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Yesterday the Canadian dollar topped out at 1.06 cents US. Five years ago if you went to Canada you could swap each dollar for more than $1.50 of Canadian money. Today if you go you only get about 95 cents...not even a full Loonie!

So what? Well it is a sign, amongst many others (record gold, oil, wheat, etc. prices) that the US dollar is losing its status as the "world's currency", a status that has allowed America to live beyond its means for so long. Here is a lovely analogy (below the fold):

Imagine if five people were washed up on a desert island: four Asians and an American. In splitting up their duties, one Asian says he’ll fish; another will hunt, another will look for firewood, and another will cook. The American assigns himself the job of eating.

"The modern economist looks at this situation and says the American is key to the whole thing," says Schiff. "Because without him to eat, the four Asians would be unemployed." The alternative: Without the American, the Asians might eat a little more themselves and even spend some time building a boat. This is happening as we speak: With the rise of the Chinese consumer class, the local citizenry is now spending, and the country is no longer totally dependent on exports. Which means they’re no longer totally dependent on us.

There are really two points to be made here.

  1. The US dollar is losing its status as world currency, a status that has allowed the US to avoid normal economic laws for some time now.
  1. The rise of other nations and currencies that is going to change how America relates to the world. Although America remains the only military superpower (hey if you spend 50% of the world's spending on the military you had better be a superpower), its role as the predominant economic superpower is being usurped, just as Britain's was in the early 1900's.

To highlight these changes let's look at a few recent stories from the media.

1. Who is the richest man in the world? If you said gates or Buffet, you'd be wrong.

A record-breaking performance by India's stock markets has put the industrialist Mukesh Ambani at the top of a list of the world's richest people.

Buoyed by unprecedented inflows from US and European investors, the benchmark Mumbai Sensex stock index topped 20,000 for the first time yesterday – having almost doubled in value in the last two years.

One of the results of the surge in share prices has been a boost for Mr Ambani's Reliance Industries, a powerhouse of the country's industrial strength and its most valuable firm. Its excellent performance, along with that of two other of the group's companies, saw the net worth of its chairman and managing director rise to $63.2bn (£30.6bn) yesterday.

The Press Trust of India reported that the increase placed Mr Ambani above such figures as Microsoft's Bill Gates and Mexico's Carlos Slim Helu, who are each worth just over $62bn.

2. The US dollar's role as a local currency may be ending

In many countries around the world the US dollar serves as the unofficial number 2 and sometimes number 1 currency. Go to places like Cambodia or Burma, or...and you can use dollars pretty easily. This means that there is a stack of US dollars floating around the world creating a demand that keeps the dollar value higher than it would be. That may be changing.

Bargaining while buying some trinkets in the Maldivian capital, Male, recently, I heard most unexpected words: "You can keep your dollars."

The tiny nation of 1,200 islands has long accepted the US currency out of convenience for visitors and financial sobriety. The dollar tended to do better in global markets than the local monetary unit, the rufiyaa. That may be changing and it is a bad omen for the world's reserve currency.
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These things start out slowly, and in recent months I have had similar experiences from Mexico to Vietnam. In restaurants, taxis and shops that long accepted dollars, many are opting for local currency. The reason: concerns the dollar plunge that analysts have predicted for years is afoot and that the United States is not interested in halting it.

There is also a realization that something transformational may be happening in global markets. Some states that long pegged their currencies to the dollar are scrapping the policy while others are considering it. A survey by HSBC Holdings found that twice as many Gulf businesses see benefits from dropping currency pegs to the dollar as those that see negative consequences.

3. The US influence on the world economy is declining.

Okay so this is not a direct relationship...China's economy will take some time to reach the size of America's...but China has already overtaken the US as the world's biggest emitter of CO2. The US can't even claim to be the world's biggest polluter and more. Is nothing sacred <snark>

China has overtaken the United States as the world's biggest producer of carbon dioxide, the chief greenhouse gas, figures released today show.

The surprising announcement will increase anxiety about China's growing role in driving man-made global warming and will pile pressure onto world politicians to agree a new global agreement on climate change that includes the booming Chinese economy. China's emissions had not been expected to overtake those from the US, formerly the world's biggest polluter, for several years, although some reports predicted it could happen as early as next year.

Summary:

When the US dollar is used worldwide and used to price commodities traded worldwide other countries need to hold US dollars. This "extra" demand works to the US's advantage. For example China, Japan, etc lend their extra US dollars back to the US government at very low interest rates.

In the past every country that has run a current account deficit (basically spending more than you are making as a nation) of more than 5% of GDP has run into currency devaluation issues. Think Argentina if you will. The current US current account deficit is now in the 5.5% -6.5% range and finally we are starting to see the "impact" as the dollar, day after day, falls to record lows against other currencies.

The fall of the dollar may not seem important to many people and it barely registers on the nightly news, but it will eventually make all imports more expensive, it will make US assets cheaper for foreigners to buy, and it will reduce the US standard of living. In other words it is a big deal.

Unfortunately there is no easy way out. For now the Fed has decided to NOT face the music and has decided to bail out the economy (Wall Street) first. As a result expect more inflation and an even lower dollar. To really fix the problem we need to save more and spend less. Its that simple and that difficult.

Originally posted to taonow on Thu Nov 01, 2007 at 06:30 AM PDT.

Poll

My thoughts on the dollar

63%41 votes
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| 65 votes | Vote | Results

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Comment Preferences

  •  The Problem Being the World Currency (5+ / 0-)

    is Stopping.

    When your currency is a world currency, you can do a lot of irresponsible things and not suffer the consequences immediately. Now, we are looking at an predictable payback: the dollar will likely be below Purchasing Power Parity for the foreseeable future against unmanaged currencies (Japan and China will still be trying to keep their currencies undervalued) and those billions of dollars abroad will be coming back to collect on the promise.

  •  Also, the weak dollar will expand our exports (1+ / 0-)
    Recommended by:
    RonRaunikar

    and has already by leaps and bounds.  For years, the strong dollar hampered US companies ability to compete globally through exports and that is finally changing.  The strong dollar is not necessarily a good policy to have all the time (especially in a global economy).

  •  Si. (5+ / 0-)

    The virtual collapse of the trade-weighted value of the dollar over the last several months has enormous repercussions, most of which haven't been articulated yet (in part because they are difficult to work out).

    The shopkeepers in Mali might accept a dollar that declines in value slowly enough so that they can trade them in for local currency, but they're not interested in a currency that loses 1% or more of value seemingly every week.

    Stay-at-home Americans won't truly feel the repercussions until retail prices of general merchandise, beyond oil and food, rise well in excess of their wages, and their credit cards are maxed out.  Of course, at that point, it's too late to act.

    Cheers.

    "When the going gets tough, the tough get 'too big to fail'."

    by New Deal democrat on Thu Nov 01, 2007 at 06:46:45 AM PDT

    •  I travel (0+ / 0-)

      In fact I was planning a trip to Italy and Croatia for next February.  I am likely trading that in on a trip to India due to exchange rates.

      Pretty soon the Euro is going to be the international currency.

      There are bagels in the fridge

      by Sychotic1 on Thu Nov 01, 2007 at 06:52:37 AM PDT

      [ Parent ]

  •  Inflation (4+ / 0-)

    Inflation = currency depreciation = loss of purchasing power.

    The falling dollar means loss of purchasing power in the market place. Oil and other energy resources, gold and other metals, cement and other resources, wheat and other commodities are all getting more expensive in dollars. Eventually these increasing costs work their way through the economy causing further prices rises. Unless wages rise correspondingly, workers are screwed as they see their standard of living decline.

    However, assets -- ownership of resources, capital, and agribusiness - do rise correspondingly, and so inflation does not hurt the asset class. In fact, it benefits them relative to the non-asset class, as more and more of the country's wealth rises to the top.

    Inflation is a hidden tax on the middle class. The end result will be to turn the middle class into wage slaves, just like the underclass. This was the goal of Reagan's economic policy that Bush I dubbed "voodoo economics." Bush II is a voodooist and the Fed is supporting him as they trash the value of the dollar by creating excess liquidity through historically low interest rates and increasing the money supply. They are selling increasing inflation as growth, since it seems that business is doing very well measured in nominally. But adjusting nominal dollars for the real rate of inflation (not the fake one that is reported officially) shows that real increases are just not happening. Moreover, adjusting for inflation, wages have been stagnant for decades, while prices have been soaring on things that people need, like gas and food, which are no longer counted in figuring core inflation.

    Wake up, America, you are getting royally screwed as the dollar is turned into the peso and the US becomes a Third World country in terms of wealth inequality.

    Live unity, celebrate diversity.

    by tjfxh on Thu Nov 01, 2007 at 06:50:00 AM PDT

  •  A few years back (2+ / 0-)
    Recommended by:
    SecondComing, RonRaunikar

    1 US$ = 1.20 euro
    Now 1 US$ = 0.68 euro

    The reason is that oil is priced in $s. As the prince of oil goes up, the value of the $ falls - that way the price of oil remains constant in other currencies.

    How long before oil is so expensive in the US that the average American will not be able to afford to drive to work, let alone go shopping?

    And don't come out with the BS that the lower $ is good for us because it makes our exports more competitive. Hell, we don't make anything in this country anymore - other than armaments, of course.

    Bad, very bad times ahead. The inevitable result of an insane Administration that has been financing its foreign wars of aggression by simply printing more $ bills. Remember what happended to Confederate currency in 1865?

    No, we can't compare the US$ to the Peso, but we can compare it to the Mark of 1920s Germany: worthless paper.

    we're shocked by a naked nipple, but not by naked aggression

    by Lepanto on Thu Nov 01, 2007 at 06:59:57 AM PDT

  •  Won't it make manufacturing here (0+ / 0-)

    more attractive?  I don't see that as completely negative

    Some writers have so confounded society with government, as to leave little or no distinction between them - T Paine

    by breezeview on Thu Nov 01, 2007 at 07:11:17 AM PDT

    •  The problem (0+ / 0-)

      The problem is that the US imports about $2 billion PER DAY more than it exports. There is no way exports alone can balance the equation (someone needs to buy $2 billion more each day). There must also be a drop in imports (i.e. spending less by consumers) and that is hard because oil is such a big part of imports and the price of oil keeps going up.

      I can live with doubt and uncertainty and not knowing. I think it is much more interesting to live not knowing than to have answers that might be wrong- Feynman

      by taonow on Thu Nov 01, 2007 at 07:51:20 AM PDT

      [ Parent ]

      •  If we are buying goods (0+ / 0-)

        manufactures here which can now compete because of the devalued $, it's a 2fer.  Each dollar spent on goods manufactured here eleminates 1$ of imports.

        Some writers have so confounded society with government, as to leave little or no distinction between them - T Paine

        by breezeview on Thu Nov 01, 2007 at 11:59:08 AM PDT

        [ Parent ]

  •  The problem is (2+ / 0-)
    Recommended by:
    taonow, RonRaunikar

    that no one will want to buy dollar-denominated debt any more.  We will no longer be able to live on our multi-trillion dollar credit bill.

    "A revolution without dancing is a revolution not worth having." V for Vendetta

    by Captain Nimrod on Thu Nov 01, 2007 at 07:12:24 AM PDT

  •  Better question: Is the dollar the COUNTRY? n/t (0+ / 0-)

    As God is my witness, I thought turkeys could fly.

    by ticket punch on Thu Nov 01, 2007 at 07:42:47 AM PDT

  •  it's fitting that the dollar is the new peso (2+ / 0-)
    Recommended by:
    taonow, New Deal democrat

    because we're the newest banana republic

  •  Jan 2009? (0+ / 0-)

    Presumably, our next president is going to end our illegal and expensive invasion of Iraq?  So our budget deficit won't be as large so we can not run The Printing Press as much?

    Also, presumably, our next president will have an energy policy other than "make energy company executives as rich as possible" so we will not import as much oil?

  •  The Mogambo Guru today (1+ / 0-)
    Recommended by:
    taonow

    The Mogambo Guru: Drowning in inflation is never popular

    I wait for the applause, but Byron King of Outstanding Investments is apparently not a movie fan, and apparently cannot appreciate the staggering genius of my new film, and merely says, "Many news reports attribute the recent rising prices for oil and gold to tensions in the Middle East. This may, in fact, be the immediate reason why the prices for oil and gold are rising. But this reason is far too facile, if not convenient. The root cause is the declining value of the dollar."

    I look to Goldmau.com, but they, too, are unimpressed with my new movie, and say that the decline in the dollar means that "Gold and the RMB's (Chinese renminbi, or yuan) rise will be the final chapter to the dollar's status as the world's reserve currency, and the end to an era of low priced Wal-Mart goods made in China. Welcome to the American peso."

    Live unity, celebrate diversity.

    by tjfxh on Thu Nov 01, 2007 at 09:32:52 AM PDT

  •  Fallacy of exports (1+ / 0-)
    Recommended by:
    taonow

    Exports won't save US economy

    As usual, the Wall Street cheerleaders have found a way to persuade investors that the U.S. economy is in good shape and that individuals should continue to invest in equities.

    Their latest argument is that the economy will continue to expand at a healthy rate because, according to these "experts," increases in the export component of the nation's total output of goods and services (GDP) will make up for the slumping housing market.

    I have a very difficult time accepting this argument.

    Although U.S. exports have in fact increased significantly over the past few years, their rate of growth has nowhere near made up for the rate of decline in the housing component of gross domestic product (GDP). For example, residential construction spending has fallen 17 percent over the past year, while exports have risen only seven percent.

    And, once declining consumer expenditures on automobiles, furniture, household appliances, food and clothing are added to the equation, the cheerleaders' argument becomes even less convincing, because spending on these items accounts for approximately 28 percent of GDP.

    In addition, much of the increase in the reported value of exports has been due to the declining U.S. dollar — not rising foreign demand. In other words, when U.S. companies convert their sales to foreigners into lower-priced U.S. dollars, the reported, dollar value of those exports rises.

    Live unity, celebrate diversity.

    by tjfxh on Thu Nov 01, 2007 at 09:42:39 AM PDT

  •  A pcture worth a thousand words (1+ / 0-)
    Recommended by:
    taonow

    "I'm here for the rug."

    [Posted by Tina at Agonist.org and lifted by me.]

    Live unity, celebrate diversity.

    by tjfxh on Thu Nov 01, 2007 at 10:38:36 AM PDT

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