The U.S. dollar hit an all-time low against the Euro today. This is mildly interesting, because the dollar should be strengthening as the Federal deficit increases: Higher deficits generally lead to increased foreign borrowing/investment,* which in turn leads to an increase in demand for dollars and hence a higher price for the same. Why that isn't happening here yet -- well, it just ain't clear. And that's mildly interesting.
Consider this, then, your mildly-interesting economics open thread.
von
*You remember the ugly period when it was fashionable to claim that America was being bought by the Japanese? Those Japanese investments were a direct result of the Reagan deficits. It's ironic, I think, that many so-called Reagan Democrats supported Reagan's fiscal policies, but later decried the foreign investment that resulted.
Higher deficits generally leads to increased foreign borrowing/investment
/talking straight through my hat/
Don't we have two things working against us this time?: 1) a lack of trust in the current administration (and a keen desire for revenge, I'd bet) among those allies who didn't have the same degree of grudge against us back then that they do now; and 2) a global sense that China is in the driver's seat now and there's not much we can do about it (short of a war)
Also, there was no such thing as the Euro back then. And if England joins the effort (Bush's real reason for flattering Blair???)...watch it bury the dollar.
/talking through my hat now off/
Posted by: Edward | December 29, 2003 at 02:09 PM
Now, I'm clueless as to economics, but I've heard it said many times with regards to this thing that big deficits lead to a *weak* dollar for precisely the opposite reason - foreign investments drop off because our credit is perceived to be worth less (if we have a gigantic debt, nobody expects us to pay them back). The response to this is to pursue a "weak dollar strategy," which many claim the administration is following, in which American products become cheaper to foreigners, and thus exports and tourism increase (This hasn't quite happened yet because, for whatever reason, foreigners are still buying foreign products. Maybe they just like them better).
I also was never under the impression that the Reagan deficits were responsible for the strong dollar of the 80s. If deficits lead to commanding currencies, wouldn't, say, the Argentinian peso be an economic juggernaut by now?
I am, of course, reasoning by logic, not by established economic theory, of which I know next to nothing, so all you econ people feel free to step in and correct me.
Posted by: munster truck | December 29, 2003 at 02:59 PM
foreign investments drop off because our credit is perceived to be worth less (if we have a gigantic debt, nobody expects us to pay them back).
That's true in the extreme case, Munster Truck. At some point, a large deficit will trigger fiscal collapse (usually, runaway inflation and capital flight). But so long as a country is in no danger of defaulting on its loans, increasing deficits will actually lead to a stronger dollar in the short term.
Take a look at the Chicago Fed page that I linked for more information. It's a better source than I.
a lack of trust in the current administration (and a keen desire for revenge, I'd bet) among those allies who didn't have the same degree of grudge against us back then that they do now
That's possible. It's also worth noting that the dollar is doing poorly against the pound (IIRC, it's about $1.77/pound sterling).
Posted by: von | December 29, 2003 at 03:13 PM
Edward said:
And if England joins the effort (Bush's real reason for flattering Blair???)
It's not down to Blair, though he's currently in favour of the Euro. You can bet he'll choose his time, but we're going to get a referendum here in the UK before losing Sterling.
Posted by: James Casey | December 29, 2003 at 04:08 PM
So Edward, your thinking is that purchasers of government debt instruments in foreign countries have ceased buying US instruments in an effort to weaken the dollar thereby hurting their own export and tourism opportunities because they hold a grudge against the current administration?
Hmm. My thinking is that the dollar is weakening because it is no longer being propped up by our government's strong dollar policy making it easier for US companies on the export front and helping to drive tourism thereby further supporting the tax-cut related economic recovery.
Posted by: crionna | December 29, 2003 at 04:35 PM
your thinking is that purchasers of government debt instruments in foreign countries have ceased buying US instruments in an effort to weaken the dollar thereby hurting their own export and tourism opportunities because they hold a grudge against the current administration?
Such pettiness is not impossible to believe, Crionna. I scored some excellent deals in "Freedom" wine fairly recently -- 'cause no one was buying from Free-nce.
That said, the Bush administration's retreat from a strong dollar policy is undoubtably the dominant theme in the dollar's slide.
Posted by: von | December 29, 2003 at 04:52 PM
but..but... a low dollar is a good thing. Good for exports, goood for manufacturing, good for the American consumer when it purchases foreign goods and materials, etc.
Von, you think Bush's "retreat from a strong dollar policy" is the main reason for the dollar's slide?!
The relative strength of the dollar is the last thing effected by monitary and fiscal policies.
The fact that the dollar stays low in the face of our deficits shows that the deficits are not being seen by the world as the disaster that some Dems and overly anal conservatives think.
People, read your Keynes.
Posted by: Bloodengine | December 29, 2003 at 05:26 PM
That should read: 'good for imports', apologies.
Also, a low dollar is not always good, as von mentioned it can lead to collapse if we are not honnoring loans, but in the current climate a low dollar is very good.
Posted by: Bloodengine | December 29, 2003 at 05:32 PM
No, I was right the first time, dammit.
Posted by: Bloodengine | December 29, 2003 at 05:36 PM
but..but... a low dollar is a good thing. Good for exports, goood for manufacturing, good for the American consumer when it purchases foreign goods and materials, etc.
It all depends, Bloodengine -- but the important thing to remember is that there is no free lunch. A "strong" dollar has certain advantages (cheaper imports, easier for US companies to invest in other nations, etc.), and a "weak" dollar has certain advantages (it's favorable to US exports, among other things). Frequently, a strong currency is seen as an endorsement of a country's economy, because it indicates that foreigners (not the 80s hair-rock band) believe in that countries economy and are voting with their dollars (or Euros, or Yen).
The relative strength of the dollar is the last thing effected by monitary and fiscal policies.
Are you suggesting that money supply has no effect on the relative strength/weakness of the dollar? Shall I recommend that you read your Friedman?
von
*Most of your examples of the benefits of a weak dollar are actually mistaken.
Posted by: von | December 29, 2003 at 05:42 PM
The weak dollar (in this case) is far more related to the relative strength of foreign markets (rather it is indicative of a healthy and growing world market) than with this administrations policies.
Yes, you need Freidman as well as Keynes, as well as the Austrian school...its not that one or the other are the dominant paradigm, but they all have their uses.
The bottom line: the current deficit and the low dollar are good for the economy....but don't take my word for it...just watch the dow keep on climbing.
Posted by: Bloodengine | December 29, 2003 at 05:55 PM
That (spending and weak dollar) and supply siding are feuling the boom (yes, boom). Now IF things stop booming (yes, booming), then you may have more of a case, von.
Posted by: Bloodengine | December 29, 2003 at 05:59 PM
that should read: 'fueling', I will try and proof read with more accuracy in the future.
Posted by: Bloodengine | December 29, 2003 at 06:03 PM
"there is no such thing as a free lunch"
Actually, the field of economics consistently defies all sorts of rules of thermodynamics and entropy... it is indeed, a perpetual motion machine.
The "no free lunch" thing may be conventional wisdom, it may even make for intelligent policy, but free markets have (historically speaking)inexplicably givien far more than they demand. Go figure.
Posted by: Bloodengine | December 29, 2003 at 06:13 PM
"The bottom line: the current deficit and the low dollar are good for the economy....but don't take my word for it...just watch the dow keep on climbing."
C'mon, Bloodengine. Even I know that the Dow and the overall economy aren't one and the same.
Posted by: JKC | December 29, 2003 at 07:29 PM
Well JKC, its a damn good indicator...perhaps you would like more jobs?
Commin' right up!
Posted by: Bloodengine | December 29, 2003 at 07:47 PM
Well JKC, its a damn good indicator...perhaps you would like more jobs?
Or how about some inflated jobless rate numbers?
Seriously, though, I don't know how much of this report gloom and doom and how much is sound, but I know I'm not going to trust anyone spouting about the standard jobless rate without also figuring the "underemployment rate" and the "discouraged worker" rate. Not to mention whether I personally am able to land a decent salary in the next 6-8 months.
Posted by: Jordan | December 29, 2003 at 09:03 PM
The bottom line: the current deficit and the low dollar are good for the economy....but don't take my word for it...just watch the dow keep on climbing.
JKC's right that the DOW is merely one (of many) leading indicators of the economy, and not necessarily the best one. As for whether the current deficit and low dollar are good in the short term -- undoubtably, yes. As you suggest, Bloodengine, short term deficit spending is the classic Keynesian solution to an economic downturn. When deployed in a low-inflation environment and in accord with a compliant Fed, it can be very effective.
As a long term solution, however, its disasterous. It has been remarked that deficits are corrosive, not explosive. For quite some time, the harm they do is not visible. This can cause one to believe that deficits do no harm. That's a mistake.
As for the weak dollar, I meant no criticism of the fact. I mentioned it because I expected the dollar to be strengthening at this point.
Actually, the field of economics consistently defies all sorts of rules of thermodynamics and entropy... it is indeed, a perpetual motion machine.
There's too much to unwind here. I'll accept your premise -- perpetual motion -- in a narrow sense, but suggest that "perpetual motion" and "without cost" are not one and the same.
Posted by: von | December 30, 2003 at 07:47 AM
von, this reply has satisfied me immensly and though we do not agree about how disasterous this deficit is, we agree on much. Yor reply was well considered and this exchange has been very interesting. I thank you.
One quick question: if Dean gets the nomination, you will vote for Bush right?
Posted by: Bloodengine | December 30, 2003 at 08:33 AM
I enjoyed it too, Bloodengine.
One quick question: if Dean gets the nomination, you will vote for Bush right?
If Dean gets the nomination, my vote will be Bush's to lose. Bush can very quickly lose it, however, by proposing additional tax cuts or failing to demonstrate how he's going to cut expenditures. These deficits are deadly if allowed to continue past the point of recovery.
Bush could also lost my vote by prematurely withdrawing from Iraq -- after all, a large part of my dislike of Dean is my perception (perhaps unfair) that he's going to cut and run.
Posted by: von | December 30, 2003 at 09:01 AM