That’s a silly argument. These are issues that must be dealt with collectively through the political process. Of course, on the individual level, each person wants to pay no taxes and have the government provide them with wonderful services (“Lord, won’t you buy me a Mercedes-Benz?”). It’s the classical “free loader” problem.
The question that must be decided through the political process is how much taxes are needed and who should pay what and what services are needed and for who, etc.
On the individual level, my sending the government an extra $1000 isn’t going to do much to improve our society. However, us collectively deciding that people like me don’t need $1000 in tax cuts and putting that money to other uses (whether it is tax cuts for those who most need it, services for those who need it, or just lower the deficit) would do quite a bit.
Well, I don’t know if this conspiracy theory has any validity, but the dollar has been falling rather precipitously over the past year, as you can see by this chart:
As I write this, the dollar is at a four-year low, according to the financial news.
Given that both Europe & Japan are not really doing all that great economically, I think the only real answers to why the dollar is falling are:
1 - the spree of war and tax-cut related deficit spending we’re now embarked on, and
2 - the loss of confidence in the U.S. politically as a result of this Iraq venture. Notice on the far right hand corner of the chart how the dollar peaked in the second half of March and has been falling ever since. Seems to me that’s a pretty good barometer of the world’s opinion of the war on Iraq.
Even I am not going to say Bush HAS done this. But I would say that he has reserved the right to in that he has said he will act preemptively not just to defend the US itself, or its troops or citizens abroad, but also its economic interests.
So, basically you are saying, that Bush is allowed to go to war to against other countries killing thousands of people to defend the economic interests of the US? And here we are talking about an economic advantage which is not evident by itself. It was the choice of the countries of the world to chose the US dollar as global currency, and I think it is their natural right to reverse that choice.
Regardless of the truth of the theory, you tell us, that Bush is allowed to wage war for the sole reason to prevent countries taking legal economic measures which could harm the US, and if it is just something as to remove an advantage it had until now.
I have absolutely no idea what you’re getting at. And I wasn’t saying what Bush is allowed to do and what he isn’t. I told you what he’s said. And I even flat-out said I didn’t think that was the motivation or reason for what’s been happening.
The dollar has been overvalued on a number of bases, e.g. purchasing power parity, for quite a stretch now. However it’s value has been propped up or sustained by large capital inflows to the United States in the past decade, esp. in the 1998-2001 period. Those inflows were driven by the perception of lower risk in the United States and better returns, above all in the securities markets but also in other areas.
Rather obviously such perceptions, driven by the stock market bubble and the general investment bubble in the US economy, have not panned out. Further, US interest rates are quite low, from a foreign perspective especially. We may add to this that the perception of risk for many investors in re US assets has also increased markedly, partly due to more or less economic issues such as Enron and the bursting of the myth that US corp gov was worlds away better than the rest of the world, partly for quasi-political reasons, e.g. there seem to be sustained capital inflows to MENA from Gulf investors afraid for their assets inthe US, with no doubt reflows to Europe. It may be that other investors are losing an appetite for US assets for similar reasons, if the perception that the US is willing to seize assets for political reasons grows, although at present I think this is minor and exaggerated. Further, US expansion experience for many Euro firms has not been as profitable nor as happy as originally thought when the investment was made. There is also a perverse self-reinforcing mechanism in the exchange rate trend (with certain bounds obviously), the weaker the dollar, the weaker returns look, in the near and perhaps medium term, for the foreigner – that $10 profit ain’t worth quite so many Euros.
Thus the economic drivers for the capital inflows have slacked off. Higher perception of risk on a number of fronts (economic and political risk), much worse than expected returns on most assets classes all are turn offs – in addition in times of generally higher perceived risk, people tend to stick to home markets for their investing – stick with what you know in effect.
What effect on USD? Well, you know I am sure that we are a net debtor – American savings rates in the aggregate are at historic lows, so in order to finance both Government spending (investment and consumption in the deficit) and private investment, we need to borrow / buy savings from abroad. That means exchanging dollars for something else. Now, since we are going strongly into deficit again, on the government side, and not saving very much in the private sector (although also not demanding so much capital for investment either), obviously we’re trying to pull in quite a lot of capital – while at the same time the offer is declining.
Martin Wolf (my single favorite columnist) in The Financial Times had what turns out to be a highly prescient analysis back on 7 Jan 03, which I quote in part:
As you see, Wolf feels that given the current situation – and I may add here we see a real threat from the fuck you policies of the Bush Admin in building up bad-will among our major trading partners and fellow developed economies – has some significant risks for something of a currency crisis, although as obviously this is probably something that will be addressed. Will it be addressed in a positive framework? Well, given the record to date….
It seems while it was translated in several other languages, English is not one of them. One reason might be that he was immediately declared ‘anti-american’ by US pundits.
That’s fine, I have no problems with French. Sounds overdrawn but perhaps I shall try to locate it. However the issue re dependance on large capital inflows is correct and not trivial.