Iraq War and the Euro

[DemoCoder]

Most of those quotes were from secondhand or questionable resources, but 2 of them were ok. I'm not denying that world trade conducted in dollars isn't beneficial to the US (but like anything, it is also detrimental), however, the claims that the US is fighting wars to maintain a strong dollar is bogus.

As you quoted yourself and as I stated, switching currencies isn't easy. Look how long it took EU to do it. There are trillions of dollars being traded by financial interests around the world which are primarily fiscally conservative in nature, and no one wants to rock the boat. It actually makes logical sense for OPEC to switch to Euro since a majority of the OPEC exports now go to Europe rather than the US.


This theory relies on Iraq being some pivotal keystone in which if a country that ships a trickle of oil starts accepting Euros, the dollar will collapse like a domino around the world, but with trillions of dollars in reserves all around the world, and precious metals, coal, food, and other commodities still traded in dollars, it is unlikely anyone could change quickly even if they wanted desparately to. There's too much interconnection, too many vested interests, not just in the US, but overseas as well.


Every economic effect has a positive and negative. For every economist you can find arguing for a strong dollar, you can find those (even within the government) arguing to weaken it. For example, economists at labor unions and organizations like the National Association of Manufacturers have been arging for years that the strong dollar unfairly shipped jobs and factories offshore.

Same for inflation/deflation. Inflation helps debtors, deflation helps consumers. Low interst rates vs high? Low helps home buyers, helps finance construction. High helps retirees, pensioners, banks, and attracts capital to the US.

For every effect, there are positives and negatives, so you should at best try to be moderate. Many people see the international situation of the dollar as a position that needs a "correction" like a bubble in the stock market. It's unhealthy for our economy and it would be best if the dollar weakened for awhile to correct to balance of trade.


Right now, everyone is holding dollars, but buying American goods is too expensive, so those dollars are instead invested in bonds. A weak dollar will make American goods much cheaper to buy, causing more of those external dollars to flow back into the country for exchange of goods. Those dollars will then go to American workers and get spent here. We are currently facing a near deflation, so this influx of dollars would allow help with the deflationary pressures. In the long term, it will raise interest rates, but are the rates of the past decade natural either? No, they are a historical anomaly.


In any case, with higher inflation, and more cash in pocket, American workers will have less need to borrow and their debt burden will be eased. Should please Pax. I'm not saying it's a cure all, since there are negatives as well.

But before you talk about the US spending $100 billion to invade a country whose dollar trade is miniscule, you should perhaps ask if the US Administrator wants a stronger dollar in the first place, and what EU and Japan want from a dollar value perspective.

 

[fbg1]

No, the reason the Euro is going up is because the US economy is a festering piece of shit.

No, comparative economic strength does not explain the dollar's fall against the Euro. Europe's economy is worse than America's. The dollar is falling b/c the Bush administration is allowing it to, at least temporarily, in order to boost the economy. Obviously, the war on Iraq and the large deficit push it down too.

 

[Deepak]

US should cut its defence spending a bit....it can still dominate the world with lesser military budget!!

 

[amk]

This theory relies on Iraq being some pivotal keystone in which if a country that ships a trickle of oil starts accepting Euros, the dollar will collapse like a domino around the world, but with trillions of dollars in reserves all around the world, and precious metals, coal, food, and other commodities still traded in dollars, it is unlikely anyone could change quickly even if they wanted desparately to. There's too much interconnection, too many vested interests, not just in the US, but overseas as well.

Firstly, the invasion of Iraq has scared the crap out of other middle eastern nations, from which 2/3rds of the world's oil comes.

Secondly, except for food, oil is the most important commodity you mentioned. You could run a developed economy without coal or iron (e.g. France?), but not without oil (or food ). Oil is also conveniently concentrated at one choke point, resulting in massive international trade, and dominated by one controllable consortium. I expect most nations are pretty much self-sufficient for food.

Thirdly, in order for the economic collapse Clark and Glazyev predicted, there would have to be a run on the dollar. However, IMO this is not necessary for the ulterior motive theory to work: if the US does indeed get significant benefits from the use of the dollar as the international currency, then as trade moves away from the dollar (whether to the euro, the gold dinar or to direct barter as Venezuela is doing) and that advantage diminishes, it becomes increasingly in the economic, and eventually political, interests of the US to intervene. I am in any case not convinced that a crash is unfeasible, although I am no economist. The more the dollar drops in value, the more institutions will cut their losses and move away from it, causing further drops in value, causing more people to dump it... Snowball effect. Currencies have crashed this way before, just not one this pervasive.

Never mind exchange rates or inflation, I think the basic argument goes like this:

If you are an oil importing nation, you need to get hold of dollars to buy it. In order to get dollars, you need to export goods and services to the US. The US then gains your product, but until the dollars are used to buy US products, the US does not have to produce anything in exchange. Until the dollars return, the movement of goods and services is in the US' favour. In effect, it has been given an interest-free long term loan. This is particularly good for the power of Americans to consume.

Furthermore, when not changing hands, these dollars are often invested for safe keeping in US government bonds.

If, as you say, there are trillions of dollars in reserves, then that is a massive loan by any measure. IIRC the US economy is worth $8 trillion?

 

[DemoCoder]

The more the dollar drops in value, the more institutions will cut their losses and move away from it, causing further drops in value, causing more people to dump it... Snowball effect. Currencies have crashed this way before, just not one this pervasive.

The people holding trillions of dollars in reserves can't move away from it overnight. The US won't redeem dollars for gold anymore and if no one is buying US dollars, than the only place to redeem those trillions of dollars of reserves is to come to the US and spend them on goods and services which can then be sold in your home market for your native currency.

Secondly, the US is the world's reserve currency not because of the international oil trading system. This is a misunderstanding of history. The US is the world's reserve trading system for the same reason Switzerland was a popular banking destination because for most of the 20th century, it had the most stable government and stable financial system, whilest the rest of the world was plunged into 2 world wars and crisis after crisis (hence the founding of Bretton Woods after WW2). If you were looking to "bank" a reserve currency there was only place to currency to put it. Foreign countries viewed the US dollar "as good as gold" Many other currencies were hyperinflating over this century, communist revolutions, et al. The US government is seen as the world's most reliable. It has never defaulted on anything and it has not engaged in nefarious money printing.

If you are an oil importing nation, you need to get hold of dollars to buy it. In order to get dollars, you need to export goods and services to the US. The US then gains your product, but until the dollars are used to buy US products, the US does not have to produce anything in exchange. Until the dollars return, the movement of goods and services is in the US' favour. In effect, it has been given an interest-free long term loan. This is particularly good for the power of Americans to consume.

#1 you don't need to go to the US government to get dollars. There are more than enough dollars in circulation that the US never need to "print" anymore to expand the international money supply, printed money only replaces old or damaged money mostly. Today, if someone needs dollars, they go to FOREX and get them from someone else who has reserves. Remember, everyone else conducting world trade in dollars has dollars they need to get rid of, so they are apt to exchange them with other foreigners who need the dollars.


The US government doesn't even "print" money hardly anymore. If it wants to expand the money supply, it just alters the interest rate, changes the federal reserve ratio, or buys bonds from the market. The US government also buys foreign reserves.



#2 the US is not the one getting the free ride. The strong dollar of the last 50 years has amounted to a stupendous transfer of wealth from the US to foreign markets. Cheap foreign goods have simultaneously demolished native manufacturing industries and transfer American's real savings into overseas hands, not to mention the selling off of American property.

Those dollars are not an interest free loan. The dollar bill is a GOLD BAR. It is no different than if the US simply shipped GOLD BARS to foreign reserves. Firstly, since most trade happens in dollars, and everyone accepts dollars, you can always convert dollars into goods, as if you had gold, and secondly there is FOREX. Remember, if we were all using gold, no one would need to "print more gold" to continue to conduct trade. As long as there is enough in circulation to satisfy trade needs.


Think of a European company that sells a product to the US. It will accept US$ as payment. However, it must pay employees and costs in its native currency, EU. Thus, those dollars are going to be converted immediately to Euro for operating expenses. This is done by exchange dollars for Euro on the public markets. Someone else in a neighboring country needs dollars, and buys them from you, you get Euros.

If you make a profit and have excess dollars, and don't want to sell them, you can invest them in overseas investments: US stocks, bonds, or real estate. If you buy government bonds, every year, US Taxpayers are paying you back money with interest. If you buy real estate or stock, you now own part of America.

Slowly, EU and Japan are buying America. The fallacy is that the dollars are an interest free unpaid loan, they are not. They are reflected mostly in the $4+ trillion dollar debt that the US taxpayers make payments on every year. Those payments are going to holders of US bonds, and alot of those bonds are held by foreigners.

Furthermore, when not changing hands, these dollars are often invested for safe keeping in US government bonds.

Yes, and payments are made yearly to those investors.

If, as you say, there are trillions of dollars in reserves, then that is a massive loan by any measure. IIRC the US economy is worth $8 trillion?

The number of dollars in circulation is not related to the GDP. There are $500 TRILLION in circulation.

If as you say, the US had a huge debt in all these dollars, then the best thing for the US to do is to weaken the value of the dollar to inflate away this debt.

The problem with your theory is that a strong dollar is against our national interest on so many levels. Workers and manufacturers don't want it since it exports jobs and manufacturing. Existing investors don't want it (strong dollar lowers real value of overseas assets) The government doesn't want it (strong dollar raises real value of US debt payments)

The fact is, the government would like nothing more than to devalue our currency on purpose, the same way Japan purposely devalued the yen in the 80s (which pissed Reagan off)


A strong currency merely makes foreign goods cheaper, but that is of little consolation, since you have to have a job to afford even cheap foreign goods

So we have:

Strong:
American consumers (those who still have jobs) can buy cheaper DVD players and have a cheaper travel experience

Weak:
Foreigners buy more US goods
More americans employed
More demand for US manufactured goods = more investment in manufacturing
Value of US investments overseas rises
US debt lowered




If Bush wants reelection and wants to jump start the economy, the single best thing he could do is let devaluation happen. It will screw the EU and Japan but help us. This fact alone busts your OPEC theory.


We already know why we invaded Iraq. Because after 9/11, a bunch of hawks saw a renewed opportunity to force change on the middle east thru military force. Iraq was the logical choice because it was an easy win. You now see how much better cooperation we are getting from Syria, Iran, Saudi Arabia, Lybia, etc because of it.

Iraq was a demonstration of power, plain and simple. There is no need to concoct backwards and abstract monetary theories (that are recycled versions of WWI/WW2 theories anyway) to explain the war. Supposedly the Bilderbergers have been organizing wars to push towards a single world currency, and Iraq was a stepping stone.

 

[pax]

Im not sure the gov can devalue the currency that easily. Certainly holders of dollars on currency markets wont want to sell at a loss. if devaluation happens itll have to be for real economic reasons that will drive the speculators.

Now saying that there are plenty of reasons for speculators to devalue but the bad side will be the huge need for countries whose economies are hugely dependant on exports to continue their growth. Im not sure europe is as open to imports as the US.

3rd problem will be if China and others take such a hit from loss of exports to the US that they in turn wont have the ability to buy us goods at any price. Also the low unemployment rate in the US means there would have to be huge increases in immigration to refill the old manufacturing jobs coming back to US shores. Thats isnt likely for social/cultural reasons.

The current issue that is keeping these things from resolving properly and at a a manageable rate is, as Lou Dobbs put it, the huge disparity of incomes that has developped. And which is increasing still. Im sure itd be nice if everyone could get that masters degree to get out of the blue collar class but lets be realistic and see the fact that education is also not the only answer. Learn all you like if disparities continue to rise along with consumer indebtedness I dont think even modest inflation will solve it. Whatever method is applied to invigorate the consumer economy.

Nice to see you're not worried at all demo. You seem to have an undying faith in the mechanisms in the economy. But I think there are issues not only ignored but problems just over the horizon that may be a bit more severe than we would like to think. However again we might all be surprised that some things may not be that bad while others may become worse in the next 2-3 years.

Its gonna be very hard to inflate wages to overcome debt when % rates will obviously increase to counter that inflation...

But im open minded and hope things will turn out ok. I just dont believe a right wing gov like Bush can implement the right tax and spending policies to help the consumer economy sufficiently. And like you said when things are too far gone as might be the debt load of consumers I dont think gov can do any effective change...

I dont credit or blame the gov with much either when it comes to the economy. The us gov is simply far too uninvolved with the economy and certainly very few policies really do any good. I do think Clinton deserves some credit for debt reduction tho maybe not as much as the tech boom. Same with reagans large military expenditures. Had Carter won a 2nd term his spending would have been marginally less than Reagans so the debt wouldve probably still be too high .

Looking at the present I think its near catastrophic at 500 billion year for new deficits. It maybe not yet but if we still have that rate of deficits in 5-6 years then there'll be serious probs. If the dollar devalues how will bonds remain attractive to investors? Europe of today with the Euro is almost as good an investment in terms of currency or bonds as America is. I dont think we can rely on the us's inherant stability due to its geographical location as much as we used to to get investment to come to these shores and the dollar. I think we have gotten lazy here and will pay a price for that. The same lazyness we got for relying on the dollars value due to its overwhelming acceptance in international trade which is another old standby we cant take for granted anymore.

I have to admit my thinking is seriously colored by my cousin who is an investment banker with hong kong bank international. He works in London. We all know the economy can be roller coaster but the average guy in the street might not be as patient as we are with laissez faire capitalism when things dont go well. Things are changing fundamentally as they did in the ealry 20th cent when the US eclipsed Europe. Its not gonna swing back totally but things will even up a lot more than in the past and Im not sure there are any easy policies to save the day such as currency devaluation.

 

[DemoCoder]

I'm not advocating a devaluation Pax. I am merely pointing out what the incentives are for doing so (which are against the dollar conspiracy). As in the past, I happen to like cheap foreign goods, and I think it is a net benefit that American wealth is being exported to third world workers through a mechanism that Americans are mostly unaware of. (imagine if the US simply gave several trillion in direct foreign aid, the voters would protest such a huge line item in the budget! But if a trillion dollars outforms in terms of imports, no one notices)

Look, the US ran an international trade surplus up until the 70s. The rest of the world had been recovering from major wars. We had a huge boon and got lucky due to our geographic position that isolated us from invasions (ditto for Canada) Now in the last 30 years, the US has ran a trade deficit, and all the wealth that flowed into the US from overseas is now flowing back out. It's simply a natural ebb and flow. The nations that have rebuilt are now producing their own goods.


The problem I have with you pax is that you want to do something, and doing something means trying to manage a multitrillion dollar economy via a government which takes years to enact a policy which is outdated by the time it is enacted (e.g. most stimulus packages actually get implemented by the time the economy has already recovered! due to the slowness of democracy) Moreover, the leverage the government has is like a butterfly in a tornado, and if it doesn't flap its wings at the precise position and time correctly, it could end up doing more harm than good.

We learned from the failure of Marxism (of course, proven by Hayek and von Mises long before the failure) that you cannot "manage" a market. The best you can do is lay some ground rules, and watch how it develops, but you can't really predict the outcome when making the rules, since people behave in ways counter to your intentions.


The alterations in the dollar value and international trade are due in part because of the betterment of the financial and economies systems in the rest of the world. I see the dollar's decline in terms of the EU getting their act together. I see the glass as half full.

We know that a government can temporarily cause the devaluation of a currency, but only by immense actions by the Fed Bank, and those correct themselves within a few days. AMK is postulating a war in Iraq to strengthen the dollar, but again, this is an immense action that won't change a thing. And the US spent +$100 billion and is spending $1billion a week for this action, not to mention lost GDP because of reservists who were called up and are not working right now.


Moreover, globalization is erasing the boundaries of nation states. As more and more states achieve Western levels of stability and GDP, the lead that the US had and most of its advantages will evaporate. Pending some technological revolution like nanotechnology (assuming only the US gets it, or gets it first with some lead time), there is no real way for the US to maintain a persistance lead is production, unless you factor in better demographics (younger pop) and a more attractive place to invest capital.

Thus, the only real control that governments have in the long term is how friendly they are to foreign investment and capital gain, and how friendly they are to immigrants and workers. Ultimately, people and money will go where they have the best chance.


I think you are laboring under a false assumption pax. Your theory is that we had all this productivity growth, but all of the extra money is in the bank of the wealthy. I'm saying, the productivity numbers are fatally flawed: they rely too much on services, while manufacturing was shipped abroad. People who used to work manufacturing jobs, switched to services. Blue collar services pay a lower wage. Thus, productivity growth can overall rise, but wage increases can lag. Growth in services productivity was accelerated by information technology, but that simply means it takes fewer people to render the service, e.g. don't need a store front, use automation, etc Thus, computer programmers got paid more money (e.g. pay a guy $120k a year to maintain a online store), but you can eliminate 20 $30k/yr workers.


If you want to see a rise in wages, you need to make more "stuff". Services are at the top of the food chain. People in the services sector get paid by people are the manufacturing sector to take goods and distribute them, invest money, create content, and so on. All of wealth is based on production. No one considers "amount of services I have consumed in the past" to be "assets", but manufacturered goods represent assets. The US cannot continue to increase the wealth of citizens by shrinking the manufacturing sector.

What to do about it? Well, revitalize the manufacturing sector, but we can't do that by mandate or by trade tariff. It's partly cultural: the new generation doesn't see manual labor as something they want, and secondly, there are lots of people in poor countries who do see blue color work as something valuable, so capital is going there.

Thus, US manufacturing has to go more heavily into automation, and the workers in "manufacturing" need to be people skilled in maintaining automated production, supply chain, etc.

We need an IT/engineering revolution in manufactured goods. I simply do not see a return to the golden era of the 50s and 60s with everyone going to work in factories.

 

[pax]

One thing tho is that Im not sure that many wouldnt want the old factory jobs back. Most services jobs arent that much more interesting than manufacturing.

Im not advocating that much intervention. I think some ground rules need to be added and those already there applied. This isnt some new leftist revolution its just trying to keep very bad fluctuations from happening.

I dont think it means lots of gov spending. But Im not sure unrestrained free trade is a good answer either. Was a good series on exporting america on lou dobbs couple weeks ago.

I do think taxation needs reforming tho. Elimination of sales taxes... straightening out the bell curve a bit on income tax especially on the middle class... Upping basic personal deductible. Making % on mortages tax deductible. Of course this would mean getting revenu from other areas. Mots of the new revenue would be had thru higher consumption. But some could be had from a very modest financial transactions tax. many countries have alrady implemented it but most transactions are international so not that much is being collected right now.

These are no final answers tho. I still think the real answers, unfortunelty, will only arrive if and when the 'fluctuations' get bad and last long enough. Im really not optimistic about the long term prospects of the north american consumer economy. If we gave the excuse than any regulation laid down would lead to people finding ways around it then we wouldnt have any regulation by now. Some find ways around it some dont. Its pretty obvious many rules are relatively effective when passed into law.

Its hard to preach refomr or new rules right now. No one is suffering. Only when thi gs get bad do enogh seek new answers. Take my own home province. Auto insuracne rates skyrocketed last year. Up average 73% in 2002. Thats on top of a 20% hike in 2001. Thats even with a couple dozen companies in the market and even with overall claims rates dropping every year over the last 10 years.

So what happened? Deregulation. The current conservative gov deregulated the industry in 99. Before companies had to justify rate increases which were usually allowed core cpi increases even if claims were down.

Now were in an election and a popular issue is public not for profit driver owned insurance plan as in Manitoba where rates are 70% lower than here even with their claims slightly higher. In less than 2 weeks the conservatives and liberals are both now advocating a public plan or law of some sort to get rates down.

It simply take suffering for this to get happening. We couldve had publicly managed driver owned insurance years ago. But unitl poepl really get hit bad they wont likely do anything...

Of course a consumer spending slowdown of major proportions would do the same thing politically. But Im not sure Id like to see consumption drop even only 10-15%... It would be catastrophic in a large modern economy. And Im not a fan of band aid solutions either. We can easily solve our auto insurance dilemna which is only one small part of the economy. But sudden drops in general consumerism may not be that easy for a gov as tied up in debts as the US gov. Im not sure either deflation or inflation could solve the issue either.

Im a fan of long term careful management. One of the things that shouldve been considered in that management is making sure the average consumer didnt get so indebted.

So I have no real solutions at this point. I dont think you can seriously drop taxation. Or up wages thru regulations... Those are major moves done when the patient is on the operation table. Various tax reform ideas might only work for a little time. It would only stretch personal income a litle bit more...

I dont think Ive ever seen in my 25 years of watching the market a situation so fraught with problems on every side or every possible solution for the consumer economy.

I really think we are in a bit between a rock and a hard place. Itll take major surgery pretty soon...

We may still have some ehadway as to how much the average person can get an education for some it\eng jobs but I doubt those will ever replace the huge jobs generated by past industial production. Heck factories modernized can typically remove 90% of the people working there with a few engineers and techs...

Unless we also agree that a shorter work week can be made an option...

Utimately any series of solutions will be had from various quarters. Itll be better education, 4 day work week at least for blue collars, tax reform, social acceptance of more moderate income discrepancies... ect... answers cant only be fomr the right wing of the poitical establishment. If they are I dont think the consumer economy will survive easily.

 

[Sxotty]

saying that policy takes 10 years is a lie, that is just what people say who want to say reaganomics worked. It also allows current presidentes to do completely stupid things and say well after my term is expired it will work just play along for now. A low Dollar would be good if we still manufactured a lot of goods, but our capacity is much reduced.

Whatever happens with the economy I don't care much b/c it is all just a make believe thing anyway in a way.

 

[Sxotty]

Well, I'm all for make EU and North America a single free trade zone too. The closer we can bring EU and NA together the better. You're probably right that neither side is willing to accept that at this moment, but I'd love to see it happen some time in the future.

I kind of agree, but you have to understand and I am sure to some extent you do the U.S. mindset. It is cool to be overly independent here, and the populace I do not believe would buy into this for at least 20 years, I doubt we could get a common currency with Canada, I mean where would all our presidents faces get plasterred then?

I would like NA as a whole (and the US in particular)and Europe to get closer though honestly b/c our goverments, whatever nationalism or anti-ism you have, do support human rights, and essential freedoms. We share similar morals and what not and we should all work together, but whatever...

 

[pax]

Yeah mid term in the next 20-30 years economic unification or at least integration of free trade zones (even without currency unification) would be good. But in the shorter term of 3-10 years I think the NA consumer is in for some serious jolts.

I think the jolts can be moderated but with serious policy changes. I certainly dont think the coming fluctuations will be good for democracy or our social compact. I certainly dont agree we should sit back and let it all happen without any intervention anymore than I want gargantuan interventions that would give govs too much power over private lives.

But to do as we are doing now, which is little or nothing, or betting whats left of the farm on tax breaks for wealthy investors, we are gonna have serious probs...