Originally Posted by
Shareholder
I'd be more amazed when the US media started making Americans aware of how much Bush and his crew have devalued the US$ since coming to power. In any other major country, the declining value of the currency vis a vis the world's other currencies would be front page news...and of great concern. In fact, it is as significant as any interest rate change by the central bank. Yet I've not caught a single mention of this on even CNBC, nor seen it on the front page of the WALL STREET JOURNAL.
The US always complains when other countries devlue their currency so their goods will be available to Americans more cheaply, or bash the Chinese for not raising the value of theirs. Of course, a lower US$ is good for American manufacturers and US products sold abroad, but it increases the cost of imported goods and this will have an impact on levels of imports in coming months/years.
Of course, it also benefits the US treasury since all those borrowed dollars that are piling up the US debt are payable in devalued dollars, so the US off-sets any interest being paid with a far smaller "real value" principle.
If any one person should shoulder the balme for the devaluation of the U.S. currency it is the Maestro himself, Alan Greenspan. He panicked in his reaction to the bursting of the tech bubble by reducing the fed funds rate to 1%. This led to too much money sloshing around the U.S. chasing too many bad investment ideas in the name of increased return. The biggest distortion created by the excess amount of cheap money was in the excessive building of residential real estate. Too much credit was extended to people who probably were not financially ready to purchase a home and take on a mortgage. Free market economies are good at correcting the excesses created by irrational choices, but these corrections come at a price. The U.S. housing correction is real, it is severe and it is going to last a long time. Bernake is going to have a heck of a time trying to minimize the effects of this housing correction, and that is why (in my opinion) he panicked with the 50 basis point fed funds cut and the 50 basis point discount rate cut. The recent rapid decrease in the value of the U.S. dollar is a natural consequence of the sudden drop in U.S. interest rates.
If there is a problem with the U.S. economy is that everyone whorships at the alter of home ownership (i.e. the "American Dream"). Not only is there tax dedcutibility of home mortage interest in the U.S. but there is also tax deductability of property taxes, and also an exemption of up to $500,000 (per couple) in capital gains taxes for the sale of a primary residence. These tax incentives skew the investment landscape in a way in which too much is spent on homebuilding and not enough is spent on other capital formation related activities. An underappreciated fact is the strength of the real estate lobby in Washington. Fannie Mae, Freddie Mac, the National Association of Realtors and the National Association of Homebuilders combine their lobbying forces effectively so that together they are a force as powerful as the NRA or the AARP.
The reason why the decline in the U.S. currency is not as predominant an issue as it would be in other countries is that the U.S. economy is less reliant on trade with other countries (on a percent of GDP basis) than Canada, or any developed country in Europe, Asia or Latin America. The size and diversity of the U.S. economy allows for a greater degree of self-sufficiency compared to its peers. Of course, the U.S. dependence on foreign trade is increasing as the forces of free trade, reduced costs in communication and transmission of capital flows and other trends which encourage the growth of globalization become more prevalent.
If someone wants to criticize President Bush, he or she certainly has plenty of ammunition. But I think it is unfair to criticize him for the weakness in the value of the U.S. dollar.
Just my two (Canadian) cents. Thanks.