It sounds like you're thinking of Iraq.
Yes I was, but fact it takes more of Iran's currency to buy a dollar is also not any indication that contradicts my view that the dollar is rapidly getting weaker now. If I had any of Iran's money, I would also be trying to get it into other currency, probably Euros or gold, before US (or it agent Israel) attacks and makes mess of the Iranian economy. {As in Lebanon, where crops can not be harvested because in the final three days US delayed the already agreed UN truce, Israel spread more than one million bomblets from cluster bombs over the fields. They kill approximate one child per day now. - The relivance of this to subject will be clear soon, when I speak of the "global hostility" to US.} I.e. Just as was the case for all of the other four countries you were able to find with currencies that have declined even more than the dollar, Iran's currency has dropped more than the dollar
for extreme local reasons.
Having a highly valued currency is not helpful to a country's exports. Everyone pays the same price for the commodities, regardless of how it's denominated. As soon as it's exported, the apparent "savings" in commodity prices is canceled out by the exchange rate. This is why every export-oriented economy actively tries to keep its exchange rate low.
It could be helpful for products manufactured and sold internally, but not for exported goods. The fact that America's currency is down with respect to its primary export markets means a decreased trade deficit, not an increase. Why do you think China has been manipulating the yuan relative to the dollar all of these years?...I expect the trade deficit to shrink. And that's without considering the recent upward trend in interest rates.
I never said weak currency causes exports to decrease. I agree with your text in first paragraph here, but second sentence of second paragraph is too broad to be necessarily true. Not only does it ignore the imports side of the trade balance, but also fails to consider the global hostility the US actions are creating. (Like trying to sell Danish cheese in Arabia, hostility towards US can more than compensate for normal effect of lower valued dollar. My wife will not even drink Coke Cola when it is FREE at parties as it is a US image product.)
In contrast to you, I expect the drop of dollar value AND parallel increased in trade deficit of the last few years to continue. According to convention academic threory that should not happen, but it has and I expect it will continue. I think part of the explaination for this violation of conventional wisdom {in addition to "global hostility"} is the increasing concentration of wealth in US. The rich celibrate their good fortunes by buying more French champaign and the middle class, whose purchasing power has been dropping, are now drinking "Two buck Chuck's" or beer, if they can afford to drink alcohol at all, any more.
Another example of the reason why the conventional wisdom is wrong is: Expensive imported car sales to the well-off Americans are way up, but Detroit's sales are down and Detroit is hardly exporting any now. Part of this is due to fact foreign factories are newer and more modern and producing cheaper, (not just because of cheaper labor). Most US steel producing factories are from WWII. - They needed special government help only a few years ago to avoid bankrupcy, until the demand surged.
Another example of the conventional wisdom's drastic failure:
Brazil's exports should
by conventional theory be not only in the toilet, but flushed completely away as the wrt to the dollar the Brazilain real is twice as strong as it was about five years ago, but in fact exports have about doubled! Some sectors, like cheap clothes and shoe exports are down, mainly business lost to cheaper Asians, and it is not just a "commodity demand" that has boosted Brazil's exports. For example:
Northwest Airlines placed a $1 billion firm order for Embraer 175 aircraft, and has 36 options on Embraer 175s and a rolling purchase rights for 100 jets more. NW’s old DC-9s (105-seats) could be swapped for Embraer 190/195 planes (100- to 120-seats). Because of component delays, Embracer will deliver only 135 planes in 2006, delivering 10 of earlier 145 forecast in 2007.
Their new corporat jet line is selling like "jets" ("hot cakes" is the more common comparison, but "jets" seems more appropriate and interesting). Embraer, ERJ on NYSE, is among my Brazilian ADRs, so I can quote a recent release:
"...In respect to the Phenom 100 and Phenom 300, since our launch announcement just over a year ago, we have logged in excess of 235 firm orders. The Legacy 600 was launched in 2000 at the Farnborough Airshow, with deliveries beginning in the following year. In 2004, 13 Legacy 600 jets were delivered; in 2005, 20. In 2006 and 2007, 25 to 30 aircraft are expected to be delivered per year. Embraer's market share in the super mid-size category has grown from 12% in 2004 to 13% in 2005 and now accumulates 13.5% with
76 aircraft delivered to customers in 18 countries. In mid-2008, deliveries of the Phenom 100 will commence, totaling 15-20 units by the end of the year. In 2009, when deliveries of the Phenom 300 begin early in the second half of the year, the production of the Phenom 100 and Phenom 300 is projected to reach 120-150 units combined. Delivery of up to two Lineage 1000 is anticipated for the second half of 2008 in its first production year. In 2009, three to four Lineage 1000 are planned to be delivered." {The lineage 1000 is a BIG corporate jet - full sized airplane. The recent collision of the small Legacy 600 with the big Boeing, causing it to crash, killing about 150 people, while the legacy safely flew half hour more to nearest airport has had morbid side effect. - Corporate requests for the legacy have surged greatly, but are not include in the above data.}
.... Take a look at some slightly longer-term numbers ...So you can't really judge much from looking at the change between 2004 and 2005. I don't see any serious downward trend in FDI to America.
No thanks. - I am only looking forward, but using many current trends, not just one or two. You, IMHO, need to look at what is actually happening and rely less on your accademic training and what economic books say should happen.
...The money to pay for the trade deficit is produced by the American economy. You may recall that America's GDP is over $12 Trillion per year, more than enough to pay for the $800 Billion annual trade deficit. In the long run, investment plays a role in maintaining and growing the GDP, but let's not lose sight of the fact that FDI accounts for only about 5% of investment in America ($100 Billion in FDI compared to $1.9 Trillion total investment).
It is the US services and
goods produced (Not printed
money, as you surely know well) that can be exported in competition with those produced in more modern factories with cheaper labor that must pay for the imports, not financed by lenders. When no one will lend the deficit to US at present interest rates, interest rates must be increased more to get them to do so. This will make it more expensive for US to modernize its factories to compete with the foreign ones. Also real US wages must come down, as they have been for four years, but much more, if the outsourcing of service jobs is to be halted.
I agree looking backwards, the picture is very pretty. - 12 trillion economy and all that, but looking forward what do you see in view of the above? I see more of the same as the last few years - I.e. dollar less valuable, housing slump, less production, more good jobs leaving, growing twin deficits, increasing interest rates, growing trade deficits, slumping global influence, oil sold for Euros (cutting out the only reason for central banks to hold dollars dropping in value every year), growing problem financing Baby Boomer's Social security, growing unemployment claims as jobs leave US, growing debt service cost (debt growing and higher interest rates on it) etc. - and that is when I am feeling optimistic about US future!
...Increases in interest rates increase savings and thus domestic investment. ... As rates rise, people save more and so the trade deficit goes down and domestic investment goes up.
So the economic books say.
Perhaps US saving rate will cease to be negative, but I doubt that as more baby Boomers retire each year for next decade. They failed to save when young (in their "Go-Go" years) and thus had to cut to spending to the bone during their last decade of earnings. I.e. They were the big savers, so despite your text book knowledge that ignores baby boomers etc, I expect saving rate to become even more negative, mainly as many have taken all the equity out of the homes and that equity is going down with the housing slump. Some will be selling their cars to pay their adjustable rate mortgages or at least fixing up the old one, instead of buying a new one. Some will soon be losing their homes to the banks, that will put it on the market for whatever it will bring. This speeds up the slump - ever faster downward it unstably goes!
I had better stop; I am beginning to lose my optimistic mood.
However, part I made bold of your:
"The effect of a declining dollar and rising interest rates will be to cure the current excesses of the American economy: trade and budget deficits and low savings. This
process is inherently stable, as long as the change plays out gradually."
At least provided a laugh.