tadpole76

Possibility of Greece's Euro Realignment Could Upset the Economic Applecart

I've enjoyed reading the comments on this analysis. However, comparing California's or any other US state's fiscal situation to a sovereign country such as Greece is not an apples to apples comparison. It isn't meaningful. Yes, California's GDP is the 8th largest in the world, but California's fiscal issue are mostly self-contained within. The US decision not to bail out the state of California didn't hurt the union of the US. Next, a currency has nothing to do with internal social progression or non-progression of a nation. It is the will of leadership and will of a nation's people. Currency is a mere measure for trade and payment backed by a hard asset or faith (fiat). A currency's success is dependent on how well a nation's financial leaders manage the currency. A successful currency bolsters a nation's might and influence on the international stage. While it may be hard initially if Greece were to revert back to the drachma, it won't harm the long-term social progression of its people. Up until now, Trichet has been viewed as an excellent steward of the euro currency. The truth is he is no better than Bernanke is with the dollar. Trichet could have dealt with the PIIGS of the EU earlier since coming to office in 2003. Bernanke could have dealt with the subprime lending and addressed the shananigans on Wall Street earlier. I think its easy to see no leader is better than the other. I believe Trichet is just better at managing public perception. Perception is everything for a leader. Bottom line: Globalization has caused the finances of every sovereign nation to be interwound in some form. Failure of one CAN contribute to the failure of others, depending on the amount of exposure. Greece will survive in or out of the euro.

Understanding the Dollar's Reversal: Who Will Feel the Pain?

I would agree that calling Friday's action with the dollar is premature to call it a reversal of the long 7+ year trend down of the currency. However, I don't think the dollar will remain the funding currency of the carry trade for long. When the USD carry trade is unwound and shifted back to the JPY, this will obviously be bullish for the USD. This will certainly happen. It may not happen next week...but the market always does what it needs to do. Just not always on our time table. Fundamentally, there is no reason for the strength of the pound or the euro versus the dollar. They are all overbought and the dollar oversold. Gold is also in a speculative bubble that will also pop eventually. Just watch it out there guys, if an investment appears to be too much of a good thing, it usually is. Don't put all of your eggs in one basket.

Politics and the Dollar

Our country needs national and international investment. At current interest rates, there's no incentive for foreign investors to put more capital into US assets until interest rates are raised by the Fed. We need to bite the bullet and jack up rates as was done under Paul Volcker in 1979. Although we ended up having a double-dip recession during the years following; the dollar stabilized and went on to rise until the Plaza Accord in 1985 when we agreed to a dollar devaluation against the yen and the German mark. Maybe another accord needs to happen? Only this time around, the European Union would agree to devalue the euro against the dollar and China would agree to appreciate the yuan against the dollar. I think if euro hits 1.60 and beyond, an accord with the EU could be more of a reality. China is a pipe dream. We'll have to quit offering them debt or US assets to purchase by making hard decisions to significantly reduce Federal spending. If there's no debt or deficits to finance, the need to offer federal debt diminishes. A balanced budget is in order. To think at the beginning of this decade, that President Clinton predicted that our national debt would be paid off by this fiscal year?

China, Emerging Economies, and the U.S. Dollar

There is no immediate replacement for the dollar. The euro simply cannot support the world's liquidity needs. The euro is a largely unproven currency and still an experiment. It has a hoge podge of 16 small economies that has fault lines. It is just a currency of the moment. Europeans and the Chinese are afraid of debt. For the euro or yuan to take the crown of the world's reserve currency, these economies must be prepared to run current account deficits to spread its currency all over the world. Swaps won't do the job. The Chinese must also lift their capital controls, which they won't likely do. I won't presume to know what will happen in the end. I do look for most countries to return to a commodities-based standard of some sort so their currency is actually backed by something.

Fix Euro / Dollar Exchange Rate? Fat Chance

The euro needs a valuation correction, not a fixing. The euro exchange rate is higher than USD because of euro's higher interest rate, not because the euro is fundamentally more sound than the USD. This imbalance (not to mention the public angst over US debt) has caused the euro to be overbought and the USD to be oversold.

Good News: Dollar Headed Down

Yes, a falling US dollar makes our exports more competitive in the international market. But it also reduces the purchasing power of the US consumer. I agree with JeffDB. A falling US dollar will not close our trade deficit with China and the rest of the world. Over the last 15 years NAFTA has killed our domestic factory production base and led to offshoring of millions of jobs. Because more things are made abroad, the US consumer has had no choice but to buy more imported goods. Instead of a competitive devaluation of our currency to boost exports; a more responsible approach is to renegotiate NAFTA to reflect current realities, get everyone on a level playing field and incentivize US-based companies to bring their jobs back home.

U.S. No Longer Looking Toward China?

The truth is, there are very few countries with a fiat currency or (pretty car). By far the ugliest of the G-8 is Japan. Japan has a debt to GDP ratio of 198%! Italy is 104%, France 65%, Germany 76%, UK 44% (and climbing quickly), US 61%, Canada 61%. Russia has the prettiest car at 6% (IMF, 2009). It should be stated that Russia's economy is still centrally planned and is not market-based. Problems with effective monetary policy has also plagued the Russian ruble over the years. Honestly, I don't see why any other country (particularly Japan and those using the Euro) feel their "car" is better than the US's from this perspective. If anything the "cars" of the other countries are overvalued against the dollar.

More Asset Bubbles and a Dollar Primed for Collapse

I agree with a couple of the premises of this article: 1) We do have a President, Congress, Fed Chairman and Treasury Secretary that does not know how to reign in spending (Remember when Obama promised during his campaign to go through the budget line-by-line and eliminate programs and agencies that didn't work? It sounded good!) and tighten monetary policy appropriately. 2) Failure to do these things will cause the exchange rate of the dollar to drop further making our debt less expensive to pay down. This is indeed what the Fed is determined to get. I don't think our quality of life will suffer too much though. A dollar will still be worth a dollar in the US. We just won't import as much because these items will be more expensive, and we may just actually start restoring our manufacturing base. Wages won't decrease unless we have some significant and sustained drop in the CPI. A sustained increase is inflationary for wages. However, our sovereignty as a nation can potentially suffer greatly. Weak nations tightly correlate to a weak currency. A weak dollar will affect our ability to assert our economic might to fight for liberty, justice and protect the free world in general. China has been able to influence decision-making in our country for last 10 years by threatening to dump dollars or dollar-based assets. There's nothing in it for them to hurry up and de-peg their currency from the dollar. 40 or even 30 years ago, this wouldn't have been an issue because we had a stronger dollar and we didn't have to tolerate it.

Strengthening U.S. Dollar: Bad for the U.S. Economy and the Global Imbalance

I respectfully disagree about needing a weaker US dollar to address trade imbalances and the current account deficit. Beggar thy neighbor currency & trade policies are a road to nowhere. China needs to "unhing" from their managed float to the US dollar. This will allow the US to become more competitive in exports. We also need to re-work NAFTA as this has further hindered our ability to export more. The US also needs to be fiscally more responsible by working towards a balanced budget and use budget surpluses (if we ever get to this point again) to pay down the national debt.

Is the U.S. Dollar the Fed's Next Weapon?

If it were 1959, throwing our weight around via the dollar to make everything right with the world would have been the weapon and strategy of choice. 50 years later in 2009, we are a weakened nation that is morally and fiscally bankrupt having already debased our currency by fighting three expensive wars, financing a welfare state with much of the population dependent on a free government hand-out (Medicaid and disability SSI), voluntarily debasing the dollar against the majors in the 1985 Plaza Accord, and a soaring national debt is a result of this current war and stimulus spending is over 80% of GDP. Why? Because we can't mind our own damn business in foreign affairs (by still spending like its 1959) and are content to incentivize people to lay around and not be an upstanding contributor to society. If we continue on this reckless spending path, the dollar will lose its world reserve currency status, guranteed! If the dollar falls, the US falls. The way to destroy a nation is through its currency. That's not opinion, that's a fact.

Will China Dump the Dollar?

Unless the yuan can achieve full convertibility it will never achieve reserve currency status. While the Chinese have been slowly working for some time on this; they have enjoyed massive current account surpluses under their current regime because the inflows and outflows of capital are restricted by the inconvertibility. I would presume they're in no hurry until they can figure out a way to make it work for them. It will be years, if not decades if this happens. Another factor to ponder is that convertibility will likely destabilize the yuan exchange rate. The managed peg (I mean float) will be harder to maintain if capital inflows and outflows cannot be restricted as they are now. China knows they are in a dollar pickle with us and cannot end the game they started years ago now. Now, they're currency swapping with other countries like Argentina to reduce dollar dependency (which in the long-run is a shot in the foot for China) and hedging their dollar investments with commodities. This is causing a commodities bubble like last year and the bubble will pop again because the real fundamentals: supply and demand don't support the prices. It is a vicious circle that can only be broken until Uncle Sam puts down his checkbook and quit his 40 year spending spree. The federal government should run an old fashioned campaign to encourage the public to take on some of the debt. If we're going to cry fowl by the government raising federal taxes because SS and Medicare are running dry, then the public should be obligated to help finance these great programs by buying treasuries and bonds. At least this way they'll get their money back on maturity and a little extra.

Is the Euro About to Fly?

As long as currency fundamentals are out of play and the interest rate remains below the eurozone's; yes, the euro will be rewarded for improvements in the US economy and the dollar punished as skittish investors feel better about taking more risk. However, this can only go on for so long. Fundamentals will eventually return.

U.S. Dollar Revaluation

Who in the hell would want to maintain long USD positions with the current interest rate near zero right now? That's why investors are currently shorting USD. Currencies that have higher yield return like the euro, will be favored until the going gets tough. With the tough just around the corner, the euro will be selling off, here's why: ECB is considering further reducing their interest rate to 1% and introducing their own version of quantitative easing to devalue the euro because Europe (specifically Germany) has mounting unemployment and is generally refusing to take action on their trade imbalances. Some European companies (Volkswagen, Thyssenkrupp and Airbus) have already made plans to close up shop and move to the US because the lower value of the US dollar makes operations more cost effective. How does Europe prevent further erosion? Devaluing the Euro. Now some will say, "Didn't the G-20 just agree to no competitive currency devaluations?" Yes they did. But what they didn't agree to is leveling the playing field with all major economies. The euro devaluation only becomes competitive if the currency goes below dollar parity.