Is the US intentionally allowing it's dollar to sag?

[jEEZY]

Originally posted by Bodhi
Exactly, which means if we continue to devalue our currency it forces the Chinese to devalue ours, but in the long run, who is it going to effect more, US or China.  If the US can maintain this policy, then it will definitely affect the Chinese.  As they will be less able to import needed materials and equipment.

or they just print more yuans....

The real problem is for the US becuase the Chinese need hard currency for their infrastructure, i.e. oil, and right now they have a whole lotta dollars that are sagging in value.  This leaves them a choice, either buy what they need from the US or take an initial hit and buy up foriegn currencies.  I think that they will take a balanced approach but err on the side of investing in foriegn currencies--thus both increasing the trade deficiet (which really isnt that big of a deal except to pols and thier stupid constituants) and further devauling the dollar.  A real catch 22.

[Thrawn]

Originally posted by GScholz
A low USD/Yuan value is good for China, but bad for the US. The Chinese export far more to the rest of the world than they import, even if you exclude the USA. Vice versa for the US. The Chinese get more Yuan for their exports while you have to pay more USD for your imports.

Yes, and it will effect the US more than China if the Yuan rises and USD falls.  Take a look at the trade deficit.

You give the Chinese over 30 billion dollars worth of stuff.  They give you over 180 billion dollars worth of stuff.  Who can afford to lose the other countries stuff more?


But, I hope you're right Bodhi.


PS: Something to think about.  China already has hundreds and hundreds of USDs in reserve.  So even with a devalued USD, they still will be able to buy stuff from the US, depending on the devaluation.  And if devalues to the point where thier USDs are worthless, then US is in a world of hurt.

[Thrawn]

Originally posted by jEEZY
increasing the trade deficiet (which really isnt that big of a deal except to pols and thier stupid constituants)

How so?

[Toad]

"Bad News" on the Trade Deficit Often Means Good News on the Economy

Trade Deficits, GDP, Manufacturing, and Unemployment
By the most basic measure of economic performance, the change in real GDP, evidence points to a stronger economy in years in which the current account deficit is rising.

In those years since 1980 when the current account deficit declined as a share of GDP, the economy grew each year by an average of 1.9 percent.

In those in which the current account deficit grew moderately, real GDP grew at an annual average of 3.0 percent.

In those years in which the deficit most rapidly "deteriorated," to borrow another popular characterization, real GDP grew by a robust annual average of 4.4 percent–a rate more than double the growth in years when the deficit was "improving." Four of the five best years for GDP growth since 1980 have occurred in the same years when the current account deficit was growing most rapidly.

The same pattern emerges in the manufacturing sector. It has become the conventional wisdom that a trade deficit hurts manufacturing because imports presumably displace domestic production, but the plain evidence of the past quarter century contradicts that presumption.

Manufacturing output actually declined slightly on average in those years in which the current account deficit shrank. In contrast, it grew by 4.1 percent in years when the current account deficit grew moderately and by a brisk 5.3 percent when the deficit grew rapidly. In fact, five of the six years that saw a decline in manufacturing output occurred in years in which the current account deficit was declining.

The pattern also applies in the politically sensitive area of employment. Again, the conventional wisdom holds that a trade deficit destroys jobs by supposedly shipping them overseas.

But again the evidence suggests something quite different. In those years of an "improving" current account deficit, the unemployment rate on average jumped by 0.8 percentage points.

In years when the deficit moderately "worsened," the unemployment rate fell by an average of 0.2 points, and in years when the deficit grew the most rapidly, the unemployment rate fell by an even larger average of 0.7 points.

Indeed, in 7 of the 8 years in which the current account deficit "improved," the unemployment rate went up; in 13 of the 16 years in which the current account deficit "worsened," the unemployment rate went down.

So, is the sky falling or not?

[Zulu7]

No. The Dollar is going tits up because Bush is more interested in starting wars and forceing his brand of "freedom!?" on us all, than he is in manageing his economy.

Ok a bit simplistic and theres probably more to it than that but I still think the guy is more concerned with foreign policy than his own domestic policy.

Still it means Harleys will cost less over here! ( not sure thats a good thing! lol )

[Bodhi]

Originally posted by Zulu7
No. The Dollar is going tits up because Bush is more interested in starting wars and forceing his brand of "freedom!?" on us all, than he is in manageing his economy.

Ok a bit simplistic and theres probably more to it than that but I still think the guy is more concerned with foreign policy than his own domestic policy.

Still it means Harleys will cost less over here! ( not sure thats a good thing! lol )

lol, yet another idiot who thinks that the sitting president can effect an economy as large as the US's....

[Thrawn]

Toad, one of the factors used to calculate GDP is consumer spending.  So when the trade deficit is high, there's alot more foreign goods at cheaper prices for consumers to buy.

But those things are bought on loan in the form of USDs as promisary notes.  GDP is a crappy way to measure actual economic growth, as people spending money doesn't mean that the domestic economy is getting better.  Especially when they are bought on loan.


PS: It would help if the author actually stated the years where he saw these trends, and if he chose to explain the actual causation and not just show a correlation.

[ygsmilo]

A wise man once said,,,,,

look at the yield curve of the bonds that currencies are based on.

The answer lies within,

I have spoken.

[Toad]

Thrawn, the year by year  (80-03)data are in the chart "Table 1" in the article?

Did you read it?

[Thrawn]

Sorry Toad, I was lazy and didn't actually click on the link.  I'll get to it soon as I find historic data for "yield curves" for the US, Euros and China...and find out what the heck they indicate.  


ygsmilo, you could save me some time by telling me what I'm looking for.  

[Toad]

Jeebuzzes.

I hate it when folks argue from........... insufficient knowledge.

Milo likes to throw top water baits out. I doubt he'll spill the beans. I'll tell you this. His grasp of trade and economics is amazing. When we drove to the con, he held forth splendidly for Rude and I. The guy knows his biz.

[Thrawn]

Edit:  My point about trade deficit vs GDP stand.  I didn't comment on employment or manufacturing because I had insufficent info.

I have a job interview tomorrow and got to get to bed, I respond more fully tomorrow.

[Toad]

By the most basic measure of economic performance, the change in real GDP, evidence points to a stronger economy in years in which the current account deficit is rising

A stonger economy is bad?

But then you're going to say that THIS time, it's just not going to be the same, right? That the dollar will totally collapse and we're all going to die and it's the end of the US and all that stuff?

[Thrawn]

Hey Toad, figured I should put up or shut up.  In my own defence, the day after I spent hours looking up facts and figures, and rewriting out the trade deficit numbers and associated data in linear form because I didn't like the way the were presented in the article.  About halfway through I hung up my connection to make a phone call, and subsquently clicked "Submit Reply".  I lost the entire post and lost all will to recreate it.  That being said...



It's not surpising to me that the author got higher numbers for GDP when there was a large trade deficit.  The question is where are the numbers higher and how does that benefit the US?

GDP = consumption + investment + exports - imports

Seeing as we are dealing with a trade deficit situation, imports will more than cancel out the exports so...

GDP = consumption + investment - imports


So if GDP is increasing there must be an increase in consumption and investment against the increase in imports.

Consumption to investment is generally excepted to be at a 2 to 1 ratio.  If we assume that all imports are invested or consumed and we have further consumption and investment (of domestic product) than we see an increase of GDP.


But how exactly does consumption directly help the growth of the economy.  It doesn't.  One can assume that if more people are consuming than the business that are producing product are making more profits to reinvest in the busines or whereever.  But this already calculated for in the "investment" part of the equation.  

What's more if we apply the 2 to 1 ration to the deficit imports, than in a given year the investment part of the trade deficite has to return 66% on the investment before it breaks even.


In regards to manufacturing output and unemployment, first of all they are both lagging indicators.  So we would have to see them in linear format to make sense of them.  I'm not up to doing it again right now, but perhaps in the near future.

Secondly, the author is trying to show correlation, not causation.  There are other factors to take into account, like government deficit.  Reagen went massively into debt during the 80's.  But you can always do into debt to increase manufacturing and decrease unemployment, but that is still stuff you are paying for.


There is no economic crisis as long as the system holds.  If the world world keeps paying for US standard of living forever than you guys are fine.  But between the last post and this the numbers for the US trade deficit came out for 2004.  It has inceased by 24%! over 2003.  

Central banks lose faith in the USD.  USD goes down.  Fed prints off more to keep the US public in cheap goods.  USD goes down more.  Central banks lose more faith.   It seems to me like a downward spiral.