Up or down? Well the dollars certainly going down in the short to medium terms but who and what are going down with it. Well in the US the benefits are likely to be felt in the dirty old towns as by Josh Bivens observes
“The benefits of the lower value of the dollar will be felt predominantly in the manufacturing sector, as it accounts for more than 80% of traded goods in the United States. This means that the positive effects of the falling dollar are concentrated in the sector that has suffered most in the recent recession. The U.S. manufacturing sector has shed 2.1 million jobs since the onset of the recession in March 2001, accounting for nearly all job loss during this time.”But externally this adjustment is taking place mainly by way of depreciations against the Euro, Canadian dollar, Mexican peso and Japanese yen while China and other East Asian currencies cling desperately to their self imposed pegs.
“ This is a far from optimal pattern of adjustment. The euro area is one of the slowest growing economic areas in the world, yet it will bear much of the burden of relieving the pressure of U.S. trade deficits. This will deprive the euro area of demand for domestic products at a time when such demand is necessary to forestall a full-blown recession. China, Malaysia, and Taiwan, on the other hand, are three of the fastest growing economic areas in the world; however, none of these nations will bear any burden of reconciling the U.S. trade deficit, although they could easily afford it.”“To maintain this peg however and avoid adjustments, East Asia need to buy dollars, as a result of which, the Economist observes, China and the rest of developing Asia now have $1.4 trillion of reserves, mostly dollars. As they say, if it cant go on it wont go on
“ “At the heart of the central banks’ calculations is a trade-off: intervening to keep your currency down can be costly, but it is good for exports. Though the costs of intervention are hard to quantify, they are potentially big. Because the domestic money supply is expanded—those dollars must be paid for with something—it can cause inflation (though this can be neutralised through “sterilisation”, ie, bond sales). But the big potential cost is in amassing a huge stash of dollars with precious little exit strategy. Quite simply, Asian central banks now own too many of them to exit en masse, for their exit would cause the dollar to crash and American interest rates to soar, which would cause huge losses on their holdings of Treasuries. “
So ……….???
“The incentives to flee the Asian cartel (to give it its proper name) thus increase the bigger the game becomes. Why take the risk that another central bank will leave you carrying the can? Better to get out early. Because the game is thus so unstable it will come to an end, and probably a messy one. And what will then happen to the dollar? It is hard to imagine its hegemony remaining unchallenged when so many will have lost so much. And doubly so given that America has abused the dollar’s reserve-currency role so egregiously that its finances now look more like those of a banana republic than an economic superpower.”
If this is the answer, the question then is what will replace dollar as the world currency? The Euro’s keen, but it would be hard for it to credibly retain a strong currency in the face of a weak economy, weak fiscal balances and shaky demography. Perhaps the Yen, but the BoJ has traditionally been very reluctant to see its currency used as an internatial reserve currency.Given the lack of alternatives, what is probably more likely than a loss in confidence in just the dollar is a loss in confidence in the international financial system. After all is there’s no international lending, theres no need for an international currency.
Posted by wardx107 at November 29, 2004 09:19 AM