Currency Events

November 18, 2004 12:32 PM

Will Currency Wars Effect You? Oldman gives a quick run-through of the geopolitics of America's budget deficit, with some likely scenarios for the next 2-5 years.
posted by alms (26 comments total)

PedantryFilter: Currency wars will effect exactly no one. They may affect many.

Good thing I've got a bank account in the Euro zone.
posted by oaf at 12:36 PM on November 18, 2004

After reading the whole thing, it looks to me like just another link-to-a-blog-with-a-scary-but-not-very-plausible-scenario post.
posted by oaf at 12:45 PM on November 18, 2004

Grammar Disclaimer: Thanks for the correction. It was Oldman's misusage, though I could have caught it.
posted by alms at 12:53 PM on November 18, 2004

The January after GW's first election is when the "recesssion" started.
Recession part deux coming?
posted by a3matrix at 1:30 PM on November 18, 2004

Wow. I really, really hope that the guys who wrote that are total morons.
posted by Yellowbeard at 1:57 PM on November 18, 2004

It isn't uncommon for governments to deliberately devalue their currency for the purposes of fighting economic wars. Reagan halved the value of the dollar to try to make Japanese goods more expensive and reduce the trade deficit. It didn't work, but that was one justification. Likewise, let's say Bush's economic team wanted to hurt Europe's economy to make a point about, say Airbus, or petro-Euros, then they would let European goods become more expensive and reduce their demand.
posted by AlexReynolds at 2:22 PM on November 18, 2004

Behold the power of Everbank You can buy foreign currency CD's with a minimum deposit of $10,000 or start a deposit account with only $2,500. I've been thinking about moving some of my dollars for awhile now and after reading those articles I am even more inclined to do so. There was a decent discussion on Daily Kos about the pending US financial crisis.
posted by tirebouchon at 2:23 PM on November 18, 2004

If there's one thing, one thing, that I trust Republicans on -- it's not tanking our economy.

Do you think that the party of big business, of rich people, and of corporations (generalizations, with some validity) is going to tank the US economy? No. They're going to do what's most profitable to them. I realize some companies will try to play this wave to their advantage -- but as much as the US can, they will help the economy. We came out of the Great Depression, we can come out of this.

And, and, and, might I add, after having this discussion earlier, a lower US dollar will help us. For years our imports exceeded exports because of the high dollar. Now we might finally begin to export again. Keep in mind there's a reason the world wants our currency back up, so we'll buy more of their products. The EU, et al, aren't kindly giving us words of advice, a high dollar helps their economy and a low dollar helps our economy.
posted by geoff. at 2:24 PM on November 18, 2004

Actually, while I agree that the Republicans are the party of "big business, of rich people, and of corporations", the market does better with the Democrats in power. I think the key here is that while Republicans make decisions that businesses tend to like, the economy as a whole isn't necessarily better off when they (big business) are happy.
posted by aquafiend at 2:33 PM on November 18, 2004

geoff -

You have to understand one thing about currency deflation - and the inflation it creates - if your rich and have hard ASSETS (like oh...er...OIL) their worth is ALSO inflated.

This is what creates entrenched property classes and aristocracies. As long as these folks can afford go somewhere else - like Europe - it MAY be in the direct interests of some wealthy people to encourage and abed a Currency Nuke.
posted by tkchrist at 2:52 PM on November 18, 2004

tirebouchon, thanks for the pointer to EverBank. I've been looking for a way to get some of my investments into a Euro-denominated account. It's suprisingly hard in the U.S. to do that. So far the best I'd found was wiring money to Frankfurt to open up an account at Deutsche Bank.

(For anyone who suggests buying shares of a mutual fund that invests in European equities: please read the prospectus before posting. Every mutual fund I've ever seen that invests in stocks outside the U.S. specifically states that they may engage in currency hedging to insulate equity returns from changes in exchange rates. That's exactly what you don't want in this situation.)
posted by alms at 2:52 PM on November 18, 2004

geoff., it is possible for the super-rich to allow the economy to tank and still remain super-rich. During the Great Depression, although there were some very rich people who lost their shirts, most of the very richest stayed just as rich. I think J Paul Getty and Nelson Rockefeller are probably good examples - and they were oil men.

It's also possible to position oneself in the market so that a financial slump or collapse actually makes one a lot of money (shorting stocks is one example, you make money when they lose value). The super-rich know that, and if they themselves set up the financial crash, they would basically be using insider trading to enrich themselves even while the rest of us are reduced to near-serfdom.

This particular article seems to ignore the moves that China and Japan can make to finagle their currencies along with dollar fluctuations in order to help both us and them. It's in China's best interest, since the majority of our trade deficit is with them (we import vast amounts of Chinese goods, but don't sell them much), and they keep our dollars as their trade currency reserve, to make their financial moves work to keep the relative value of the deficit (as percentage of GNP) around the same, apparently (I'm learning a lot from reading stuff all over, but then again IANAE). They have a choice to keep the yuan (renminbi) pegged to the dollar, as it is now, or float it, and each choice has different consequences.

Likewise, it's in Japan's best interest to keep their exports flowing to us, their Hondas and Sonys and Mitsubishis etc., so they will try to keep their goods cheap by keeping the yen weak against the dollar. The article does mention some things that might happen if that fails, such as a Honda Accord going from $25,000 to as much as $50,000.

You might see a lot more Chevy Aveos on the road, eh? In any event, there needs to be more consideration of the effect of Asian imports and currency complications in this analysis - and frankly, if Asia makes the wrong moves it could magnify the potential problems enumerated in the article very drastically.

This is scary stuff, and I too hope that the changes come slowly enough to roll with them.
posted by zoogleplex at 2:56 PM on November 18, 2004

I've lurked on metafilter for a few years and finally decided to sign up today to post to this....

In my opinion the US cannot do much about where the dollar goes. Central banks can only do so much when the try and talk there currency down or up. People on this thread are talking as if the US can control the dollar, please provide an example about how they would do this.
The biggest problem is that the US debt is growing. A secondary problem is that Japan, China, Taiwan, South Korea, have 1.5 trillion (as of Feb 2004 (The Economist)) of US debt, held in US Bonds. More now. The Chines Yuan does not float and is pegged to the US dollar.

So basically the story goes that if China or Japan decide one day that they have enough US dollars and decided to buy something else, the treasury bonds interest rate could take a leap (say 5%) and then the dollar would drop like a stone. This is not that likely to happen, because it causes negatives for them as well. A change like the Yuan being pegged to a currency basket is not that unlikely and could rock the US dollar siginificantly. On preview what zoogleplex says.
posted by sety at 3:05 PM on November 18, 2004

All the links you could want on this general subject are right here. Predicting an economic apocalypse isn't just for lone nutjobs anymore. These days, everyone's doing it. Get in on the fun while you can still afford it!

China ownz the world economy.
posted by sfenders at 3:22 PM on November 18, 2004

the treasury bonds interest rate could take a leap (say 5%) and then the dollar would drop like a stone

That is not what I would expect. Could you explain in more detail?

I would have thought an increase in treasury bond rates would boost the dollar - in fact, that such an increase could be taken as a measure to arrest the dollar's fall.
posted by i_am_joe's_spleen at 4:19 PM on November 18, 2004

I suppose it wouldn't be reassuring to note that Warren Buffet started buying foreigh currencies more than two years ago, betting against the US dollar. Or that as of March 2004, his company, Berkshire Hathaway, had around 12 billion USD invested in foreign currencies.
posted by WestCoaster at 4:24 PM on November 18, 2004

What I think is frightening about our CA situation today is the extent to which it reflects a government deficit and not just, as was the case 10 years ago, an insufficient amount of domestic savings.

I think that this is the most pressing issue America faces today. More important than terrorism, more important than Iraq, and, yes, more important than gay marriage.

I strongely urge everyone to check out this very readable account of what is going on now.
posted by diftb at 4:45 PM on November 18, 2004

the treasury bonds interest rate could take a leap (say 5%) and then the dollar would drop like a stone

That is not what I would expect. Could you explain in more detail?

You are right, normally a boost in interest rates would cause more countries to buy US dollars. I'm getting at a situation where countries are worried they have too many US dollars and don't want anymore (and we are basically just talking about Japan and China when we say countries) and thus a big jump in interest rates occur because no one is buying the treasury bonds. This causes a chain reaction of secondary effects (dollar taking a steep dive) and would also trigger an American recession. This is all unlikely, but America cannot keep running a bigger and bigger deficit. I'm worried. IANAE.
posted by sety at 5:19 PM on November 18, 2004

Does China need us to be able to afford all the stuff they make or no? Isn't it in their (current) interest not to tank our economy?

And we're supposed to want to put our SS money in the market? unbelievable.
posted by amberglow at 6:50 PM on November 18, 2004

Amberglow, here's what Stirling Newberry says about China in a related post:

The China situation is simple: they need capital equipment, and they need energy. At the point where they have sufficient capital equipment and the ability to design their own, and access to energy, they can collapse the system and become the new lynch pin economy - the source of consumption. This is not going to occur for quite sometime, however, which is why everyone is pretty sanguine about the world economy. They are, however continuing along this road. If a new energy infrastructure is not in place - and it seems like that it is not going to be in place in time - then this is a long term threat. But not an immediate one.

The full post is worth reading. Not quite as lucid as Oldman's, but helps fill out the picture.
posted by alms at 7:54 PM on November 18, 2004

Amberglow, here's an even better comment re: China needing our consumption, from the discussion of Oldman's post:

I'm just wondering how China and Asian economies in general can handle us not buying their junk?

I mean we are their biggest importers and IMO a depression here would tank the economies of asia to some degree as a result, i would think.

Also has anybody run scenarios as to what happens to the asian economies when exports to the U.S. drop say by 30-70%?
Posted by Rodger at November 18, 2004 06:22 PM

This is a catch-22 argument people seem have backed themselves rationally into a corner with. By definition the strong US currency allows it to be a consumer, not because it is a consumer it has a strong currency. If Europe, Russia, and China see their currencies rise then they can consume just as well as we can. It takes no virtue to be able to consume.

If their currencies are stronger then they can consume as well.

Somehow economists have tricked Americans into thinking that well if we weren't around to consume stuff then nobody would consume stuff. Given a currency realignment then there are many billions of people around the world happy to pick up the slack for us.

It is not consumption which is at issue. We have a privileged position as far as consumption because we have a unique role. Take away that role and it's like being fired from a sinecure job. You can no longer eat lobster every night. But someone else will eat it.
Posted by oldman at November 18, 2004 06:30 PM

posted by alms at 8:08 PM on November 18, 2004

ahhh, thanks...we're in big trouble.
posted by amberglow at 8:10 PM on November 18, 2004

we're in big trouble.
posted by amberglow at 8:10 PM PST on November 18

What are the ways 'the world' can interact with America?

Diplomacy? (That works out with the present administration?)
Open Warfare? (Good luck with that)
asymmetrical Warfare? (Seems to have 'better' luck, but you get to spend time in caves.)
Not Buy American goods? (Already not doing that)

Why does "the world" care about America? #1 reason - The US Dollar is used to buy oil.

If "the world" agrees to sell oil in Euros, gold dinars, small gerbils - why does the US Dollar matter?

So a change from the Dollar is as much a reaction to how America interacts with the world as how the US manages its own bookkeeping.

Welcome to the biggest effect of re-electing GW Bush - the loss of the Dollar as the reserve currency and PetroDollar. The Sept 9th treasury auction - few buyers came.
posted by rough ashlar at 9:00 PM on November 18, 2004

zoogleplex, a bit off topic, but the Chevy Aveo is made by Daewoo in South Korea. Those cheap lil' things would be affected as well if these events actually occur.
posted by zsazsa at 10:09 PM on November 18, 2004

Do you think that the party of big business, of rich people, and of corporations (generalizations, with some validity) is going to tank the US economy? No. They're going to do what's most profitable to them.

geoff. what makes you think "them" equates with "us"?

What's good for corporations isn't necessarily what's good for us.
posted by three blind mice at 12:46 AM on November 19, 2004

*smacks forehead* Ya know, zsazsa, I should have known that, because I work for a company that specializes in car information (though I don't work in a capacity where I need to know that). Color me ashamed. Let's change that to the venerable Cavalier instead... *blush*
posted by zoogleplex at 9:57 AM on November 19, 2004