The falling dollar may be bad for Europe. And the Canadians, too!

November 28, 2004 8:18 PM

This .pdf(accessible to laypersons) from the labor-backed Economic Policy Institute suggests that a falling dollar is probably very bad news for Europe.

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 the 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.

Via Marginal Revolution.
posted by trharlan (38 comments total)

PDF?
posted by mr_crash_davis at 8:20 PM on November 28, 2004

very bad disastrous news for Europe.
posted by loquax at 8:25 PM on November 28, 2004

Form for converting PDF to HTML.

Copy this URL to your clipboard first: http://www.epinet.org/briefingpapers/140/bp140.pdf
posted by blacklite at 8:41 PM on November 28, 2004

So, what about China ?
posted by troutfishing at 8:43 PM on November 28, 2004

This is all very complicated and confusing and I don't think anyone knows what is going to happen. But it does look like the dollar is going down either way. It is another one of those huge gaping uncertanties in the future, like the Iran question (What is Bush going to do with them?)

Everything is very unpredictable. The 21st century is weird stuff.


So, what about China?
You forgot Poland!
posted by blacklite at 8:47 PM on November 28, 2004

I can tell you this is also bad news for our Asian competitors. They cannot press any sort of advantage in this country as long as the dollar is performing the way it is now. I work in an industry where several Asian companies have made big goals, this year and next, to erode US dominance in both the US and global markets. These goals are now in serious trouble. Add to that rising energy and raw goods cost and several Asian countries, including China, could be headed for recession.
posted by UseyurBrain at 8:50 PM on November 28, 2004

China? In terms of currency? They peg the Yuan to the US dollar, and control the value of the currency. This contributes to Europe's problems by being another source of cheaper, imported goods, regardless of exchange rates. This has been one of the long standing complaints the US has had with respect to Chinese currency manipulation. Meanwhile, China benefits by effectively financing foreign purchases of Chinese-made goods, goods that with a convertible yuan would no longer be affordable for Western consumers. Is that what you mean?

On preview, UseyurBrian, how is China affected by the relative strength of the Euro? Why does a relatively low US - Euro exchange rate hurt Chinese market share growth?
posted by loquax at 8:54 PM on November 28, 2004

It would be nice if this punished France and Germany for their disgraceful behavior vis a vis Iraq, but I doubt that's the intention. What a weaker dollar may do, however, is destroy the moronic anti-inflation-is-everything policy of the EU's Central Bank (or whatever it's called). Lower EU interest rates would slow or stop the dollar's slide, and wake up Europe's economy.
posted by ParisParamus at 8:59 PM on November 28, 2004

It would be nice if this made PP's cough syrup habit gradually more expensive, thereby causing him to switch to the huffing of chemical paint strippers.
posted by ladd at 9:12 PM on November 28, 2004

One explanation for the ever-expanding budget deficit and tax increases is an attempt to devalue the dollar without saying so like Reagan did in the 80's. So it makes sense.
posted by calwatch at 9:14 PM on November 28, 2004

ladd, I know you're new, but just because ad hominem attacks are commonplace around here doesn't mean you have to join in. Try to rise above, and even turn the other cheek if you see an opinion you happen to disagree with.
posted by loquax at 9:28 PM on November 28, 2004

It would be nice if this punished France and Germany for their disgraceful behavior vis a vis Iraq, but I doubt that's the intention.

So, you're saying that it's unlikely that the "intention" of global currency markets is to set rates to "punish" certain countries for their UN voting record. Wow - you may just be right.

And to what level should the ECB set the prime rate to "slow the dollar's slide"? Its current rate of 2% is pretty close to Euro-area inflation. Banks are usually not in the business of lending at a loss.

All ignorant jingoism aside, the dollar is sliding against the euro (and the yen, and the renminbi, and the australian dollar, etc) because Americans import more then they export. Pure and simple. Eventually, those numbers have to even out. The Chinese and the Japanese have been playing a game of chicken with each other - each trying to get the other to inflate the dollar. Sooner or later (as per Stein's Law - "things that can't go on forever ... don't") they will have to stop. And this will be good for nobody. If we're lucky, it'll mean a lower standard of living for americans (as import prices start rising) and increased unemployment for those countries that actually make stuff (as their products become less affordable). If we're unlucky, well we've discussed that already.
posted by bonecrusher at 9:37 PM on November 28, 2004

trharlan, I'm usually with you on your economic posts, but I have to wonder: wouldn't the falling dollar be even worse for, say, the U.S.?
posted by Civil_Disobedient at 9:37 PM on November 28, 2004

loquax, are you a UTSer by any chance?
posted by Krrrlson at 9:53 PM on November 28, 2004

"Why does a relatively low US - Euro exchange rate hurt Chinese market share growth?"

I said 'Asian'. At this point we are battling, for example, several Korean companies that China has a stake in and helps produce some of the goods for. If you compete in this country at some point you are converting your money to ours and that conversion does not work in your favor at this point as long as the dollar is low (such as dollars to 'wons').
posted by UseyurBrain at 10:03 PM on November 28, 2004

Wouldn't that be more of an ad simianem attack?

Thank you, thank you, I'll be here all night.
posted by ladd at 10:04 PM on November 28, 2004

wouldn't the falling dollar be even worse for, say, the U.S.

Not necessarily. It hurts certain sectors while helping others. For example, it means that US exports have become cheaper and Canadians, Australians, whomever can afford to import more of what Americans produce. Fewer jobs should disappear due to cheaper labour elsewhere. It makes Foreign Direct Investment more attractive, perhaps reversing the trend that has seen China overtake the US in that department. Of course, it does give Americans a smaller relative purchasing power, but I'd wager that the effect won't be very dramatic on the average person. It would depend on the types of goods that are imported, and whether they are subject to currency fluctuations. Canada benefited in many ways throughout the 90's by having a very cheap dollar relative to the US, just ask the folks in Windsor or Oakville building cars up here instead of in Michigan, or the film industry workers in Vancouver and Toronto.

On the other hand, Europe's Central bank, and "Europe's" economy is far less flexible and far less dynamic on the whole that the American economy, and is much less prepared to deal with the Dollar-Euro spread that currently exists. Like others have said, goods produced in Europe today are simply not competitive on the global market, or the domestic market. Add that to negative or very small population growth, the health care and pension crises, an almost total lack of domestic natural resources and ongoing political instability (relatively speaking), and Europe has many challenges to overcome in the first half of this century. A re-emergement Russia, and an exploding China also likely hurt Europe more than the US.

Krrrlson: Yup - You too? Send me an email, it's in my profile.
posted by loquax at 10:08 PM on November 28, 2004

I don't think the falling dollar is an intended policy, per se, just the consequences of irresponsible fiscal and monetary policy. Econ 101 says that if you keep printing dollars, prices will go up and the value of what each dollar can buy will go down. Current policy is printing dollars faster than ever to fund the massive budget and current accounts deficits created by this administration. The only thing keeping the boat floating right now is China, Japan, and to a much lesser extent, the EU's willingness to buy all the dollars being printed. Its hurting them to do it, continuing to throw money at a declining investment, but to stop at this point would tank their exports. This is a much bigger deal to China and Japan than to the EU because of percentage of GDP dependant on Exports to the US. So the EU is at this point looking to soften the blow for themselves and ride it out. China and Japan don't really have any options at this point but to continue propping up the dollar as best they can and hope to acquire enough resources to become the dominant actor when if the house of cards finally falls. In the short term, as the Asian's purchasing power increases, so does their ability to demand better terms from the US, driving up interest rates and causing a recession. Hopefully this will let the air out of the bubble slowly and avoid a Weimar style catastrophe for the US Economy.

ParisParamus: If you have x amount of growth in GDP and 3x increase in inflation, it doesn't matter how large your growth is, you're still screwed. No matter how hard The US Government tries to make inflation disappear with talk and fudged numbers, it doesn't go away.
posted by clubfoote at 10:11 PM on November 28, 2004

goods produced in Europe today are simply not competitive on the global market, or the domestic market

The EU is running a trade surplus, the US is running a trade deficit, so you have this exactly backwards.
posted by bonecrusher at 10:23 PM on November 28, 2004

goods produced in Europe today are simply not competitive on the global market, or the domestic market

Goods produced in Europe today are simply not competitive? Not true.
posted by faux ami at 10:27 PM on November 28, 2004

Loquax wrote:
Fewer jobs should disappear due to cheaper labor elsewhere.

This is nonsense. In order for US Labor to become competitive in the service sector jobs currently being lost the dollar would need to devalue by a factor of 10, in manufactured goods it would take at least a factor of 50, possibly more in certain industries like textiles. This type of devaluation would be catastrophic for everyone except the very wealthy. Retirements savings for most of the middle class become inadequate, most people already on fixed incomes can no longer pay their bills. Any benefit from a decrease in unemployment gets eaten up by the tremendous increase in social spending needed to keep everyone's retired parents and grandparents from starving to death.
posted by clubfoote at 10:28 PM on November 28, 2004

Basically, The big boost in the Euro is due to (sorry) it's novelty, and the fact that the Dollar and the govt associated to it are in the shitter.

All of Iraq's future oil is mandated to be valued in US Dollars.

This is not by chance.

This is a crutch grasped by the (Dare I say it) Neocons...

The US HAS to have a SOMETHING to bargan with.. And if US dollars are not looking promising, Iraqi oil does.

But you gotta buy the dollars to get the oil...

I shoulda taken my own advise a year ago when gold was $320 an ounce... I still might at $420

But if you really think things are gonna go peachy keen from here on out... Here's your chance!!
posted by Balisong at 10:39 PM on November 28, 2004

bonecrusher: the dollar is sliding against the...renminbi

Wha? Did I miss something?
posted by trharlan at 10:45 PM on November 28, 2004

clubfoote: China and Japan don't really have any options at this point but to continue propping up the dollar as best they can and hope to acquire enough resources to become the dominant actor when if the house of cards finally falls. In the short term, as the Asian's purchasing power increases, so does their ability to demand better terms from the US, driving up interest rates and causing a recession. Hopefully this will let the air out of the bubble slowly and avoid a Weimar style catastrophe for the US Economy.

Deserves to be repeated, in bold and italics. Very well put. Too few people understand that this is our future, beyond the relatively minor and short term impact of currency fluctuations on Europe and the US. While I do think that Europe's economy might be completely screwed for the next decade or so due to the dollar, it pales in comparison to to the implications of the theoretical uncontrolled collapse of the house of cards, as clubfoote put it. Asia is very much the master of "Western Civilization's" long term economic fate, for better or worse.

On preview: Bonecrusher, as a Canadian whose currency has not changed relative to the Euro, why should I buy a widget from Europe when I could buy one for less from the US? Why would a German want to buy a German widget compared to an American widget? I didn't mean to imply that European companies will go bankrupt overnight, only that since X date when the dollar and the euro were at par, goods priced in euros are now Y% more expensive relative to goods priced in dollars. You're right, those trade balances are currently at the levels you stated, but they may not be that way forever. Read pages 7, 8 and 9 of the linked PDF.

This is nonsense.

You're right, with respect to the US and industries like textiles. I was just trying to scare up some benefits of a low dollar. Sure, a 10 or 15% decrease is not going to have much of an effect at all on textiles. But it may enter into corporate outsourcing calculations. Shipping a call centre to Newfoundland is now 20% more expensive than it was a few years ago for AT&T, for example. Table two in the linked PDF has some projections, citing chemicals and transportation equipment as some of the sectors that will theoretically benefit from a low dollar.
posted by loquax at 10:47 PM on November 28, 2004

There's an interesting (yes, really) on the mechanics behind a sliding dollar in The Economist. It doesn't deal so much with the long term effects as the causes.

I imagine the outcomes range from a sort of soft landing to the US becoming a (kind of) cheap labour country. I can remember the same debate in Britain when the pound went down the toilet. But then again Britain is a medium sized country off the coast of Europe and not the world's largest economy.

Still, I imagine rich Americans are starting to get kind of p-ssed off that all those nice luxury goods that Europeans and Japanese make so well are getting so pricey. In that way at least, I suppose, Bush's economic lunacy might be hurting his supporters a little.
posted by rhymer at 1:11 AM on November 29, 2004

Any argument that devaluation of a currency somehow benefits an economy is an outright lie. Only the ruling elites come out of a devaluation unscathed. They own the means of production, real things like land, minerals, petrolem, ect. so what ever the value of the chit you use to denominate wealth, they're still on top. Its the other 99.5 percent of society that feels the pain when fiat currency decends towards its intrinsic value. Economists, in service to their masters, like to divert peoples attention from this with flourishes like "certain sectors will benefit". It's still nonsense. The net effect on any economy that devalues its currency is always negative.
posted by clubfoote at 1:49 AM on November 29, 2004

Why would a German want to buy a German widget compared to an American widget?

Because the US got out of the widgets business 20 years ago.

bonecrusher: the dollar is sliding against the...renminbi

trharlan: Wha? Did I miss something?

Whoops. But, give it a month or two - they've been signalling hard that a change is coming.
posted by bonecrusher at 2:22 AM on November 29, 2004

This would be good for all those US manufacturing jobs...
posted by Space Coyote at 2:46 AM on November 29, 2004

I don't think the falling dollar is an intended policy

In spite of administration claims and news reports to the contrary?

Any argument that devaluation of a currency somehow benefits an economy is an outright lie . . . Economists, in service to their masters, like to divert peoples attention from this with flourishes like "certain sectors will benefit". It's still nonsense. The net effect on any economy that devalues its currency is always negative.

Wow: discussion over, huh? Any evidence for your "always" claim?
posted by yerfatma at 4:15 AM on November 29, 2004

Any argument that devaluation of a currency somehow benefits an economy is an outright lie

Come again? Based on what? Do you mean the under-valuation? By what metrics are you judging the performance of an economy?
posted by loquax at 6:16 AM on November 29, 2004

I'm an ignoramus in economic policy, but I have the nagging feeling that if the situation was reversed (weak euro, strong dollar), there would be a bunch of people (possibly the same ones) eager to tell everyone how wonderful a mighty dollar is for the US economy, with countless snarky comments about those wussy Europeans and their weird-looking currency...
posted by elgilito at 6:43 AM on November 29, 2004

there would be a bunch of people (possibly the same ones) eager to tell everyone how wonderful a mighty dollar is for the US economy,

This report wasn't about the US economy per se, it was about the US economy as opposed to other economies, through the prism of a falling dollar. It doesn't (as far as I gather) attempt to explain any of the structural, geographical, political, technological or demographical factors of economics. These are the factors that really determine the relative performance of an economy relative to others. The US has been generally outperforming Europe for about 15 years, and this report posits that little will change due to a fall in the value of the dollar relative to the euro. Is there a lot of jingoism around a "strong" dollar? Sure. Does it really matter? Not really, within limits (see the economist article linked above). A "high" or "low" currency means nothing on its own - nor does a trade surplus or trade deficit. It's how an economy reacts and adapts to new conditions that's significant. See Japan in the 1980's and early 90's. See Canada in the late 90's and early 2000's. See the US in the late 1970's. None of this is to say that the US rocks and Europe sucks - Europe will continue to grow and be prosperous and be a fantastic place to live. Their relative economic strength and influence, however, will continue to wane along with the US, but to a greater degree.
posted by loquax at 7:42 AM on November 29, 2004

An article in progress on this very topic from the new wikinews.
posted by loquax at 8:28 AM on November 29, 2004

Loguax: The only metric that matters is standard of living. Everything else misses the point entirely

Yerfatma: Fiat money's intrinsic value is always zero. Currency manipulations conducted by the elite serve their interests only, the net effect on the economy as a whole is always negative.

http://www.mises.org/humanaction/chap31sec4.asp
The devaluation, say its champions, reduces the burden of debts. This is certainly true. It favors debtors at the expense of creditors. In the eyes of those who still have not learned that under modern conditions the creditors must not be identified with the rich not the debtors with the poor, this is beneficial. The actual effect is that the indebted owners of real estate and farm land and the shareholders of indebted corporations reap gains at the expense of the majority of people whose savings are invested in bonds, debentures, savings-bank deposits, and insurance policies.

http://www.gold-eagle.com/gold_digest_03/shostak100603.html
However, the so-called improved competitiveness on account of currency depreciation means that the citizens of a country are now getting less real imports for a given amount of real exports. In short, while the country is getting rich in terms of foreign currency, it is getting poor in terms of real wealth, i.e., in terms of the goods and services required for maintaining peoples' life and well-beings. As time goes by however, the effects of loose monetary policy filters through a broad spectrum of prices of goods and services and ultimately undermine exporters profits. In short, a rise in prices puts to an end the illusory attempt to create economic prosperity out of thin air.
posted by clubfoote at 9:54 AM on November 29, 2004

Please don't take offense, because I don't mean it as snarky as it sounds, but if you're going to pull quotations from sites that tout gold as the One True Monetary Way, we're never going to change each other's minds.
posted by yerfatma at 10:37 AM on November 29, 2004

yerfatma, I think your reply was inoffensive and unsnarky, but why not judge the argument on its own merit?

After all, those of us on MeFi's libertarian fringe don't write "if you're going to pull quotations from sites that tout government as the Solution To All Of Life's Problems, we're never going to change each other's minds."
posted by trharlan at 10:54 AM on November 29, 2004

Yerfatma:
I'm not trying to change anyones mind. You can choose to believe whatever you like. Goldbugs have some pretty suspect ideas. They've also nearly doubled thier money since equities peaked in 2001. Personally I'd rather have a nuanced discussion than engage in conversational terrorism.
posted by clubfoote at 12:57 PM on November 29, 2004

The Europeans certainly seem to be concerned about what a falling dollar will do to their standard of living.

Markets have pushed the euro up from about US$1.20 over the past two months in a surge labeled "brutal" by European Central Bank President Jean-Claude Trichet.

"I cannot imagine (Bush) effectively weakening the economy because the rest of the world has a problem with the American current account deficit or the dollar's exchange rate."

This is also an interesting dollar-related development:

Regulators may let China's four biggest state banks become market makers in U.S. dollar trading, paving the way for less currency intervention by the central bank, a state-run newspaper reported Monday.
posted by loquax at 1:36 PM on November 29, 2004