The Falling US Dollar
[One of my op-eds at Modern Republic]
In January of 2007, if I traveled somewhere in the European Union where the Euro is used, my one US dollar would exchange for .77 Euros. If I were to do so today, that one US dollar would exchange for .69 Euros. Closer to home, in January of 2007 I would get 1.75 Canadian dollars for my one US dollar; today I would get .98 Canadian cents.
This trend is generally true for most international currencies - the Japanese Yen, the Australian dollar, the Singapore dollar, the Swedish krona. In terms of exchange rates, this is what is meant when we read "the dollar is falling." If you're a traveler, the meaning of a falling dollar is evident in the higher expense, in US dollars, for your trip. But what does the falling dollar mean for us living in the United States?
This is a simple question with complex, even inscrutable, and certainly equivocating, answers. So first a few facts. The exchange rate between the major international currencies used to be - between 1946 and 1973 - "fixed at levels determined by governments" (http://www.econlib.org/LIBRARY/Enc/ExchangeRates.html ), and were fairly stable, according to Paul Krugman. Krugman is an economics professor, and writes for the New York Times (http://topics.nytimes.com/top/opinion/editorialsandoped/oped/columnists/paulkrugman/ ). He's written a lot in the past year or so on the fate of the dollar. Read his article at The Concise Encyclopedia of Economics and you will see that, concise though it is, it isn't a simple matter. Suffice it to say here that since 1973, exchange rates are no longer determined by governments, but by financial markets. People around the world buy and sell currencies on foreign exchange markets. Thus the values of those currencies are determined, to an important extent, just like stocks are on the stock market.
This means two things: First, unless you corner the market, individual transactions won't bring about boom or bust - there are just too many total transactions going on for that to be true. Second, like any financial market, confidence and perception are very important. If the dollar is, and has been, falling, the conclusion is that lots of people - not just one or a few - who are trading currencies believe that the dollar is worth less and less.
One effect of the falling dollar is a boost to the economy (which is not to say, a rosy economy, just a boost to a clearly flagging economy). Foreign investment in American assets - real estate, retail sales, American exports, financial investments - are all getting cheaper and cheaper for those foreign investors. This is good for America, to a point. If you trust George Bush (http://www.reuters.com/article/politicsNews/idUSWBT00811620071220 ). He is a Harvard Business School graduate, after all.
That is an effect of the falling dollar. What is the cause? People around the world believe the dollar is worth less and less. So the investments represent, not unqualified signs of confidence in our economy, but also belief that the investor has found a bargain, and that bargain is in part a reflection of the desperate situation of the seller. A Chinese bank bought into an American bank, where the American bank had just recently lost billions of dollars on subprime mortgage loans (http://www.boston.com/business/articles/2007/10/16/china_bank_bids_for_bear_stearns_stake/ ). This is a relative bargain for the Chinese bank, because of the falling dollar, but the subprime crisis is also a cause of that falling dollar. Analysts and investors around the world lose confidence in the American economy, at least in the short term, when they see more and more American banks losing money.
The world just witnessed the assassination of Benazir Bhutto in Pakistan. Early speculation suggested either the Pakistani military, or Al-Qaeda. A quote from Cursor.org says that "Trudy Rubin reported from Islamabad that 'just about every Pakistani with whom I spoke blamed her death not on al-Qaeda, but on their own government - and the United States.'" ( www.cursor.org, Dec. 28, 2007) The Asia Times report on the same day (http://atimes.com/atimes/South_Asia/IL29Df01.html ) makes it clear how both of these are true: Al Qaeda did it, BECAUSE of the U.S. and Musharraf.
Another reflection of diminishing respect for the U.S. from our fellow world citizens, a fact reflected in the falling dollar. The world does watch America.
In January of 2007, if I traveled somewhere in the European Union where the Euro is used, my one US dollar would exchange for .77 Euros. If I were to do so today, that one US dollar would exchange for .69 Euros. Closer to home, in January of 2007 I would get 1.75 Canadian dollars for my one US dollar; today I would get .98 Canadian cents.
This trend is generally true for most international currencies - the Japanese Yen, the Australian dollar, the Singapore dollar, the Swedish krona. In terms of exchange rates, this is what is meant when we read "the dollar is falling." If you're a traveler, the meaning of a falling dollar is evident in the higher expense, in US dollars, for your trip. But what does the falling dollar mean for us living in the United States?
This is a simple question with complex, even inscrutable, and certainly equivocating, answers. So first a few facts. The exchange rate between the major international currencies used to be - between 1946 and 1973 - "fixed at levels determined by governments" (http://www.econlib.org/LIBRARY/Enc/ExchangeRates.html ), and were fairly stable, according to Paul Krugman. Krugman is an economics professor, and writes for the New York Times (http://topics.nytimes.com/top/opinion/editorialsandoped/oped/columnists/paulkrugman/ ). He's written a lot in the past year or so on the fate of the dollar. Read his article at The Concise Encyclopedia of Economics and you will see that, concise though it is, it isn't a simple matter. Suffice it to say here that since 1973, exchange rates are no longer determined by governments, but by financial markets. People around the world buy and sell currencies on foreign exchange markets. Thus the values of those currencies are determined, to an important extent, just like stocks are on the stock market.
This means two things: First, unless you corner the market, individual transactions won't bring about boom or bust - there are just too many total transactions going on for that to be true. Second, like any financial market, confidence and perception are very important. If the dollar is, and has been, falling, the conclusion is that lots of people - not just one or a few - who are trading currencies believe that the dollar is worth less and less.
One effect of the falling dollar is a boost to the economy (which is not to say, a rosy economy, just a boost to a clearly flagging economy). Foreign investment in American assets - real estate, retail sales, American exports, financial investments - are all getting cheaper and cheaper for those foreign investors. This is good for America, to a point. If you trust George Bush (http://www.reuters.com/article/politicsNews/idUSWBT00811620071220 ). He is a Harvard Business School graduate, after all.
That is an effect of the falling dollar. What is the cause? People around the world believe the dollar is worth less and less. So the investments represent, not unqualified signs of confidence in our economy, but also belief that the investor has found a bargain, and that bargain is in part a reflection of the desperate situation of the seller. A Chinese bank bought into an American bank, where the American bank had just recently lost billions of dollars on subprime mortgage loans (http://www.boston.com/business/articles/2007/10/16/china_bank_bids_for_bear_stearns_stake/ ). This is a relative bargain for the Chinese bank, because of the falling dollar, but the subprime crisis is also a cause of that falling dollar. Analysts and investors around the world lose confidence in the American economy, at least in the short term, when they see more and more American banks losing money.
The world just witnessed the assassination of Benazir Bhutto in Pakistan. Early speculation suggested either the Pakistani military, or Al-Qaeda. A quote from Cursor.org says that "Trudy Rubin reported from Islamabad that 'just about every Pakistani with whom I spoke blamed her death not on al-Qaeda, but on their own government - and the United States.'" ( www.cursor.org, Dec. 28, 2007) The Asia Times report on the same day (http://atimes.com/atimes/South_Asia/IL29Df01.html ) makes it clear how both of these are true: Al Qaeda did it, BECAUSE of the U.S. and Musharraf.
Another reflection of diminishing respect for the U.S. from our fellow world citizens, a fact reflected in the falling dollar. The world does watch America.
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