Euro's rise raises 'catastrophic' fears

December 24, 2004 5:02 PM

Euro's rise raises 'catastrophic' fears The euro rose on Thursday, topping $1.35 for the first time ever, amid speculation that the United States would not act to counter the dollar's decline. . "If we remain in a situation without any coordination, we can imagine a catastrophic situation" for the global economy, Finance Minister Hérve Gaymard of France told manufacturers during a factory visit Thursday in Strasbourg
posted by Postroad (60 comments total)

As an American ex-pat living in London for the last 30 years I can only say that the decline of the dollar is already a disaster for me. Since I am retired and living more or less on a fixed income in dollars my cost of living has increased by more than thirty percent in the last year. I try to console myself by recalling that there were years in the past when I was living much more cheaply in the UK than I could have done in the US but it doesn't help much. I am just waiting to see what these guys are going to come up with next.
posted by donfactor at 5:11 PM on December 24, 2004

Well, what can we do?

Nothing.

The dollar's fundamental backing is the "Full Faith and Credit" of the United States of America. The USA has been running record deficits, the US Government is pursing a fiscal policy that ensure that these deficits will only increase, consumer debt load is at an all time high, and consumer savings has plunged to under .5%.

We owe a bunch of money, and there's no reason to think we're going to sober up and start paying it back anytime soon. There are two reasons we haven't seen the dollar crash. One is that much of the debt is owned by countries that would really rather get paid back. Two is that, right now, to buy oil, you buy in dollars.

However, the kicker, here, is China. China owns a bunch of our debt, sure -- but they are in a much better position than many. If China decides that it is in thier best interest to screw over Japan, then the dollar is dead. You'll look back at the $2 GBP and the $1.40 EUR fondly -- and gas? God, when Russia and Saudi Arabia (not if) declare that they're taking payments for oil in Euros only, things will get very, very bad here.

I don't see any good way out. The right answer. Raise taxes, cut spending, work the markets to make consumer debt unpalatable, and reduce the US debt. Not deficit -- we need to run significant supluses, and pay off those bonds. Once the debt is back to rational levels, then the dollar becomes an incredibly strong currency again.

That, quite simply, will not happen.

It's been a good run.

Prediction: EUR buys $2 by 01-JUN-2004, and $3 by 31-DEC-2005. I'm confident of that -- I really think it'll be closer to $5 by then end of 2005.
posted by eriko at 5:37 PM on December 24, 2004

Canada is having similar hyperventilations over their rising dollar. As our market currently heavily dependent on the exportation of raw resources to the United States (lumber, lumber, lumber!), as our dollar increases in value relative to theirs, so do our prices become less and less competitive.

In the short term this is unpleasant, yes; but on the other hand, it encourages Canada to vertically integrate, something that has been demanded for many years.

Generally, I approach this sort of doomsaying with skepticism. While the changing dynamic will mean previously profitable endeavours will no longer be so, it also opens new doors. Bad in the short term, but in the long term, just... different.
posted by mek at 6:20 PM on December 24, 2004

Sometime around May 2003, if my secondary source has it right, Time Magazine wrote:

Why is Iraq such a prize? Not only does it have the potential to become the world's largest producer, but no other country can do it as cheaply. .... production costs in Iraq are much lower. The average cost of bringing a barrel of oil out of the ground in the U.S. is about $10. In Saudi Arabia, it's about $2.50. And in Iraq, it's less than $1, according to Fadhil Chalabi, executive director of the Center for Global Energy Studies in London and former Under Secretary of Oil in Iraq.

Yes, attributed to _that_ Chalabi

TANSTAAFL.
posted by hank at 6:23 PM on December 24, 2004

Shit. It's definitely going to hurt when I leave to Madrid next summer to live there a few years. I might as well just change a bunch of money now to Euros instead of waiting when the exchange rate will be incredibly sucky. I wish I would have invested in some Euros back in September.

It can't keep dropping though - there always will be an economic safety valve. Right now US companies are enjoying the extra value their exports have in the world marketplace but US tourists are losing out big time and will not travel to Europe if it gets much worse.

donfactor, if you have money sitting in banks here in the US you may want to consider opening an account in pounds. Especially if the drop is going to keep going lower. There are a few banks that offer accounts which can be set up in the US in foreign currencies. You only have to pay a small fee for the initial conversion, then it will be locked into the other currency. You might be able to invest in the currency fluctuations and make some money that way or just avoid losing when the dollar tanks.
posted by JJ86 at 6:27 PM on December 24, 2004

I lived through the Reagan years. Same thing happened, except it was Japan, not China. Take the long view.
posted by Turtle at 6:27 PM on December 24, 2004

eriko, what timeline are you on anyway... 1 EUR = 2 USD by Jun-04? I would say that you missed that prediction by a mile.

Prediction: the reality ends up somewhere between the predictions of the alarmists and the polyannas. We've seen this before. In a three year stretch in the 80s, the dollar went from parity with the quid, to $1 USD = 2.25 pounds sterling and nearly back again.

Also, what do you think happens to China's exports when the dollar falls through the floor? China has nothing to gain from a plunging dollar, and given their 'miraculous' rate of growth, they have as much at stake in keeping energy as artifically cheap as we do.

We all have each other by the balls in this scenario. It's a brave new world, laddies!
posted by Flem Snopes at 6:37 PM on December 24, 2004

People have always been saying the sky is going to fall, but the dollar does make me scared. Should I be moving all my savings to euros now? Is the housing market going to crash and I won't be able to sell my home without taking a huge loss?

The current U.S. government has shown they like to take risky gambles and don't care about world opinion. The recent economic "summit" hosted by President Bush had economic policy people saying the economy is much stronger than the press would have you believe, just like how the press is focusing on all the bad things in Iraq and not mentioning the infrastructure and schools we have fixed. If the government had acted in good faith in the past four years, then I would trust them with their stewardship of our economy, but they've shown over and over that they manufacture their own reality and then try to force us to accept it.

Does mismangement of the economy fall under the high crimes and misdemeanors clause of the constitution that allows the House to impeach? You gotta believe that if these scenarios come true, history will be most unkind to President Bush and his cabinet. We have to hope that the rest of the world realizes how damaging the collapse of the dollar will be to the world economy, because it sure seems that the American people and our government won't.
posted by beaverd at 6:46 PM on December 24, 2004

Also, what do you think happens to China's exports when the dollar falls through the floor?

Um, Flem Snopes, seeing as the Chinese renminbi (aka yuan) is artificially pegged to the US dollar, when the dollar falls through the floor, Chinese exports become even more competitive...
posted by runkelfinker at 7:00 PM on December 24, 2004

That's probably a good point runkelfinker, but assuming the dollar collapses, and the yuan remains pegged to the USD, doesn't that create an incredibly inflationary state within China that wreaks its own kind of havoc, and risks turning its economy on its ear?
posted by Flem Snopes at 7:09 PM on December 24, 2004

As the US dollar continues to fall, so will the support. The Euro is a healthy and diversified currency (arguable in some instances) and it's not surprising that it continues to rise.

This was going to happen eventually. Choosing an individual currency for international valuation as opposed to a fixed price based on physical assets (gold and silver) leaves the international currency market just as volatile as any other market based on competition. Due to international entrenchment, the US economy does not adapt quickly (or as quickly as it used to) and this is why other currencies are skyrocketing.

Add the unprecedented mismanagement of American fiscal policy and although, yes, it's been said before, it's future has never been this bleak. Also, the Euro didn't exist during the Reagan era so it's not a valid comparison.

The US dollar is in trouble.
posted by purephase at 7:19 PM on December 24, 2004

Flem, I think you're right: the yuan being pegged to the dollar would massively magnify the global fallout from a dollar collapse.

Plus China is not the only country pegged to the dollar - two I've been to are Panama (with its Balboa) and Ecuador (dollarized in 2000 PDF).
posted by runkelfinker at 7:19 PM on December 24, 2004

The dollar isn't going to collapse (whatever collapse means). Nothing happens in a vaccum, the FPP is a link to a European paper with a French commentary.. the dollars rise is hurting Europe and helping the USA and the Europeans would love to see American politicians change that by putting political pressure. The people getting hurt right now are the folks like donfactor, Americans in Europe. Otherwise, Europeans are flocking to buy US goods ie. trade deficit moving in a positive direction, stimulating US economy and growth.
posted by stbalbach at 7:28 PM on December 24, 2004

On the upside, if the dollar continues to fall, it may turn out good for students. Between ridiculously low interest rates and the declining dollar, college loans have been one of the best deals they have ever been.

So, you know, we can pay that money back and get started on credit card debt, where they make the money.
posted by Saydur at 7:46 PM on December 24, 2004

So what would a post-dollar new world order look like? After the initial fallout, of course. Is it concievable that the U.S. would drag China down with it and leave Europe as the New Superpower®? Is anyone elated at this idea? ;)
posted by abcde at 7:49 PM on December 24, 2004

Europeans?
posted by drezdn at 8:14 PM on December 24, 2004

Heh, the US dragging down China? Not going to happen. In the 21st century there will only be one global superpower and it will be China. Compared to Europe or the US, China has unlimited resources and markets.
posted by JJ86 at 8:18 PM on December 24, 2004

"... an economic meltdown of epic proportions likely in 2005"
Covered in detail at The Blogging of the President. Scary stuff.
posted by Meridian at 8:20 PM on December 24, 2004

I'm don't understand really why people think this is a bad thing? I'm not an economist, but it seems to be that besides for tourists and ex-pats, the falling dollar is great for the United States.

It makes imported goods and services more expensive, encouraging people to buy locally and employ locally, and it makes U.S. goods cheaper overseas, encouraging people to buy U.S. goods and services. Additionally, it helps correct the imbalances in the trade accounts and in the short term makes government borrowing more expensive, thereby providing incentives to lower foreign borrowing.

I was under the impression that although the Fed was talking 'strong dollar', that the fall of the dollar has been orchestrated on purpose.

Its not great for this to stay as a long term trend, but please people, get a grip, the dollar has fluctuated before.

This could really lead to a great boost in the U.S. economy at the expense of the EUR countries. I think thats why you here alot of panicking from the European central banks and not so much from the Fed.
posted by PissOnYourParade at 8:22 PM on December 24, 2004

Dec. 15th - "The policy of my government is a strong-dollar policy," Bush said during an Oval Office meeting.

Dec. 23rd - "As we start 2005, the dollar will continue to lose ground against the euro. The perception the U.S. administration is not going to do anything to stem the dollar's decline'' will push it lower, said Sophia Drossos, a currency strategist at Morgan Stanley in New York and a former Federal Reserve employee who helped manage the central bank's foreign-exchange reserves.

Whoops.
posted by Arch Stanton at 8:33 PM on December 24, 2004

Please, I'm no Bush fan, but holding economic strategies like these close to your chest is good for business and for people.

As I said, I'm not an economist, so I'd love to hear an in depth discussion on the pros and cons of a strong and weak dollar.

However, so much of market driven economics is based on perception and emotion. Maybe you can't just come out and say "If the dollar falls, we're going to allow to stay low for bit." because panicky ill-informed people will rush to web discussion boards and convince other panicky ill-informed people that its time to rush the banks and stuff their rectal cavities with gold bullion.

Or maybe this is some bad for the economy news. I don't really know, but I'm not convinced that any of you do either.
posted by PissOnYourParade at 8:45 PM on December 24, 2004

according to Fadhil Chalabi, executive director of the Center for Global Energy Studies in London and former Under Secretary of Oil in Iraq.

Yes, attributed to _that_ Chalabi

No, not that Chalabi. The buttboy of Iraq, Ahmed Chalabi, is a cousin of Fadhil. Though there's definitely a clan effect at work, Fadhil has an impressive bio of his own including the Iraqi government, OPEC, and now this CGES outfit (some sort of Saudi project, which is quite interesting as Ahmed is seen as a creature of their mortal enemy Iran). Fadhil has (from his cozy seat in London) no problem criticizing the occupation {PDF}, either.
posted by dhartung at 9:04 PM on December 24, 2004

You have to admire the guts it takes to piss off the world and then piss your country down the drain and not even care.
posted by fleener at 9:09 PM on December 24, 2004

Many writers have said all along the issue of "petro-dollars", or fear that OPEC would switch to pricing oil in Euros, was one of the main reasons (if not the primary reason) for the invasion of Iraq. Most of the articles I've read about this have been on anti-globalisation and/or anti-American policy sites - so I don't claim this is an unbiased view, but it makes for interesting reading.
posted by sixdifferentways at 10:17 PM on December 24, 2004

Should I be moving all my savings to euros now?

If you'd done it when it was $0.80 to the dollar, you'd be sitting pretty. If you'd done it when it was 1:1, you'd have been smart. If you'd done it when it was $1.15 to the dollar a year ago, you'd been smarter still (because EVERYONE was stupidly ignoring fiscal reality and saying, "Well, at least it can't get any higher.")

So, yes, you should, but then you've already missed the gravy boat. That's what you get for listening to fuckwit Republicans.

Is the housing market going to crash and I won't be able to sell my home without taking a huge loss?

Yes. Sell it now while there's still value to it, take the money and put it into something less volatile, then laugh your ass off two years down the line at all the fools who wouldn't listen.

Or, alternatively, be Wise and Prudent (tm) and think about it for another couple of years. I'm sure the economy is turning the corner, it's on the upswing, we're just a few months from getting out of this tiny tick of a recession... yada yada yada.

Keeping money in USD is like being offered a place in the lifeboat while the Titanic is sinking, but not jumping in because it looks so much smaller than the ocean liner. Sure, but which one is sinking, dumbass?
posted by Civil_Disobedient at 11:11 PM on December 24, 2004

supposing this catastrophe actually happens (which it won't), then this fantastic debt of ours turns out to be not so bad after all, eh?
posted by jimjam at 11:13 PM on December 24, 2004

Really, without trying to be -1 Flamebait, I am looking for some of the cons of a moderately weak dollar (not a completely devalued one, but maybe 2/3-1/2 weaker dollar)

One con I can see is that raw materials and finished goods purchased by U.S. corps will go up in price. This can have a negative impact on the companies attempting to buy raw materials overseas, assembly them here, and re-export them. Although, in this age of currency hedging and multinational commercial entities, it seems like a corporation should be able to buy its goods in a native currency, import them, and resell the finished product, without ever fx'ing much of the capital to USD.

I would also imagine that price for energy imports and foreign debt service will also go up. But I can only see both of those things as a good thing in the long term. Higher energy prices will slowly but surely push suppliers into domestic or renewable sources and higher debt charges may force re-examination of government spending practices.

Also, with a devalued U.S. currency, domestic companies will have less financial incentive to outsource work. With communications and infrastructure overhead, Indian outsourcing has already been pegged to around 2.5-3:1 (you get between 2 and 3 units of work in India for the price of 1 unit of work in the states) If the currency falls 30%-50% relative to the rupee, that moves even further down. Between the bad press, timezone and HR risks, less companies will jump on the bandwagon and we may even start seeing some insourcing (aka Honda and Toyota moving manufacturing from Japan to the States)

Really, the biggest con I see is that my next trip to Amsterdam to chill at a brown cafe may end up being a bit more expensive, and in the grand scheme of things, boo fucking hoo.

So, more exports, less imports, more tourism, less outsourcing. Less energy imports, strong incentive for less borrowing.

What am I missing?
posted by PissOnYourParade at 11:29 PM on December 24, 2004

Pissonyourparade, a mild drop in the US dollar is good for the US export economy, but a severe drop would not. It is the latter which we are concerned about, as it would kill our ability to finance both our trade and federal tax deficit.

Sixdifferentways, the petrodollars thing was making the rounds on the 'net in a very big way a year ago or so. It all made for a very compelling reading, until Bill Krugman of the NYT wrote a column debunking it. I can't remember the details, but I think the gist of his article was that the significance by trading volumes of petrodollars in international currency markets is vastly overstated.
posted by randomstriker at 11:35 PM on December 24, 2004

What am I missing?

If the dollar continues to fall, pay, relative to Europe, will fall, and surely this would lead to the brain-drain reversing, with top Europeans staying (or returning) to Europe, and top Americans following them.
posted by ZippityBuddha at 1:28 AM on December 25, 2004

Bill Krugman? Whozzat? Paul's cousin guestwriting?
posted by Hat Maui at 1:56 AM on December 25, 2004

Well, from a British point of view, it means I will be spending more holidays in the US. Hope my tourist dollars help a bit. It's almost getting to the point - with cheap flights - where it's worth a shopping trip to the US.

Perhaps its time to start investing in gold again? Looking at the sustained price rise of gold over the past few years it appears that at least some people have been predicting the fall of the dollar for quite some time and have therefore been investing in something physical rather than something based on the "full faith and credit" of a country which outside of its borders doesn't instil much faith (a very generalised view I know - no offence intended)
posted by gt16 at 1:57 AM on December 25, 2004

Otherwise, Europeans are flocking to buy US goods ie. trade deficit moving in a positive direction, stimulating US economy and growth.

are we europeans really flocking to buy US goods? I think the weak dollar is just allowing american companies to increase their profit margins because i haven't noticed a 30% drop in prices of american products over here.
posted by canned polar bear at 2:02 AM on December 25, 2004

What am I missing?

How do you think we finance debt? Foriegn investors, that's how. When a bunch of T-bills are sold to Der Banchus auf Deutschland, they're under the impression that we will (eventually) get our shit in order. If they start to think we won't get our shit in order, and that their investment is not, in fact, going to net them any money, but will instead generate a substantial loss, they will respond in kind by simply NOT financing our stupidity.

And I don't know what planet you've been on in the past couple of decades, but ever since we turned ourselves into a "service economy" (read: little raw production) we have been eliminating one of the economic pressure-valves of a devalued dollar -- namely, the increase in exports. This is the problem with "service economies" -- service economies are domestic in nature, serving our own people. How many Wal-Marts are there in Europe?

Oh, and more tourism??!! You think people are lining up to come to our country after all the shit we've been dishing out these days? All that "France sucks," "We'll do it alone" bullshit is really going to pay off in dividends. Oh yeah. The foriegners are just lining up to check out our police-state filled with homophobic, xenophobic war-mongerers.

Also: the United States of America doesn't get to be the #1 economic force on the planet with tourism, OK? That kinda crap might work for the Vatican, but nobody's interested in collecting our stamps.
posted by Civil_Disobedient at 2:36 AM on December 25, 2004

Maybe, Civil_Disobedient, the United States of America doesn't get to stay the #1 economic force on the planet full stop. After all, no country has ever stayed on the top spot for ever.

The interesting issue for me is the impact on the American psyche of this decline (whenever it happens). I mean, how much is an American identity wrapped up with being from that economic superpower? Do other nations have stronger cultural, historical, ethnic identities which leave them more resilient to their economies waxing and waning? I guess we'll see one day...
posted by runkelfinker at 3:13 AM on December 25, 2004

Nothing happens in a vaccum, the FPP is a link to a European paper with a French commentary.. the dollars rise is hurting Europe and helping the USA and the Europeans would love to see American politicians change that by putting political pressure. The people getting hurt right now are the folks like donfactor, Americans in Europe. Otherwise, Europeans are flocking to buy US goods ie. trade deficit moving in a positive direction, stimulating US economy and growth.

Sigh. It's French, therefore it must be anti-American and wrong, right? The same thing is being said by economists all over the world.

I'll assume you writing "the dollars rise" was a typo for "the dollars fall" - and you're right that a falling dollar is not good news for Europe - but it isn't good news for the US, either. Not when the price of your imports starts rising greatly. Not when the falling dollar drives investors away from the US. Not when OPEC starts selling oil in Euros because they don't want to hold dollars anymore.

I'm not gloating. A falling US dollar is bad for my country too - the US is one of our major export markets. With your dollar lower, our goods are more expensive for you to buy, so it's harder for us to sell them.

As for your trade deficit: your logic is correct, but the deficit is still negative. I'm not so sure that Europeans are flocking to buy US goods.
posted by Infinite Jest at 3:39 AM on December 25, 2004

The OPEC-pricing-in-Euros thing is not going to happen.

It will hurt the Europeans, who've seen their effective price of oil stay much steadier than Americans have, and who'd also have to deal with the ADDED inflationary pressure on oil that would come from North American oil also being priced in Euros. (Oil is a globally fungible commodity, so even the North America isan't a net exporter, the supply/demand equation in the U.S. influences global pricing.)

It will also hurt the Arab regimes who are the key OPEC players -- because Bush will just withdraw military support for them. I wouldn't want to be a Saudi royal when every al Qaueda element knows that there'll be no cavalry riding to the royals aid, and Israel knows that they can bomb Riyadh with impunity.
posted by MattD at 6:01 AM on December 25, 2004

China is why the current dollar-euro relationship is so historically unprecedented.

In essence, the fall in the dollar is a tax the U.S. is imposing upon the Chinese for being the vendor of choice of U.S. consumer goods. The Chinese are paying most of the tax, but are able to pass on the rest to non-U.S. manufacturers (like Europeans and oil exporters).

But what can China do? China needs the U.S. more than the U.S. needs China. There's nothing more abundant in the world than cheap labor -- if China won't sell at the Wal-Mart price, than Bangladesh will. There's no U.S. incentive to fix the situation -- we buy consumer goods from China cheap, our military ensures that oil stays dollarized, and the only people who hurt from a high Euro are people who buy European luxury goods or travel in Europe ... not a high percentage of the population.

I suspect that the situation will be fixed only by a coordinated massive sell-off of the Euro, several hundred billion in reserves or more. This will actually push U.S. interest rates DOWN even further, yield on the 10-year to 3.50% maybe, 30 year fixed mortgages to 4.50%.
posted by MattD at 6:17 AM on December 25, 2004

It makes imported goods and services more expensive

Except those from China. As the dollar falls, the price of goods imported from China falls at exactly the same rate. You can thank China for artificially undervaluing its currency with respect to the dollar and Wal-Mart for helping drop lots of cheap Chinese goods into the American market. Our trade with China is causing us to lose big.

on preview: Argh, MattD.

Oh, and there are at least 50 Wal-Marts in Germany.
posted by oaf at 6:33 AM on December 25, 2004

Wal-Mart owns Asda (the fourth biggest supermarket chain) in Britain, too
posted by ZippityBuddha at 7:20 AM on December 25, 2004

Higher energy prices will slowly but surely push suppliers into domestic or renewable sources and higher debt charges may force re-examination of government spending practices. [...]

What am I missing?

You're expecting a peculiar kind of commonsense rationality from the U.S. government. See, oil prices won't matter so much once we beat the Iraqi "insurgents", and having another big oil-soaked client state in the "Middle East" puts the U.S. in a stronger position to put down whatever "terrorist insurgencies" it will face from those Asian peoples who don't regard serving the U.S.' rulers' interests as their highest Earthly calling. Remember, the "Arabo-Persian Gulf" has been commercially and militarily significant for 2500 years before burning and plasticizing petroleum mattered so much; Malaysian spices, Persian gold and east African slaves used to do.
posted by davy at 7:53 AM on December 25, 2004

It will also hurt the Arab regimes who are the key OPEC players -- because Bush will just withdraw military support for them. I wouldn't want to be a Saudi royal when every al Qaueda element knows that there'll be no cavalry riding to the royals aid, and Israel knows that they can bomb Riyadh with impunity.

Do you really think that Bush would allow Islamic fundamentalists to take over Saudia Arabia? Seems unlikely.
posted by sic at 8:53 AM on December 25, 2004

eriko, what timeline are you on anyway... 1 EUR = 2 USD by Jun-04?

I'm on the typo timeline. I meant, of course (and it should have been obvious from context) that 1 EUR = 2 USD by 01-Jun-2005.

I mean, if I'm going to predict the past, I'd go look up the data.

For those wondering, yes, I am in fact betting on this with real money.

The question you have to ask is this -- will the dollar hyperinflate? If you think the answer is yes, the best answer for you is debt. Load it on. If you can keep a job in the hyperinflation, 2004 debt being paid by 2006 dollars means you're buying your house at an incredible discount.

This assumes, of course, that your debt instruments are at fixed rates. If not, you need to fix that now. Ahem, let me say that properly.

IF YOU HAVE AN ADJUSTABLE RATE LOAN, YOU NEED TO REFINANCE IT NOW. PERIOD.

ARMs in inflationary economies will kill you -- the government, in an attempt to save some value, will drive interest rates sky-high. If the currency goes hyperinflationary, so will the interest rates. If your loan is fixed, and you have income in current dollars, you're life is gravy.

If you think (as I do -- and I'm already clear of debt, and I'm not buying a new house at the peak of an inflated market, so I'm not really in a place to bet otherwise) that the dollar will just fall, but not hyperinflate, you need to be liquid, and you need a goodly amount of assest in non-US currencies. Push a good chunk of your 401K into Euro or Pacific Rim stocks. Change all your cash savings into something not US based. You'll eat a bit at the deposit, when your dollars change to whatever, but it'll come back in spades if the dollar keeps falling. You'll need US dollars to live on, and unless the dollar is falling fast (to the point where you're seeing 30% returns in a month) pushing it into Euros and pullling it back out in two weeks to pay for food will just get you creamed in exchange fees. When you're working another currency, the rule is you want to make the fewest changes possible. Don't live by the ATM. Exception -- when the dollar is falling fast, say more than 3 cents a day, then you don't want to pull Euros until you need them.

As long as the GOP keeps the current fiscal plans in place -- less taxes, more debt -- the dollar will fall. People are starting to give up on us.

Those who think we can export our way out of this mess, I have one question. What can we export? We hardly make anything anymore, and you can't base the US economy as it stands on raw materials and agriculture.

That's the kicker. If this happened 40 years ago, we'd be on a huge boom, as the overseas markets would be buying US products for (to them) a song, and we'd just watch the dollars roll in. But in 2005? We've got nothing to sell. We're still importing like mad, but other than China, everything we import is inflating rapidly -- and I don't see China holding the dollar link when the dollar hits 3 EUR.

China can export to Europe and India just fine -- and that's exactly what they're doing now. The US market is becoming irrelevant. We're large, but our captial is losing too much value.
posted by eriko at 9:30 AM on December 25, 2004

In theory a weak currency would help local industry, however, we must understand that most of the industry we have is in China or Mexico. Americans will see their cost of living skyrocket once again. The whole idea behind a consumer/service economy is that since we have such a strong currency we can be a buy our way out of depression, but when the currency drops we find ourselves vulnerable. We, the US, have 2 options (1) be really nice to foreigners so they buy our bonds or (2) cut the deficit. None seem likely. I have seen and heard many conservative "experts" contend that deficits don't matter. This leads me to believe that we are in trouble and that if there is a God he is cruel.
posted by j-urb at 9:39 AM on December 25, 2004

the only people who hurt from a high Euro are people who buy European luxury goods or travel in Europe ... not a high percentage of the population.

MattD, though your analysis seems reasonable on its face, I would remind you that the people in the US who do buy these things are generally on the top of the economic ladder and best connected in our current Administration.

Sic, the point is that the Saudis (and OPEC) understand this explicitly and therefore there is a near zero probability of oil becoming priced in Euros. However I can unfortunately see a set of circumstances, with a low but significantly non-zero probability, where the outside world wakes up one morning to find that the government in Riyadh has changed against our interests.
posted by billsaysthis at 9:41 AM on December 25, 2004

I think there's a chance that the fall of the US dollar will ultimately help Canada. We're far too reliant (to the tune of over 80%) on exporting to the USA. We'd be far better off selling value-added resources to China and Europe.

It is the height of foolishness to ship raw logs out of the country. Cut them to dimensional lumber and we're better off. Manufacture trusses and walls, and we're yet better off.

Our log home industry is making a ton of money off Japan and Germany. We need to replicate that success.
posted by five fresh fish at 10:06 AM on December 25, 2004

I agree with you five fresh fish. In the long run Canada is a resource based economy with lumber, minerals, water and oil. People will remember how important these are if things do get bad in a hurry.

Since the fed seems to have turned into nothing more than a printing press over the last 10 or so years and completely abused its position I think a hard readjustment is just around the corner.

There are a lot of countries sitting on piles of US paper - the question is, how will they react if this happens.

Right now central banks are selling off gold for some reasons that I don't fully understand. You may wish to consider looking at some precious-metal based mutual funds if you're risk averse...
posted by fingerbang at 11:12 AM on December 25, 2004

The United States has been abusing its position as the holder of the world's reserve currency for many years... truly, starting in about the middle 1960s. Starting in about 1991, when Greenspan took over, things got much worse. For about 15 years now, the Fed's one and only policy response to any and all problems has been 'print more money'.

Much like taking a stimulant, printing more money feels GREAT at first.. the economy immediately seems to improve. Money is easier to get, so people take out loans, build new projects, buy houses. Governments make a lot more in tax revenue. If you get several factors working in conjunction, such as easy money, a new technology, and unbridled optimism, you can get into a speculative mania, as the US stock market was through about 2000, and still, to some degree, continues to be.

The last time these three events resulted in a bubble was the late 1920s; its popping resulted in the Great Depression.

The Fed knows this, they know they're in trouble. Ever since the bubble began to pop, they have been flooding the world with dollars, trying desperately to prevent a debt deflation.

A debt deflation happens when too many people default on debt at the same time: when I lend you $50, that has an odd effect of creating more 'money'... because you now HAVE $50, and I THINK I have $50, and carry it on my books. This inflates the money supply. If enough people default at once, it destroys a lot of 'money', and can result in a runaway deflation, like in the 1930s. The Fed desperately wants to prevent that.

So, while they were bad ever since 1990 about printing too much money, they've been dropping the stuff from helicopters since 2000. In one of the last few years, they grew the money supply by 18% in ONE YEAR. (by way of comparison, in the late 1950s, economists were arguing that the money supply hadn't expanded enough to keep up with GNP... over the prior two decades, the total money supply had grown by only about 16%, even though the overall GNP had increased several hundred percent.) So, in other words, in ONE YEAR, the Fed printed more money on a percentage basis than it printed in TWO DECADES back in the 1940s and 1950s.

If you'll notice, the economy is still just barely muddling along.. the Fed has accommodated us to an extraordinary, unprecedented degree, and it has *just barely* worked. And the side effects have been terrible, most notably the enormous real-estate bubble. Bubbles are the financial equivalent of a nuclear bomb, and to try to hide the damage from the stock market bubble, the Fed has set off at least one more, the real estate bubble, and made another one much worse, the debt bubble.

We are getting to the point now that even the massive intervention by the Japanese and Chinese, in buying/sopping up HUGE quantities of excess dollars, is no longer working. But we can't stop printing money like crazy, because if we do, the economy will seize up and go into debt deflation. (it may do this anyway, no matter WHAT the Fed tries to do.) The Fed has backed itself into a corner... its only remaining possibly policy response is to print more money, but printing more money is just more of the same drug that got us sick in the first place.

The metaphor I like to use is that the economy is like a horse running a perpetual race... it has a natural gait, a natural speed, and it will always tend toward that natural speed. If it speeds up for awhile, it will slow down to compensate later... if it's slow for too long, then it will speed up faster than its natural gait. (in fact, it's very rare for it to be AT its natural gait, it's always over- or under-shooting.)

So what the Fed has been doing for the last 15 years has been giving the horse stimulants... first a little caffeine, then cocaine, then meth. The horse has been running faster than it should for a very long time, and it's very, very sick. But instead of letting it slow down and rest/heal... that outcome is deemed Unacceptable, and so the Fed keeps nailing the poor thing with stronger and stronger stimulants. This last time, the horse nearly died... only the administration of adrenaline straight into its heart got the horse moving again. The poor thing is a wreck; sunken eyes, loose skin, horrible raspy wheeze, but still the Fed forces it to run.

When it goes down this time, I believe it won't be getting back up for a LONG time. If they DO manage to hyperstimulate it into running a bit longer, it will probably die. The economic horse is a very tough one and can take a lot of abuse... even now, if they let it rest, it will someday recover. But if they don't let it rest now (and, keep in mind, it's going to be so slow and crippled that Americans will be starving to death), then it stands a good chance of outright dying and never coming back in its present form.
posted by Malor at 11:12 AM on December 25, 2004 [2 favorites]

MattD, whatcha been smokin?

... the situation will be fixed only by a coordinated massive sell-off of the Euro, several hundred billion in reserves or more ...

Who exactly is going to sell off all these Euro reserves? It won't be the USA - according to this dataset, they don't have any reserves in foreign currencies (and only 82 billion USD in reserve). It certainly won't be Japan - they're too busy threatening a Dollar sell-off... Maybe the EU countries should sell all their Euro reserves - what would you recommend they replace them with, Dollars?
posted by runkelfinker at 12:31 PM on December 25, 2004

There's nothing more abundant in the world than cheap labor -- if China won't sell at the Wal-Mart price, than Bangladesh will.

MattD, some interesting comments. Not sure about this one though - China's making DVDs and PCs (and a lot of them), not just dirt-cheap consumer goods. I don't think it would be as easy as you think to switch suppliers.

The other issue being, as runkelfinker mentioned, who's going to sell Euros when it's the Dollar that's dropping? Wouldn't people be more likely to sell Dollars?

(and remember, this isn't just a case of the US Dollar dropping vs the Euro, it's dropping against all currencies).
posted by Infinite Jest at 2:27 PM on December 25, 2004

"I have seen and heard many conservative "experts" contend that deficits don't matter."

Are these the same nabobs that used to natter about balancing the budget? And what happened to that idea anyway?
posted by davy at 3:35 PM on December 25, 2004

Malor, thanks for the Xmas cheer. You may be spot on target, I can't dispute what you've said, but I sure hope there's an answer that doesn't involve another Great Depression.
posted by billsaysthis at 9:22 PM on December 25, 2004

Well, I think a more likely outcome is like the 1970s, only much, MUCH worse.

I think we missed our chance for a Great Depression: the Fed carpetbombed the world with dollars to make sure that wouldn't happen. I think, instead, we're going to have a Great Hyperinflation. Either outcome is highly destructive. I don't think that a sane balance is really possible anymore, at least nowhere near current levels.

Look up the Weimar Republic for one of the better-known examples of the dangers of a runaway currency. Also note that, while times were terrible, they WERE eventually able to recover and prosper... they did so by switching to hard currencies. I think in Weimar's case it was silver, but the specific metal doesn't matter.

Money just needs to be based on SOME commodity to keep the politicians more honest, and prevent them from doing what they have done... steal the wealth of generations of Americans and squander it. We are something like FIFTY TRILLION DOLLARS in debt if you count all our unfunded Social Security liabilities. We have written checks that we cannot cash, and there are only two possible outcomes: we default, or we destroy the currency.

The second is always more palatable to politicians.
posted by Malor at 9:57 PM on December 25, 2004

I, too, am confused about what we will export in such numbers as to recover from hyperinflation or crash conditions. Our information economy does not make things, but outsources production to other nations. One in particular, Taiwan, is in an unstable political situation especially wrt American and Chinese relationship. If there is a currency collapse, where is American production?
posted by AlexReynolds at 10:21 PM on December 25, 2004

put your savings into an index fund of commodities and you might survive.
posted by godseyeview at 11:39 PM on December 25, 2004

I have one question. What can we export?

The threat of a nuclear winter?

Joking aside, what affect does the US military have on all of this? Is it concievable that you can fight your way out of depression?
posted by fullerine at 12:57 AM on December 26, 2004

Wars are inordinately expensive, and it's unlikely to be of much use: we probably couldn't loot enough from countries we invaded to pay for the costs of invading them, occupying them, stealing their goods, and defending against counterattacks. But war has always been a good way to distract citizens from misery at home.

Unfortunately, Bush seems more than ready to start foolish, expensive wars for little real benefit. It is one of my strongest fears that we may try this... if there is any true road to Armageddon, that's it. As strong as we are, much of our strength is paper-only, and should the world decide it doesn't like or trust America anymore, we will absolutely collapse.

At the moment, we import over TWO BILLION DOLLARS A DAY to support our massive consumption habit. The provinces of Rome send us tribute, and we give them worthless green paper (or even more worthless blips in a computer) in exchange. If the world decides it doesn't want to do business with us anymore, our ability to wage war will dry up and blow away with the rest of the economy.

We are strong, but we are not strong enough to fight off the whole world at once. If we go down the path of waging war to try to extricate ourselves from the mess we've gotten ourselves into, we will certainly lose. We are too dependent on the world to wage war on it, at least successfully.
posted by Malor at 1:47 AM on December 26, 2004

Is it concievable that you can fight your way out of depression?

Thats usually the traditional way of things (its what Britain and Germany and France spent 500 years doing).
posted by ZippityBuddha at 1:53 AM on December 26, 2004

We are strong, but we are not strong enough to fight off the whole world at once.

Actually, you're not particularly strong.

The USA can't even muster up the ability to simultaneously wage tribal war against a bunch of starving Afghanis and a few thousand insurgents in Iraq.

The US military is recalling senior citizens to participate in its military campaign in Iraq. A draft would certainly give the USA enough bodies to fight another Iraq-sized front, but I'm quite doubtful that the military actually has the weaponry to pull it off. A bunch of unarmed teenagers aren't going to do so well against, say, Iran or North Korea, let alone a real threat to the US hegemony, like China.

In almost every manner, the US Administration has over-extended the country's ability to maintain its status. From engendering deep-harboured resentment from first-class nations 'round the world, to depleting its military on foolish vendettas, to counterfeiting money in a desperate attempt to keep the loansharks at bay, to sending most of its true economic power overseas in search of cheaper labour, the USA is fucked six ways to Sunday.

The only thing the USA has going for it right now is a large, proud, and sadly underinformed population.
posted by five fresh fish at 9:59 AM on December 26, 2004

fff - That, and we can still destroy all civilization in a matter of minutes.
posted by Civil_Disobedient at 5:19 PM on December 27, 2004

Good times, good times.
posted by codeofconduct at 11:51 PM on December 27, 2004