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Looking at a trip to Asia next month - Japan & Hong Kong - am very glad all but one night is covered by reward miles. This is the upside to a collapsing dollar - our reward miles our worth more when we travel internationally :) One the other hand the USD $1,000 for the one night is probably going to end up closer to $1,200 and our meals and other shopping will be more expensive in terms of the dollar.
Cheers, Jeff |
>Stay on OP's topic
The OP asked "Will the dollar collapse?" This moved to a yes/no conversation - "No, provided you get your house in order and get your economy back in place." "Yes, because we're still strong" etc. Discussions such as this are still on-topic. |
I work at the Federal Reserve and am quite familiar with how policy is being set. There is very little concern about exchange rates, and certainly nothing like a deliberate "export-driven policy" as an earlier poster mentioned. In general, PPP, or the equalization of prices across economies, tends to hold in the long run (say, 5 to 10 years). Over shorter periods, it's very difficult to know what moves exchange rates.
The only way prices will reequalize is a) higher US inflation, or b) strengthening of the dollar. The Fed spends 99% of its energy limiting inflation (and 1%, as seen this week, in preventing liquidity problems), so I would bet on b) and not a). The dollar was very, very strong in 2001 and 2002, and we're unlikely to return to that point. But something along the lines of $1.20 - Euro 110 Yen - $ $1.25CAN - $ 6 RMB - $ 1.70 sterling - $ .75 AUD - $ seems fairly plausible for me a few years out. Currency is a huge mystery. There is basically a zero chance of US default, so standard parity equations would imply that investors see a much higher real interest rate in Europe vs. the US over the next few years. Inflation is very similar in the Eurozone, Uk and US, so this implies that Europe will see much higher nominal growth than the US for the next few years. I just don't see this happening. Finally, one more note on "export-led growth". Exports matter is small, trade-heavy countries. In the US, the exports part of GDP is very small (well under 10%), so you'd be hard-pressed to see a large gain in GDP from export growth alone. Ok, one more note: A lot of the differential (not vs. the Euro, but certainly against the CAD) recently has been driven by huge growth in raw material prices. Canada is something like 15% minerals. The US does not have a large (relative to GDP) export industry in things like oil, nickel, etc., so some of these currency gains against the US look like old-fashioned "Dutch Disease". |
Dumb question for the Fed guy: Every time the Fed acts to increase liquidity, it's by lowering interest rates, in effect giving away money to bankers in the hope that some of the liquidity will "trickle down" to consumers. Ever thought of, say, lowering the $3 ATM surcharge, or even subsidizing ATM surcharges for a year? That would put $33B directly in the hands of consumers.
Or the Fed could buy 10,000 homes (take mine, please) -- Mr. Bernanke could buy the first one -- thereby giving a symbolic message that it's OK to buy homes. |
2012 could prove interesting. Social security payouts will start to exceed taxes by increasingly larger margins every year as the baby boom starts to retire. The "surplus" of the past 4 decades has been spent in general revenue so the only ways to address that problem is increase retirement age, increase SS taxes, decrease benefits, further increase the budget deficit, increases taxes, or all of the above.
The other viewpoint is that countries hold the USD because of the U.S. anti-inflationary policy not to freely print money (a new dollar spent/printed is backed by a dollar of new debt). If this belief goes away, trillions of dollars of U.S. debt instruments could be dumped. Think post WW-II Italian Lira....... |
Originally Posted by kevincure
(Post 8443209)
I work at the Federal Reserve and am quite familiar with how policy is being set. There is very little concern about exchange rates, and certainly nothing like a deliberate "export-driven policy" as an earlier poster mentioned. In general, PPP, or the equalization of prices across economies, tends to hold in the long run (say, 5 to 10 years). Over shorter periods, it's very difficult to know what moves exchange rates.
The only way prices will reequalize is a) higher US inflation, or b) strengthening of the dollar. The Fed spends 99% of its energy limiting inflation (and 1%, as seen this week, in preventing liquidity problems), so I would bet on b) and not a). The dollar was very, very strong in 2001 and 2002, and we're unlikely to return to that point. But something along the lines of $1.20 - Euro 110 Yen - $ $1.25CAN - $ 6 RMB - $ 1.70 sterling - $ .75 AUD - $ seems fairly plausible for me a few years out. Currency is a huge mystery. There is basically a zero chance of US default, so standard parity equations would imply that investors see a much higher real interest rate in Europe vs. the US over the next few years. Inflation is very similar in the Eurozone, Uk and US, so this implies that Europe will see much higher nominal growth than the US for the next few years. I just don't see this happening. Finally, one more note on "export-led growth". Exports matter is small, trade-heavy countries. In the US, the exports part of GDP is very small (well under 10%), so you'd be hard-pressed to see a large gain in GDP from export growth alone. Ok, one more note: A lot of the differential (not vs. the Euro, but certainly against the CAD) recently has been driven by huge growth in raw material prices. Canada is something like 15% minerals. The US does not have a large (relative to GDP) export industry in things like oil, nickel, etc., so some of these currency gains against the US look like old-fashioned "Dutch Disease". Add the political developments of the last 5 years which have made the US not exactly more popular around the world (and (currency) investors are just normal people, too), and you have a movement away from the USD. The US has been living above its means for a long time. The US as a whole has been spending the money that others have saved. Some balance needs to be restored. This does not mean the USD will get much lower. Currency markets always overshoot. I don't have a crystal ball, but my guess is that at 1.4 USD to the EUR we are close to the USD's low. |
As to the question about liquidity, the Fed doesn't actually give away money. We lend it to banks for 1-15 days, secured with bank assets, and with interest. By making more of this type of loan available, bank holding will increase, and therefore they'll lend more to consumers at a lower rate. No one has ever defaulted on a Fed repo.
When the interest rate is lowered, more or less the Fed buys treasury bonds held by banks, thus increasing the money in the economy. Both of these policies are inflationary, which is why cutting rates tends to be done only when things are a bit dire. The number one goal of the Fed, though, is to keep inflation lower than 2% and above 1%. We're around 2 right now, so this rate cut worries me a bit. As for the dollar being an international reserve: I dont' know that that's terribly important for the value of the dollar. If China and OPEC stop using dollars, interest rates on dollars would rise, but multinational firms could just borrow in another currency anyway and hedge the currency risk, so it's not a terrible problem. Also, despite the US budget problems, our deficit is still not a very high percentage of GDP (many Eurozone countries have a higher deficit) and the Fed has a much stronger inflation-fighting reputation than the ECB, simply because the ECB hasn't been around very long. I imagine OPEC and China will diversify but it seems impossible that they'll outright drop the dollar. |
Originally Posted by kevincure
(Post 8445249)
As for the dollar being an international reserve: I dont' know that that's terribly important for the value of the dollar. If China and OPEC stop using dollars, interest rates on dollars would rise, but multinational firms could just borrow in another currency anyway and hedge the currency risk, so it's not a terrible problem. Also, despite the US budget problems, our deficit is still not a very high percentage of GDP (many Eurozone countries have a higher deficit) and the Fed has a much stronger inflation-fighting reputation than the ECB, simply because the ECB hasn't been around very long. I imagine OPEC and China will diversify but it seems impossible that they'll outright drop the dollar.
At any rate, even India is now refusing to accept USD at tourist sites. Here's some food for thought on other topics: http://news.independent.co.uk/world/...cle3169638.ece http://news.independent.co.uk/world/...cle3169654.ece |
I have seen so many of these cycles. :) The buck goes up, the buck goes down. And, no one knows what is going to happen.
Who would have ever predicted that Democrat Bill Clinton would make the dollar very, very strong. Or that "business" Bush would blow it down the tubes. Currency predictions are fun... but, pretty much meaningless. Nonetheless, IMHO, the buck will be much higher within two years. Right after we invade Saudi Arabia. :D PS. As to Medicare--I suspect we will see successful efforts to cut US medical spending back to around 9-10 of GDP from the 16-18% of today. This would probably solve the Medicare issue. No other country spends so much on medicine and gets so very little for it. Health care in the US is pretty mediocre. That's why we are told so many times how great it is. Cut costs, save lives! |
A weak dollar brings along with it many benefits. It's funny how people talk about how strong the Bush economy has been when it was the federal reserve and exchange rate adjusting to avoid a rather deep recession.
The real concern should not be the dollar itself but trading partners like China who illegally peg their dollar to ours. Of course, the USA's inept political system means that those people who have a vested interest in China's actions, such as the retail lobby, are successfully pushing politicians in the country to do nothing. The dearth of leadership at the top isn't helping either. Hopefully in 2 years we'll have a president without his/her head stuck straight up their backside. |
Originally Posted by thegeneral
(Post 8745498)
The real concern should not be the dollar itself but trading partners like China who illegally peg their dollar to ours.
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Originally Posted by thegeneral
(Post 8745498)
The real concern should not be the dollar itself but trading partners like China who illegally peg their dollar to ours.
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Originally Posted by biggestbopper
(Post 8743949)
I have seen so many of these cycles. :)
PS. As to Medicare--I suspect we will see successful efforts to cut US medical spending back to around 9-10 of GDP from the 16-18% of today. This would probably solve the Medicare issue. No other country spends so much on medicine and gets so very little for it. Health care in the US is pretty mediocre. That's why we are told so many times how great it is. Cut costs, save lives! But given that medical costs rise at an annual rate 2 - 2.5% points higher than the overall cost of living, how do you think medical costs will be reduced from today's 16% of GDP? Germane to FlyerTalk, and the OP, "medical tourism" or traveling overseas for medical care may be one tactic, as much lower overseas costs outweigh even the weak US dollar value. Most people think "other people's" medical care costs should be rationed to lower cost, not their own. The aging Baby Boomer population and expanding high-cost medical technology will drive Medicare (and US budget) deficits through the 2030's or even 2040's, a continuing contribution to the weakness of the US dollar. Global economic cycles may moderate this, but I don't see any real solution to rising medical costs on the horizon. Do you? I'm increasing my international and global investments in my portfolio. The USD may not collapse, but I don't foresee a strong rally. |
Statements that default on U.S. federal obligations is "unthinkable" are obsolete. For some time now various people in and out of government have been thinking out loud that the federal government might reduce Social Security benefits in order to avoid having to redeem the assets of the OASDI trust fund. If this happened, it would be, despite a massive propaganda campaign to convince people to the contrary, in the fullest and strictest legal and moral sense of the term a default of the United States government on its full faith and credit general obligations.
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Originally Posted by onlyairfare
(Post 8746035)
But given that medical costs rise at an annual rate 2 - 2.5% points higher than the overall cost of living, how do you think medical costs will be reduced from today's 16% of GDP?
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