, it reminds me of one kid pointing the finger back at the other kid and saying “Oh yeah, well, your dad…”.
lex,
As far as I remember, during the cold war there was a NATO agreement on how many percent of of GDP each country would pay for defense. In my humble recollection Germany mostly met it. Please proove me wrong if not.
As for Saddam’s gas attack on the Kurds, that was definitely noticed in Germany back then. I remember it because I saw the first reports on it on German public TV, by a moderator who was known for his left-wing, anti-US and pacifist credentials. What did not help the Kurds was that his ilk rallied about it and used it to pinpoint evil US influence and to bemoan Germany’s close connection to the United States much to the embarassement of Germany’s conservative government back then.
Again in my humble recollection: Iraq was seen as a US proxy because of the Iraq-Iran war and all western democracies supplied to its arsenal, Germany and US in particular with respect to chemical weapons. To be perfectly honest, I must add that Germany already at that time would have preferred closer links with Iran than Iraq, but changed course because of US pressure and for this gave German companies green light for all sales to Saddam.
Michelle, the term is tu quoque and it’s Latin for “your mother!” Or nearly. Since Our Paul is an American citizen (I believe), I’m eschewing the vulgar in favor of offering counter-arguments tailored to his evident preference of the European system.
h-h, the Cold War stats proved surprisingly hard to come by, but I found this at the Congressional Budget Office:
Remember that the US spent these sums for NATO in defense of your continent. We did that while also extending our nuclear umbrella over Europe – the right thing to do of course, but it made us a target for massive Soviet pre-emption should push had come to shove where we might otherwise had been able to buy some time for ourselves over here on our island.
But no one minded all that much, except of course when the European protestors drew moral equivalencies between the US and the USSR after NATO agreed to deploy Pershing missiles as a counter to existing SS-20’s – missiles which really only threatened Europe.
That hurt, a little.
Also (from the CBO):
Meanwhile, while defense spending leading into 1998 started to close the gap, the difference was more because the US was spending less than because Europe was shouldering a greater part of the burden. Even before 9/11 (according to the Hoover Institute):
Nor do things appear to be getting any better, even before we start chatting about separate European Defense forces outside the NATO construct.
None of that is intended to be critical, but many over here argue that the US could also have the same quality of social systems as does Europe (and infrastructure now too, apparently) if only we didn’t spend it all on defense. My larger point (I will for now leave off discussing whether I think those social programs are on the whole good or bad, even before we get to the declining population issue) is that our own defense spending by GDP is not historically significant and that most of the money spent in the US federal budget goes to mandatory transfer payments. There’s just not that much left over to cut and remain a serious world power.
Some people like that notion. Others wonder what will rush in to fill the vacuum left behind by a US retrenchment.
I find this graphic interesting. It shows the last few years GDP with and without MEW (mortgage equity withdrawal)
Econ, I thought for years it was a dismal science. Until I discovered the Skeptical Optimist. Now it seems somewhat less dismal.
Just so happens he has a post up about the (gasp) decline of the dollar.
Question: Is the dollar higher or lower now than it was during the Carter Presidency?
For the answer you can go here: http://www.optimist123.com/optimist/2007/09/interest-rates-.html#comments
Might be surprised what you learn.
Fliterman, let me stop at your initial premise. A trade deficit does not necessarially mean wealth is being transferred. Remember, each trade is entered into voluntarially. Would you give me a dollar for a donut? How about two? Would you give me a dollar for no return? Trade is voluntary and doesn’t take place unless both parties want the object of their desire more than the object they’re willing to give up, money included. Which is why I included that part about my not creating wealth, only adding value to things. They’re not exactly the same thing.
And when the Chinese get that dollar they don’t stuff it in a mattress, they buy raw materials and Boeings and wheat and bonds with it.
But don’t listen to me, rather read somebody who is considered an authority on the subject:
http://www.gmu.edu/departments/economics/wew/articles/07/deficit.html
Like I said, it’s when we stop trading that economies fail. And as for the Carter reference, ya gotta admit the man is smart. I mean, I’m pretty sure he’s smarter than I even if he does say “nucular” and I’d wager smarter than you since, well, he’s been the POTUS and neither of us have, plus that whole nuke school thing, and the Academy ring, kind of difficult to knock those sorts of checks on the old fitrep towards being a smart kind of guy. And look what happend on his watch…
The point of that isn’t to blame the administration specifically, I was more inclined to praise the work of the Fed in managing a huge economy using only a small tool. Finally, what was once termed “voodoo economics” and what the former communists thought they could plan five years in advance is seen for what it is, a market that can only be influenced by providing a comparison for investment value. It can never be led. Once it is led, a free market fails to work.
– Max
h-h, I left off the Iraqi alignment by accident. There’s a marvelous tradition over here of showing Rumsfeld shaking hands with Saddam 20-odd years ago.
The realists were sometimes forced to choose between evils, hoping to select the lesser form. After the Iranian Revolution, Saddam seemed much the better option – although Kissinger I believe hoped that both sides might lose.
After Halabja and Kuwait the scales fell from our eyes and Saddam’s Ba’athist regime became the more immediate threat.
We are sometimes forced to hold the hand of evil, but we should never consign ourselves to marrying it.
lex, I cannot let of the bait for now. Its basically two sentences that make me troll:
“Europe has a wonderful social safety net. That they built on the back of the US defense of their continent during the Cold War.”
“… many over here argue that the US could also have the same quality of social systems as does Europe (and infrastructure now too, apparently) if only we didn’t spend it all on defense.”
First, our defense spending of 1.5% GDP justly angers our allies, not just the Americans. Problem is, there is no sense for Germany to spend more money on defense until the German public makes up it mind on what wars it wants to fight at all and what would be a rightful cause to to go to war, because that determines what kind of military you need (draft army, oversea expedition chorps, peacekeeping troops …). That discussion is just going on.
The big difference to the time of the cold war is that Europeans at that time did not see any choice like “kindergardens or jet-fighters”, that slogan just came up with the 80’s peace-movement. That obviously escapes American conservatives and left-wingers alike.
In fact, they maintained those big draft armies and the expensive well-fare state at the same time. OK, draftees are cheaper to pay than professional soldiers, but from the 19 year old’s perspective it is indeed a big tax-burden to spend two years in the barracks for virtually no pay. Both comes out of the same communitarian spirit of mutual solidarity, you might call it socialist if you want to.
The very paragon of the well-fare state, Sweden, developed its own jet-fighters in that era. I have an old almanac from 1983 which gives as defense expenditure for that year: Denmark 2.5%, Germany 2.8%, US 3.1%, Netherlands 3.4% Sweden(neutral) 3.4%. Apart from the US, they were all well-fare states and had draft-armies.
Since the nineties, defense expenditure shrunk as much as the benefits of the public well-fare programs. “State” is the wrong word, the classical European perception is that of a mutual insurance. In fact the American left ist out for a bad surprise when it thinks that less military budget means more social spending. If you cannot pay the one, you cannot pay the other.
h-h, you’re not trolling, you are offering counter-argument. All the difference in the world.
For us, the Cold War had three major phases: The stand-off in Berlin, the long dark quiet leading up to the collapse of Detente and the Reagan-era spending binge which led to the collapse of the Soviet Union. The first phase was conducted by two fully mobilized, combat experienced countries standing opposite each other over the wreckage that was then Europe. The second phase cost less (the Marshall plan was a smart investment decision), but was dreary and mostly uneventful. I exclude Korea and Vietnam from the NATO discussion, perhaps unfairly. The last phase was hugely expensive and generated significant “what are we doing/guns and butter” political dialogue here in the US.
From the perspective of some in the US, the smaller portions of smaller GDPs spent by European NATO countries in their own defense during that last phase – mostly as you say, spent on conscript armies that would have been cheap at half the price – we’re scarcely worth the cost. Token contributions, some might have thought, intended to reassure the US Congress that Europe was just serious enough about its own defense to ensure that the US remained committed as well. I know that our ambivalence caused concern over there as well.
After the Cold War ended, we cast about for reasons to keep the Alliance whole. Europe had a hard time getting off the starting line for the crises in the near abroad in Bosnia and Kosovo. Until 9/11 and Afghanistan, it was never clear that Europe could muster the political will to engage a “common enemy” outside of Europe. NATO’s support in Afghanistan now is as welcome as the caveats host governments place upon their soldiers’ employment there are not.
In short, we are nothing like done with a shaking out of roles and missions, but that may have to wait until the current unpleasantness has subsided.
Meanwhile, we over here are always having that “guns and butter” argument. One of the main sources of opposition in the US to the war in Iraq is, I think, the fact that it is sucking up all the fiscal oxygen. Some people argue that we should more closely follow the European model. Others think, the world being what it is, that niche is full for now, that someone has to play the role that America has played in the past and that it might as well be us.