As the U.S. has the largest and most diversified economy, the US dollar has always been the currency of choice for other countries and currency traders. Virtually anything made anywhere in the world is made or traded in the US. Further, the dollar has historically been secure from political upheaval and state confiscation. The dollar has benefited from its function as the world's primary physical currency, used as legal tender in many foreign countries and circulating as parallel currency nearly everywhere. In 2003, about 60% of the US currency in circulation was held outside the U.S.
For the better part of the last decade, the US dollar has been loosing its value but until recently, the US had managed the dollar fairly well resisting the temptation to borrow too much and flooding the global market with too many Greenbacks and Treasury securities. However, the bursting of the credit bubble and the recession resulted in huge federal borrowing to finance the massive U.S. stimulus package and other entitlement programs heralded as the panacea for the ailing U.S. economy.
The shrinking dollar should have a positive impact on trade. American consumers should buy fewer imports if imports become more expensive and American exporters should sell more to markets abroad if U.S.-produced goods get cheaper. Foreigners should become more inclined to visit the U. S., and Americans should become less inclined to travel abroad. This should even out the trade flows, and stabilize the currency markets. All things being equal, this should spur job growth in the American manufacturing sector as worldwide consumers flock to purchase these cheap American products and discounted hotels and restaurants. We saw this in 1997 which is the last time the greenback’s purchasing power was this low. At that time, though, the dollar was rebounding from its low in the mid-1980s so the trend was positive. Also, it was easier then to make changes in the trade numbers because the price of oil ranged from $22 to $26 a barrel, and China's exports were tiny.
However, China has undervalued their currency (yaun) for years by selling huge amounts of yuan for dollars to currency traders. The undervalued yuan makes Chinese exports artificially cheap and foreign products too expensive in Chinese markets creating huge trade surpluses and double-digit growth for China. From 2006 to 2008, the US trade deficit went from 1% to 4% of GDP. This should have created a shortage of demand for U.S. goods and services and resulted in a recession. However, as the largest US lender, China used it’s undervalued yuan to purchase U.S. securities which it in turn loaned to U.S. consumers against their homes and on credit cards, keeping the U.S. economy going…….temporarily.
Well, there is some good news; the stock market is up about 50% from it’s March low. The not so good news is that as the dollar falls against the euro, yen and other major currencies, that gain becomes about 30%.. Additionally, when the US ended the convertibility of the dollar into gold, it provided the opportunity for other countries to manipulate the system to gain competitive trade advantages. An opportunity that China has fully exploited.
Americans have a strong appetite for Japanese cars, Chinese clothing and electronics and French wines and don’t seem to be slowing their consumption much. Additionally, the unwillingness of the U.S. government to allow domestic drilling coupled with a compulsory demand for fuel seriously lessens the positive impact that the shrinking currency should have on trade. The impact of the devaluing dollar depends upon the adjustability of the demand for exports and imports. So far, the demand has not been very adjustable, so an increase in the price of imports has not reduced the value to any significant extent. Sometimes a devaluation has a lagging effect so it’s possible that the devaluation may still produce some boost to the U.S. economy . However, if the U.S. housing market continues to decline, and unemployment continues to rise, consumer spending will continue to fall and there will be no authentic recovery, In this case, any positive impact of a devaluing dollar will be limited.
For the better part of the last decade, the US dollar has been loosing its value but until recently, the US had managed the dollar fairly well resisting the temptation to borrow too much and flooding the global market with too many Greenbacks and Treasury securities. However, the bursting of the credit bubble and the recession resulted in huge federal borrowing to finance the massive U.S. stimulus package and other entitlement programs heralded as the panacea for the ailing U.S. economy.
The shrinking dollar should have a positive impact on trade. American consumers should buy fewer imports if imports become more expensive and American exporters should sell more to markets abroad if U.S.-produced goods get cheaper. Foreigners should become more inclined to visit the U. S., and Americans should become less inclined to travel abroad. This should even out the trade flows, and stabilize the currency markets. All things being equal, this should spur job growth in the American manufacturing sector as worldwide consumers flock to purchase these cheap American products and discounted hotels and restaurants. We saw this in 1997 which is the last time the greenback’s purchasing power was this low. At that time, though, the dollar was rebounding from its low in the mid-1980s so the trend was positive. Also, it was easier then to make changes in the trade numbers because the price of oil ranged from $22 to $26 a barrel, and China's exports were tiny.
However, China has undervalued their currency (yaun) for years by selling huge amounts of yuan for dollars to currency traders. The undervalued yuan makes Chinese exports artificially cheap and foreign products too expensive in Chinese markets creating huge trade surpluses and double-digit growth for China. From 2006 to 2008, the US trade deficit went from 1% to 4% of GDP. This should have created a shortage of demand for U.S. goods and services and resulted in a recession. However, as the largest US lender, China used it’s undervalued yuan to purchase U.S. securities which it in turn loaned to U.S. consumers against their homes and on credit cards, keeping the U.S. economy going…….temporarily.
Well, there is some good news; the stock market is up about 50% from it’s March low. The not so good news is that as the dollar falls against the euro, yen and other major currencies, that gain becomes about 30%.. Additionally, when the US ended the convertibility of the dollar into gold, it provided the opportunity for other countries to manipulate the system to gain competitive trade advantages. An opportunity that China has fully exploited.
Americans have a strong appetite for Japanese cars, Chinese clothing and electronics and French wines and don’t seem to be slowing their consumption much. Additionally, the unwillingness of the U.S. government to allow domestic drilling coupled with a compulsory demand for fuel seriously lessens the positive impact that the shrinking currency should have on trade. The impact of the devaluing dollar depends upon the adjustability of the demand for exports and imports. So far, the demand has not been very adjustable, so an increase in the price of imports has not reduced the value to any significant extent. Sometimes a devaluation has a lagging effect so it’s possible that the devaluation may still produce some boost to the U.S. economy . However, if the U.S. housing market continues to decline, and unemployment continues to rise, consumer spending will continue to fall and there will be no authentic recovery, In this case, any positive impact of a devaluing dollar will be limited.
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