Why does this government let the dollar slip ?

[lutherblsstt]

Any economists out here ?

I am curious why this goverment continues to let the dollar slip in value ? While technically a lower dollar makes our products cheaper and more attractive for foreign countries, the question is whether that rationale is reasonable when foreign countries also are in a time of crisis. In other words, it does not seem to have much impact this time on our sales.

A good example is airplanes.

A rough estimate of the costs of a Boeing 777-200ER is about $230,000,000.

Differences in configuration and customer bonus can change that figure by several millions but anyhow. The US dollar losing against the Euro, with an exchange value going down from $1.30 to $1.50 for 1 euro (I know this way of presenting looks somewhat strange as it may look at first sight that it is going up, but having to pay more dollars for 1 euro obviously means it is going down), would mean, that the price for European airlines would technically go down from $230,000,000 (approx. 176,923,000 euros) to 153,333,333 euros. That is a massive reduction of 23 million euros per plane !!

You would imagine that European airlines would quickly drop buying European Airbus jets, assuming they do not yet have a contractual obligation with Airbus, and massively by hefty in price reduced Boeings. The US economy, at least in this sector, would thus be expected to soar, and benefit from our worthless dollar.

Only, it isn't happening.

That it isn't happening on a large scale is reasonable, since after all, the crisis is global, also in Europe and Japan. But, this does not explain that ... European airlines continue to buy European Airbuses. In fact, it explains even far less that American airlines continue to buy European Airbuses which would have INCREASED in price by a comparable amount !

In other words, the simplistic model of a worthless dollar is excellent for our economy since everybody buys our products, is clearly not working.

I am not looking here for cheap shots and strong political opinions about this government or 'liberals' or whatever, I am interested in hearing seriously supported economic theories and opinions. The government meanwhile seems to be focusing on problems that are not unimportant, but in a time of severe economic crisis, perhaps at least secondary, such as health insurance, and climate and environment.

Why do you think the government does not take more severe measurements to stop this continuing devaluation of the dollar. In the 1980s it was common for Natonal Banks to step in and massively purchase dollars or other currencies to stabilize such uncontrolled devaluations. We are not seeing anything of that today. Why ?

And why is the theory of cheap currency leading to high sales failing other than for the reasons I have opined ?

Relevant article: Invalid Link Removed

 

[luclyluciano]

The only real way to stop this slide is to raise interest rates so as to make investing in the U.S. Dollar more attractive. The slide could not be stopped by buying up dollars as the of the U.S. Debt and economy wouls still be the same. The sliding dollar will eventually create a boom for U.S. Exports and manufaturing......what little you have left! Lol!

 

[Delta Force]

its a 2 part answer, first the dollar will keep sliding b/c congress does not know how to balance the budget, all they know is spend spend and spend some more, as our national dept keeps rising which is currently at $12TRILLION plus other nations see less value in the dollar.
The second part is they (congress or the ones in power) may actually do this intentionally b/c a weak dollar makes our exports more affordable to other nations therefore more jobs here at home although that seems to not be working well at the moment with the high un-employment, the weaker dollar also makes imports more expensive here which can help with the trade unbalances we have.

 

[sethroberts]

The other reason is that a weaker dollar makes your debt "cheaper". If you borrow 10 trillion dollars from China and then reduce the value of the dollar by 50% then you are in effect only paying 5 trillion dollars (very simplified of course). China knows this and in the open they oppose this kind of devaluation but in reality they are largely complicit because their currency is increasing in demand (real value) while it is artificially pegged to the dollar (which the US squawks about in the open but behind closed doors is complicit). China allows this because even though it seems like they are missing out on 5 trillion dollars they are gaining through the enormous trade deficit that exists between the US and China resulting in an enormous wealth transfer. It is mutually beneficial to both countries.

 

[lutherblsstt]

What baffles me is the lack of common sense of the government (not this 'specific' government, but all the governments we have had since this problem has start occurring or was in preparation for this to occur).

I just read in Forbes that of the $600 stimulus checks we received under Bush supposedly because this would stimulate the economy by people spending this for purchases, not more than 20% of this money was actually used for purposes. About 80% was used by people to pay off credit card bills and other bills. I certainly did not spend it to purchase anything either. How on earth can a government which as economic specialists, be so stupid to think it can completely predict what people will do ? I do not get this. People make decisions on factors that may be completely different from ratio, or at the most may use what they think is ratio, but may very well be an entirely different ratio than my ratio. If people currently use a product, and I make a different product that is better, it seems completely absurd for me to concluded that people will ditch their product and buy mine because it is better. What is really going to happen, is unpredictable. People may react in any possible way to the situation. They may reject the notion that my product is better because they are suspicious of the information that I provided. They may decide not to buy my product, because some of them may have strong nationalist and chauvinist feelings and only buy a product that is 100% American. Some may buy the other product because the manufacturer has a Christian affiliation and they feel that continuing to do so is part of being a good Christian. Basically, there are so many confounders and factors in the equation, that it is nothing but a shot in the dark to try and predict the actions of the people. In fact, there is only one certainty, a 100% certainty that you can predict from stimulus money, and that is: If I spend 100 billion word of money to give a way (not to invest or convert in another type of 'money'), I will have 100 billion less. That is the only certainty you have.

We saw the same happening with the Obama stimulus plan. I am not absolutely against the idea; what I have a problem with is the flawed rationale on which it was based. From the moment you spend it, you have no control over it anymore. This was precisely part of the criticism. Many organizations did NOT use it to create new job, and the money because used for example for executive bonuses of people who already had a well-paid job. Now really, is that so surprising ? In other words, again the mistake was made of someone thinking they can predict how someone, let alone, the people would react, at least not when something exceeds a certain level of complexity.

It seems to me that in essence there are two problems that have prompted "past years of reckless monetary and fiscal policy", and those are that we live in a country built on credit; people buy with money they do not have. In other words, people maintain a level of luxury above what they can afford. Imagine a plan that would outlaw the existence of credit cards in the US within 6 months; thus withing 6 months it would become illegal to pay, or own credit cards. The move would no doubt yield an agry backlash from the people since you would essentially enter their chosen way of living and limit what they can do and how they can live by taking away their credit. Presumably, that too would have an immediate negative backlash on the economy since spending would acutely decrease. On the other hand, certain goods would bear little effect, as long as they relate to essentials.

In fact, I remember reading in Forbes too that current investment advice is to withdraw investing in anything that is "at will nonessentials" because that is where people will cut spending. On the other hand, other sectors will not have such negative effects and some sectors are in fact flourishing. A sector that is currently flourishing is gambling and casinos. People ALWAYS believe there might exist that chance that would suddenly solve all of their problems, even more so in crisis, thus casinos are virtually immune against this current type of crisis. It is an interesting business, because most of the money you will using is not your own but comes from your customers playing.

The second problem I see that has cost enormous loss of money, is the ongoing wars. There is not the least indication that the government is having this under control or will be close to getting this under control. There is no clear plan of date. I believe that Obama truly is against the war, but fears doing anything that will negatively affect his impact on history, which to me seems to be why he fears making drastic decisions on certain things and seems indecisive. With all the options that have been heard regarding those wars, there is nothing in the pipeline that would by a certain date essentially arrest the spending. The question I wonder about is what the effect would be of a drastic decision, something in the sense of: "I have decided the wars are over; we are pulling out, full stop, irrespective of whether Iran and North Korea invade you and establish nuclear basis here or whatever, we have decided that what goes on here is no longer our problem, buh-bye. What would be the economic effect of such a drastic decision ? The government spending would fall dramatically, no doubt. There may very well be severe political backlash and loss of popularity. Many people with strong military feelings will likely argue that the president sold the country, offended those who made the ultimate sacrifice, made the US into a loser when it could win, all true, and it is also true that the political consequences would be hard to predict. However, that political consequences are not my concern here in this thread. My question is solely limited to the economic consequences.

 

[bigrobbierob]

IMO anyone that understands basic economics sees what they are doing is bass ackwards.

For a while I gave them credit for being stupid, but eventually I came to realize that no one is that stupid and lacks that much common sense

So I find only one conclusion...it's on purpose.

Two words:

cloward piven

 

[Nitrox]

Foreign exchange rates and currency valuations are fairly complicated but the fundamentals basically come down to supply and demand for currencies. Of course governments have the ability to affect those factors but there are costs and time frames associated with that ability. The more the government tries to compensate the higher the costs.

The US dollar has enjoyed the status of being the international reserve currency (i.e. the world essentially used it for international financial transactions). However, with the US economy in the toilet and perceived better alternatives such as gold and the euro, demand for the US dollar has dropped and along with it, its value.

In the short term the US government has limited options to counter this. It can either raise interest rates or try to buy and hold US dollars so that they are out of circulation. Both would raise govt expenditures and hence either debt or taxes.

In the long term, it can try to fix the economy (insert 2,000 page argument on how to do it).

But luther hit the nail on the head, the average US citizen has been living above his or her means for too long and now it is time to repay the loan.

 

[Nitrox]

The other reason is that a weaker dollar makes your debt "cheaper". If you borrow 10 trillion dollars from China and then reduce the value of the dollar by 50% then you are in effect only paying 5 trillion dollars (very simplified of course). China knows this and in the open they oppose this kind of devaluation but in reality they are largely complicit because their currency is increasing in demand (real value) while it is artificially pegged to the dollar (which the US squawks about in the open but behind closed doors is complicit). China allows this because even though it seems like they are missing out on 5 trillion dollars they are gaining through the enormous trade deficit that exists between the US and China resulting in an enormous wealth transfer. It is mutually beneficial to both countries.

True but this is mutually beneficial only for a limited time. It is not sustainable. China has pegged its currency to the US dollar by continuously buying US dollars. It is now sitting on huge US dollar reserves that are now devaluating - thus the average chinese citizen is losing wealth. Additionally, with US consumers tapped out, demand for goods produced in china is falling. Kinda like a house of cards.

 

[EasyEJL]

I just read in Forbes that of the $600 stimulus checks we received under Bush supposedly because this would stimulate the economy by people spending this for purchases, not more than 20% of this money was actually used for purposes. About 80% was used by people to pay off credit card bills and other bills. I certainly did not spend it to purchase anything either. How on earth can a government which as economic specialists, be so stupid to think it can completely predict what people will do ? .

Its easy luther. The government and their economic specialists aren't stupid, but to retain their jobs they have to tell their superiors what they want to hear. You can't tell a democrat president that the best way to increase hiring is by lowering taxes, as its against the party line, similarly to you not being able to tell a repubican president that he needs to raise taxes to pay for a larger defense force.

the other slightly funny part is this - of the portion used to pay down credit cards, how much do you think was later spent anyhow on consumer goods? And do you not think that banks having more operating capital by having gotten repayment on some credit cards also made it easier for people to get larger credit limits, and people to get new credit lins?