World Economy still Contracting.

[Puppycow]

Decreasing the value of local currency is usually, a good thing, except for the rich. Hence why there's such a fetish about a strong dollar, but really, strong currency isn't all that and a bag of chips. Let it fall, it'll help the economy.

I tend to agree. The Asian economies seem to understand this, even if most people in the US love a strong dollar. The strong dollar has meant a persistant trade deficit and the movement of manufacturing jobs to overseas. But if you are already rich (in dollars), then you want a strong dollar to preserve your wealth. The goldilocks value IMO would be one that narrows the trade deficit to approach balance, although as a "reserve currency," the dollar may command an additional premium.

 

[rjh01]

Decreasing the value of local currency is usually, a good thing, except for the rich. Hence why there's such a fetish about a strong dollar, but really, strong currency isn't all that and a bag of chips. Let it fall, it'll help the economy.

That is a bit like saying have a wage cut and we will take some of your savings as well. A cut in the value of the currency makes imports more expensive (bad if there are no local substitutes), drives up foreign debt (real bad if the country has more foreign debt than foreign assets). The threat of cutting the value of the currency makes it a bad place to invest, which is bad for everyone in the country. No guarantee that you will increase exports.

 

[GreyICE]

That is a bit like saying have a wage cut and we will take some of your savings as well. A cut in the value of the currency makes imports more expensive (bad if there are no local substitutes), drives up foreign debt (real bad if the country has more foreign debt than foreign assets). The threat of cutting the value of the currency makes it a bad place to invest, which is bad for everyone in the country. No guarantee that you will increase exports.

Actually it does very few of these things. Lets break this out.

- It does make imports more expensive, but once again, that really nails the rich much more than the poor. The poor, for the most part, do better, since their products are now worth more as exports, and thus their salary tends upwards.

- It does not change foreign debt unless that debt is not in the country's currency. Since the United States' debt is currently in US Treasury bonds (dollar), this doesn't happen.

- It does not discourage foreign investment. An 8% rate of return is an 8% rate of return, whatever the initial investment is.


What you're thinking of is an artificially strong currency, one propped up by stupid policies, but which deserves to be lower. That does indeed have many of the negative effects you mentioned, but that's hardly an argument for a strong dollar policy.

 

[drkitten]

That is a bit like saying have a wage cut and we will take some of your savings as well. A cut in the value of the currency makes imports more expensive (bad if there are no local substitutes), drives up foreign debt (real bad if the country has more foreign debt than foreign assets). The threat of cutting the value of the currency makes it a bad place to invest, which is bad for everyone in the country. No guarantee that you will increase exports.

Er.

How many of those are actually applicable to the USA? The USA has one of the most varied and productive economies in the world -- there are "local substitutes" for almost everything. And since US debt is denominated in dollars, the cost of existing debt would not be drawn up (and, in fact, would be drawn DOWN because the dollars in which is is paid would be cheaper).

 

[rjh01]

I am not convinced by those posts. For example if your investment is devalued by 20% due to the currency going down then the return will also go down 20%.

Having foreign debt marked out in US$ may not save the USA. It means that investors could refuse to loan the USA more money if they think the value of that money may go down in the future.

If there are local substitutes then why are you not buying them now? Example oil. The USA does produce a little, but it imports most of its needs. If the value of the USA dollar goes down the USA has several choices, pay more per barrel, persuade the sellers to accept less per barrel (as the price is in $us this is the default, but the sellers could increase the price and sell to other countries) or buy less. It would have extreme problems trying to increase local production.


Ref https://www.cia.gov/library/publications/the-world-factbook/geos/us.html

 

[GreyICE]

I am not convinced by those posts. For example if your investment is devalued by 20% due to the currency going down then the return will also go down 20%.

But once the currency has dropped, there's no change to investment. The only way it would bar investment is if there's a looming, unrealized drop, and the dollar is being propped up.

For instance, does it matter if it is $0.8 to 1 Euro or 1:1 in terms of investment? No. It does not. The only way it would bar investment is if it's 1:1 and investors are scared it will drop to 0.8:1.

Try it. Do the math. 0.8:1 vs. 1:1, you have 5 euros to invest, 10% return on investment, which gets you more money?

Having foreign debt marked out in US$ may not save the USA. It means that investors could refuse to loan the USA more money if they think the value of that money may go down in the future.

Protip: They might do that today. Any currency may, in fact, decline in the future.

If there are local substitutes then why are you not buying them now? Example oil. The USA does produce a little, but it imports most of its needs. If the value of the USA dollar goes down the USA has several choices, pay more per barrel, persuade the sellers to accept less per barrel (as the price is in $us this is the default, but the sellers could increase the price and sell to other countries) or buy less. It would have extreme problems trying to increase local production.

*shrug* - it's just going to fuel investment in alternative energy. New industries will form, over here, due to the increased costs.

New alternative energy and energy efficiency industries would arise to decrease oil costs, and new methods of doing so would become cost effective. That would create jobs. Overall, good for the economy (unless you're rich).