Dow & NYSE NOT at all time high - dollar going down

If gold is your standard of value the Dow-Jones average is slightly less than half its peak of 14 Feb 2002. This is also true if the Brazilian Real is your standard of value. (But last time I mentioned this, someone said: "Who gives a S...? (about the Real)" so I answer that question now: I and nearly 100 million Brazilians plus a lot of others who trade with Brazil do.)

But OK, lets discount the current Dow peak by some other currencies:
In terms of the English pound: 13% below all time peak.
In terms of the Euro: 20% below all time peak.
In terms of the Swiss Frank: 22% below all time peak. etc.

Or lets compare to other stock markets etc. in this same time period:
Mexican is up, in term of dollars (which are losing value) 193%
West Texas crude is up 117% (even after recent fall of almost 25%)
Brazilian stocks (don't have accurate numbers) about 250%
Indian stocks (don't have accurate numbers) but own four different Indian ADRs, and their average is up more than 300% and would be more, but I only bought four years ago.

My best appreciation is the water company of Sao Paulo (ADR is SBS) - up more than 600% last time I looked. (bought when it was ~$5, (some shares less and a few later buys were higher) and yesterday closed at $31, and still pays good dividends!

Fortunately, I foresaw the fall of the dollar before most and put most of my portfolio into ADRs (or early stage drug development companies, six of which are also ADRs.)

In not too distant future the current dollar slide down in value will become a run to get out of dollars. If you can not get assets out of dollars now, at least buy something essential that old* rich people need* when you can not even afford gas for your car.
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*The baby boomers will be buying more each year and they have the money to do so, even if you are reduced to eating mainly potatoes.

 

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This tells us nothing except how the exchange rates of the various currencies have varied over the past few years (and the price of gold). If that's what you want to talk about, that's fine, but why obfuscate the issue by embedding the statistics into market indices?

 

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Because many think that the stock market has recovered to its all time highs, and this is true in inflationed or "nominal" terms, but not in real values (purchasing power etc.)

For example, I mention that my Brazilian ADR, SBS was up 600%, but in the local market it is up only 300%. The difference is that it now takes two US dollars to buy what one would buy in Brazil about 5 years ago. I.e. I do not really have a 600% gain. If the dollar drops again by a factor of two, and the local price per share of Sao Paulo's water company remains constant, I have twice and many dollars, but each is worth only 50% of what it is now.

The reason why my investment portfolio is heavy in ADRs is precisely that they must go up in dollars as the dollar goes down in value. - It is an efficient way to protect assest against the falling dollar. In real terms, the Dow Jones average is only back to about half its peak.

Also related:

In today's newspaper, the finance minister of Brazil and Argentina are discussing totally dropping the dollar from all bi-lateral trade. Currently both countries buy and sell to each other using the values of the transactions stated in dollars. (Probably for historic reason related to the instabilities of local currencies, but now both have been more stable than the dollar for a few years so there is less risk with a contract for delivery 3 months hence etc..)

 

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Sure, but the methods you're using to calculate "real" value are not in accord with common practice, and I can't see the motivation for them. It's true that Brazil's currency and the price of gold have gone up in recent years, but purchases of gold and Brazilian goods constitute only a tiny fraction of what America purchases, so they don't make for very informative deflators. A much more informative standard would be to measure in Yuan, since China is America's main import partner. But, due to China's exchange rate policies, there has been almost no fluctuation in the exchange rate over the past years, so it wouldn't really have any effect.

Better still would be to use the standard deflators that every economist uses. These track a representative basket of prices that reflects the things dollars are actually spent on (note that the vast majority of dollars Americans spend are on purchases from other Americans). Again, however, inflation (as measured this way) has been very low recently, so it won't change the outcome by much.

The only reason one would care about the value of the Dow Jones denominated in, say, Reals is if one is an retired expatriate who is living in Brazil off of investments in American companies

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. But, even then, these figures tell us nothing about the relative performance of American companies (which is what stock indices are supposed to do). The drastic fluctations are due entirely to Brazil's economic crisis and subsequent recovery (if you made your comparison in terms of 2000 Reals instead of 2002 Reals, the change would be much less dramatic). So, again, all this tells us is how the various currencies relate to eachother, which is driven by all kinds of factors besides the performance of the Dow Jones. Even when the changes ARE driven by American factors, they have more to do with trade balances than with corporate performance.

 

I only mentioned gold, Real, and the other main currencies, but could have mentioned almost all of the raw materials and commodities. The list of thousands of these items, which now require more dollars to buy (starting with arsenic, going thru copper, soy beans, steel etc and ending up with zinc) would fill this page. Thus, I did not and will not do that. Instead I ask you to name three basic materials and three agricultural commodities that the dollar can buy more of now compared to several years ago.

My thread’s point is correct - the NYSE Dow Jones etc are not at all time highs - that true only if measured in lower value dollars. The dollar is being destroyed by excessive wars and gifts to the already rich. Americans need to know the truth. - There is an election in three weeks, but it is probably too late now to prevent a run on the dollar, the collapse of the US economy and the global depression which will follow.

Yes it is true, thanks to China's stubborn resistance to significant revaluation, that the dollar can still buy essentially as many Yuan as it did five years ago. The US is pressuring China to be more realistic. - Change its currency’s value to reflect that the dollar is dropping in value. For example, instead of buying 8 Yuan if the dollar could only buy 5, the US would not be able to buy so much from China and if it only took 5 Yuan to buy a dollar, the Chinese could buy more from the US. As it is now, the value of the Yuan is dropping with the dollar. - This is in large measure why China is making barter deals through out the world for the raw material they will need. For example, they are paying for the 25 year contract to import enriched iron ore pellets by building new Brazilian port and rail lines, which among other uses will help deliver the iron ore pellets. Locking up African oil long term the same way. Etc.

You know better than to cite the stability of the Yuan/dollar exchange as counter evidence to my point. Namely that the dollar is already losing purchasing power rapidly by almost anyway you want to measure its purchasing power. (Artificially maintained Yaun/dollar relationship and dollarized** countries like Ecuador excepted of course)
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*You economists need to learn to think outside the box. "Common practice" is clearly giving you a missunderstanding of what is happening!
**They use the US dollar as their local currency, so of course the US dollar will still buy one of their US dollars.

 

That's a trick question. Once again, you're assigning an external factor (the worldwide commodities boom) to the value of the dollar. The truth is that commodities cost more in *every* currency than they did several years ago. The only exceptions would be currencies that were in the toilet in previous years and made miraculous recoveries (such as Brazil) but, again, those tell us little about the state of the American economy.

Moreover, the growth of commodities prices hasn't translated in comparable inflation in the dollar. This is because much of the things dollars are spent on are not basic commodities but rather manufactured goods. Go to a Wal-Mart anywhere in America, and you'll find people paying *less* for many of the goods they purchase than they did ten years ago. Which is to say that cheaper manufacturing and improved logistics have been compensating for the increased cost of the raw materials. Add Chinese monetary policy into the mix, and you get very low inflation.

Well, no. The way inflation is usually measured (which there are good reasons for), the dollar has been quite steady recently. Moreover, if you wish to measure the value of the dollar in terms of exchange rates (which I do not recommend), I see no reason to exclude the currency of the second largest US import partner (China). Of the $1.8 Trillion America spends on imports every year, $250 Billion go to China. The factors driving the exchange rate is immaterial to the point: those $250 Billion buy just about as much stuff from China as they would have 5 years ago.

But, again, focusing on exchange rate is not a good idea. 85% of America's GDP is spent on stuff in America, so fluctuations in exchange rates can only affect the dollar's value (to Americans that is) at the margins. And, again, if you measure inflation by looking at the prices of things that dollars are actually spent on (as opposed to the price of Reals or gold), you'll find that the dollar has been pretty steady lately. The exchange rate for Euros or Pounds is a bummer for travellers, but it's actually helpful to the American economy as a whole. Lastly, the fact that inflation is occurring is not in and of itself troublesome. Inflation normally occurs in all functioning economies, particularly growing economies. What's important is that inflation happens slowly, and that it lags GDP growth. Which is to say that it doesn't matter if the value of a dollar drops by, say, 5% as long as Americans manage to produce, say, 10% more stuff: at the end of the day, they'll still have more purchasing power than when they started.

 

That is true (with the exceptions you mentioned), but is only a statement that all economies have some inflation trend. Quoting myself from week ago post:

“lets discount the current Dow peak by some other currencies:
In terms of the English pound: 13% below all time peak.
In terms of the Euro: 20% below all time peak.
In terms of the Swiss Frank: 22% below all time peak. Etc.”

So the cost to almost all other countries of the commodities has NOT gone up as much as it has for the US. I.e. the US dollar is losing purchasing power more rapidly than all others except those like China & Ecuador, which tie their local currency to the dollar and thus lose with equal rapidity.

Also true. but I do not feel good that the fate of US economy is in the hands of the Chinese willingness to recycle their trade dollar surplus (already in nine months of 2006, $111 billion!) back to US. I.e. lending part of the deficit US needs to avoid printing press money / inflation that self accelerates as more countries get out of dollars, (also cease to lend to US etc.).

Also note that US, despite its huge market, is no longer the primary destination for foreign direct investment - tiny England* is now #1 in FDI. Strong decline in FDI alone can sink the dollar. - I believe net FDI has financed more of the debt than China does. (Is this correct?) I am not the only one getting out of dollars - I just acted earlier than most. This movement is in large measure why the Indian Brazilian, Chinese, etc. stock exchanges are up so much more that the US’s are, even in terms of their local currencies. In dollar terms they are up even more as the dollar’s value is dropping. Half of my 600% capital gain on ADR of Sao Paulo’s water company is due to dollar drop wrt Real, but several of my Indian ADRs have more than 400% gain in less than 3 years. (As I like to read the reports, I have ADRs in all the English speaking countries, except Great Britain - I missed that obvious one. They have protected me from the dollar’s drop and will really surge up when the run on dollar starts.)

Again we agree - you are correct on this, especially the part I made bold. I think our main difference is you are looking at the present and I am worrying about what happens in a few years when China needs most of its production for the internal market*** and investors, who have experienced loses in purchasing power by their FDI, stop financing the US debt, which I think you will agree can not continue many years more to be financed externally without significant increase in interest rates to compensate for the relative decline in dollar's purchasing power, with is already well under way. The combination of rising interest rates, and the resulting slower or even negative US growth rates, will produce lower tax revenues. The baby boomers will require more payments from the government (Social Security) and be in "negative investment / much lower taxes" phase of their lives.

The result of all this reduced capital input/ investment in US economy and greater demands upon it will be that GDP growth will be much less than inflation (your text's bold condition will not be achieved.) - The Mint's printing presses will run day and night to make up for the decrease in FDI and foreign loans needed to finance the growing government expenses. Note I have not even mention the anti-terror war induced debts, competition for oil, export of high pay jobs reducing tax revenues, etc. - Personally I think GWB has so badly managed the US economy that it is already impossible to avoid collapse and global depression. - At least then, commodities will be cheap again.

I enjoy our exchanges. You are better educated in economics etc than I am, but perhaps my ability to think independently of conventional patterns is helpful to you.
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*I find this report in my local paper's finance section hard to believe. - What happend to China? I thought they would be #1. Perhaps they are speakinonly of the "western world" but not making that clear. They show US as #2.
**Reminds me of the teenager who proudly announced that he had sold the family dog for $600. When asked what he would do with the profit - he said: “Actually, I traded him for two $300 cats.” US will not prosper by only trading services within the population - wealth must be added or produced in tangible goods also. GM, Ford & Crysler US are "basket cases." Toyoto is gaining market shair and profitable, sending capital out of US - i.e. negative FDI.
***Without massive sales to US, China will not be earning a trade surplus to lend to US. - The anti-China Congress had better be careful what they wish for - they might get it and need to cut expenditures to compensate for decreasing loans to US by China. Such cuts will get many of them thrown out of office.

 

Wait, there's a lot more countries in the world than China, Brazil, England, EU and Switzerland. There's also Japan (dollar has been stable wrt the Yen lately), Argentina (dollar is up 300% against the Argentine peso), Egypt (dollar up 30%), Iran (dollar up 400%), Israel (dollar is stable), Kuwait (dollar is stable), Mexico (dollar up 10%), Venezuela (dollar up 300%), etc. It's a big world out there, and the fact that the dollar is down with respect to a few other currencies is not a big deal (especiall considering many of them are big US export markets).

Also, the differences in exchange rate you cite are tiny compared to the boom in commodity prices, some of which are up by hundreds of percents. The commodities boom is not some artifact of inflation in the dollar: England, Europe and Switzerland are all paying more than 4 times as much for oil as they were 5 times ago, so the 10-20% differences in exchange rate aren't that significant.

It's true that England has had a huge surge of FDI just this year (bumping it from 4th or 5th to 1st), but FDI in America is still quite high (significantly higher than in China, for example). So I don't see any indication of a strong decline in FDI to America. It's true that dollar inflation reduces the returns for foreign investors, but it also makes it cheaper for them to buy new investments, so I'm not sure there's a strong link between inflation and FDI.

I'm not sure what you mean about FDI financing the debt, but it's true that America's FDI is on a similar order of magnitude as Chinese bond purchases...

 

Yes but these are dominate except for Japan where we agree the dollar has been stable wrt the Yen lately. You could only name five minor ones in which the dollar has become more valuable compared to a few years ago:

Argentina, (dollar is up 300% after recent defaulted on its debts),
Egypt, (dollar up 30% mainly due to local strife and violence plus prospect the multi-decade dictatorship may finally fall),
Iran, (dollar up 400% as everyone knows the local currency will soon be worthless when government is replaced by three-way division of country soon after US election.),
Mexico, (dollar up 10% with one province in open revolt and badly split by the inconclusive election last month), and
Venezuela (dollar up 300% I think because in few days Chavez will be re-elected and people with money are trying to get it out of country)

In all these cases the local currency is in trouble, hardly evidence that the dollar is not falling.

I never said it was. I agree the increased demand is the main reason for rapid increase in commodities. However, 20% less increase in cost of them for many foreign competitors certainly IS SIGNIFICANT. In many case it means they will be able to uncut US exports and this is further increasing the trade deficit of the US which is a larger part of the reason why the dollar is falling in value. I.e. we have a positive feed back mechanism in operation here that is making the dollar fall ever faster.

I now have the numbers, in billions of dollars:

FDI in 2004:
Great Britain = 056.2
USA ...........= 122.4
China..........= 060.6
FDI in 2005:
Great Britain = 164.5
USA ...........= 099.4
China..........= 072.4

That is England is UP 293% and US is DOWN 19% in FDI.

France is up 203% and now in fourth place. Holland, Hong Kong, Canada & Germany now hold places 5,6,7,& 8 respectively. Canada was not even in the top 15 in 2004 - The investment in oil sands were really taking off in 2005, I assume.

Then look at the numbers above. US is rapidly becoming the place to get your money out of, not make FDI. - Wait till the figures for 2006 are in. I bet the US is down at least 25% more.

I mean that the US must get dollars to pay for the excess of imports over exports. (A problem that is getting harder and more costly to solve each year now.) It can get these required dollars from foreign loans or selling US assets.

The second alternative is basically FDI. For example, when Toyota buys land in Kentucky for a car factory. This not only is sale of US asset, but also great stimulus to US economy, at least in the short term, as the plant is built. (In the long term, they plan to make a profit and take dollars out, back to Japan) It is not really a source of net jobs because the number of Detroit jobs lost far exceeds the new jobs in Kentucky and these new jobs are new hires with out the historic high labor cost that are so hard to cut. (Combined with "outsourcing" This is why real wages in US have been dropping for several years, but point you made to me a month ago about baby boomers stopping to earn high salaries etc is also part of reason.)

Thus FDI initially plays the same role as foreign loans in financing the deficit. (It is not "direct to the treasury" as most foreign loans are, but the owner who sold land to Toyoto will pay taxes on his profits etc.) The "rub" is that when the FDI is decreasing the efffect reverses, making it harder to finance the deficites. - For example, after Toyoto has started to take dollars out of US (dividends etc.) and has destroyed the ability of GM, Ford and Crysler to pay taxes, the treasury is hurting. - Because holding dollar demonated assts is growing more risky, the US is forced to raise interest rates to compensate - replace these decreasing revenues with ever more borrowing at ever higher costs. The "twin deficits" rapidly grow, etc. This increase in interest rates is also self accelerating as then there is less domestic investment also.

These trends are shown in many ways. - the dropping value of the dollar, the rising interest rate, the dropping FDI, the export of higher pay jobs, the growing trade deficits. .... The giant US economy probably can stagger on a few years more, but it is tottering on the brink of collapse already as these trends show.

You, with your education in economics, should be able to see now what I forsaw several years ago. In a few years even Joe American will see he is in trouble, probably he will never understand why, but he will know his dollar is worth much less when he can not fill his car's tank, eat as well as he did. etc. or get a loan to pay his property taxes, and loses his house to the bank.

 

It sounds like you're thinking of Iraq.

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. It could be helpful for products manufactured and sold internally, but not for exported goods. This is why every export-oriented economy actively tries to keep its exchange rate low. 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?

If anything will increase the trade deficit, it's the fact the the dollar is UP relative to the Mexican peso. Mexico is America's 2nd largest export market, and 3rd largest source of imports. However, considering that the dollar is down with respect to the other 4 of the top 5 trade partners, I expect the trade deficit to shrink. And that's without considering the recent upward trend in interest rates.

Take a look at some slightly longer-term numbers here:

http://www.unctad.org/sections/dite_dir/docs/wir06_fs_us_en.pdf

The average FDI into the US in the 1990's was about $100 Billion annually, right about where America is now. Also notice that the numbers for each country are quite volatile; swings of 50% or higher are not uncommon. 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.

Woah, woah. FDI is exactly that: investment. It's not cash that's used to import stuff, or a loan to the government. 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).

Increases in interest rates increase savings and thus domestic investment. The whole reason domestic investment is so low is that interest rates have been at historic lows since the late 1990's. Even after all of the recent increases (which have now stopped), the interest rate is below the post-WWII average. Because interest rates have been low, Americans have spent more of the money they produce on consumption rather than savings. This means a trade deficit and low domestic investment. As rates rise, people save more and so the trade deficit goes down and domestic investment goes up.

You've got the feedback effects backwards in multiple places in your theory. 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.

 

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.

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.}

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.

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!

So the economic books say.

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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.

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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.

 

I took my dough out of the market and the dow hit a 52 week high.

 

Even if you took it out exactly at the recent peak, I doubt if it would buy as much as when you put it in. For example how much copper now vs when you put it in (Choose any ofthe metal or raw material, if copper is not to your liking.) My point is that in many cases, you would have been better off to buy the copper and hold it instead of the Dow, but this may not be the case - it all depends on how long ago you "bought the Dow."

 

As opposed to extreme global reasons? I'm not sure what your point is. I'd agree that precipitous drops in exchange rate signal some kind of crisis; isn't the fact that the dollar *isn't* among the currencies that have precipitously fallen then evidence that America is not in crisis?

Are you saying that a falling currency will increase imports?

Of course, if you denominate the trade deficit in gold, it's also down from an all-time peak around 2001.

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Actually, thanks to all those cheap factories in China (and containerized shipping), the purchasing power of the middle class is way up. Just yesterday my mother purchased a Chinese-made replica French painting easel (real French ones cost around $200) for $20. You may have noticed that Walmart is almost as big in Brazil (and China, Canada, Mexico, Japan, the UK, ...) as America...

Dude, sales of foreign-based car companies to the US are way up, but most of the actual cars are built in America, in brand-new factories. Toyota has three factories in the US, and more in Mexico and Canada, many of them built in the past 5 years. More are slated to open soon. Same with Honda, Nissan, etc. What did you think all of that FDI was being spent on, anyway? Detroit going bust is a bummer for the many Midwestern families with their retirement invested in GM, but it's not much of a problem for the US automobile economy as a whole. At the end of the day, Americans are driving cheaper, more efficient, more reliable cars than ever before.

Yes, everyone else who had steel factories got them bombed in WWII. So what? Why does America need to produce lots of steel? It's not a particularly profitable business, and it's not like America is in a naval arms race.

I don't own any economics textbooks, nor have I ever taken any economics classes. My academic training is in signal processing.

Not really. Business loans are typically much higher than the prime rate (2-3 times as big), so even if the prime rate goes up 50%, the relative effect on business loan rates is small. Moreover, the increased savings generated by the rising rates leaves investors with a larger pool of capital to invest, which pushes down the rates they can charge. It's only a problem if the rate becomes really huge or ceases to stimulate increased savings. But, again, rates are still low by historic (and current international) standards, so...

Why would we want to halt outsourcing? Better to outsource the crap jobs and get people working in modern, high-value positions.

 

down turn is starting. How long before it is a run on the dollar? (I guess a couple of years,):

"Nov. 1 (Bloomberg) -- The dollar may weaken for a sixth day against the yen, the longest slide since January 2005, on concern a U.S. industry survey today will add to evidence the world's largest economy is slowing. …The dollar yesterday dropped to the lowest in five weeks as reports showed consumer confidence unexpectedly fell and Chicago factory output declined. …The dollar also may weaken on speculation central banks will reduce their holdings of the currency in foreign reserves in favor of the euro and yen.
The United Arab Emirates, the second-largest Arab economy, may reduce its dollar holdings by almost half in an effort to cut its dependence on the weakening U.S. currency, Sultan Nasser al- Suwaidi, governor of the central bank, said Oct. 30.
The Swiss central bank raised its holdings of yen and pared investments in dollars last quarter, figures it released last week showed.
Russia is considering lifting holdings of yen in coming months, Alexei Ulyukayev, the central bank's first deputy chairman said Oct. 16.
``There's a series of central banks voicing a preference to re-weight out of the U.S. dollar,'' said Peter Pontikis, a treasury strategist at Suncorp-Metway Ltd. in Brisbane, Australia. ``This is starting to weigh on the U.S. dollar'' which will drop to $1.29 per euro and 115 yen within a week.
…Kosuke Goto in Tokyo at kgoto2@bloomberg.net ;
Ron Harui in Singapore at rharui@bloomberg.net
Last Updated: November 1, 2006 01:39 EST...."

(Billy T made part of this article bold.)

 

Rest of your post either mis-represents/ misunderstand etc mine or is not worth reply but on these two you have a point worth commenting.

On (1) That is true, but incomplete. If you want to speak with gold as the index, then do it completely. -I.e. instead of just noting as I have in several threads the fact that the average Joe American's salary's purchasing power has decrease for last four or five years (Productive wealth is being transferred to the rich, by GWB's policies. - I sure have benefited by the lower taxes on capital gains etc. and someone else is paying the taxes I should have.) lets express Joe American's salary in ounces of gold also. Point is no matter how you slice it it is getting harder for Joe American to pay for the twin deficit, especially now that he can no longer pull cash out of this home by refinancing it. Consequently he is transferring these obligation to his children, and amazingly still expecting them to pay his social security when he retires. - I should mention this in my thread "How DUMB can US voters be?"

On (2) That would be true also if the US was creating high-pay interesting jobs, but it is not. Well educated people are now taking low-pay "local jobs."

Local jobs are those that require physical presence. I.e. making Big Macs, tuning up your car, building a house (but that is starting a down turn) etc. Designing computer programs, Developing drugs, Reading X-ray (they go thru the inter net) etc type jobs are the ones being outsourced, not the low-pay, local shit jobs.

Also take a look at the post I just made here.

 

And yet, real wages are higher than they were 10 years ago... plus, productivity is way up, so there's plenty of room for wages to grow. More here:

http://macroblog.typepad.com/macroblog/2005/12/are_workers_los.html

 

That is a false distortion. Your reference admits that the real wages have been going down under Bush and up under Clinton, but claims "real wages" should include the increasing non-wage benefits employer's give workers. To quote him:

"I'd argue the problem is that hourly wages or earnings are an inadequate measure of labor compensation, primarily because they exclude nonwage forms of compensation -- health care benefits, employers' share of social security contributions, and the like. These forms of compensation are an increasingly important part of what workers receive from employers."

That is certainly true, BUT misleading as it fails to note that the cost of these things such as health care, school tuition, etc. have been going up much faster than general inflation. - Why the workers are demanding and geting help in these areas, but still losing ground even with the employer's help when it comes to paying for their medical expenses and kids education, etc. (Especially with dollars that are losing purchasing power. see my next post for more on this "dollar-going-down" trend.)

All employer's nonwage contributions (not just for health care, social security and education, but these are the most important three, >90% of total.) or the "fringe benefits" employers help with are now taking more of the worker's salary. Your argument and his is entirely false. One of the reasons why I retired when I did (early at age 55) was that the percent of my salary going to Social Security was steping up by more than 1% the following year. - get real.

 

dollar going down - more evidence and why

Warren Buffett, the most famous investor in America, announced that he had bought a basket of foreign currencies to profit from a coming decline in the dollar. Although he didn’t disclose the size of his position he called it “massive” and noted that it was the first time he ever bought a single foreign currency. … He is now warning of an impending dollar crisis that could last for years. “Our country’s net worth so to speak, is now being transferred abroad* at an alarming rate,” he said. “In effect,” he warned, “our country has been behaving like an extraordinary rich family that possesses an immense farm. In order to consume 4% more than we produce – that’s the trade deficit – we have day by day, been both selling pieces of the farm and increase the mortgage on what we still own.”

Above, with bold added by Billy T, copied from:
http://wallstreetwindow.com/buffett.htm?gclid=CN63v62bt4gCFSVtFQod5HnkiQ
--------------------------------------------------
*As I (Billy T) have been telling here for at least a year (and doing for more than three), I have been part of the “move-out-of-dollars” movement (with more than 150% average profits now, and some of my ADRs up 500%!) The dollar is going down and the run on it is at most a few years away - thanks in large part to the worst president US has ever had (GWB).

 

No, he doesn't quibble about the definition of real wages. Rather, he argues that total compensation is a better yardstick than real wages. However, I never referred to the figures on total compensation (which appear at the end of the article). Rather, I referred to the real wages figures, which are in the same range as 10 years ago (right about when all of the outsourcing began in earnest). It's true that there was an increase in the late 90's and a decrease in the past 5 years, but the overall result has been fairly stable wages, historically speaking. I cited this only in order to demonstrate that outsourcing was not causing a significant decrease in wages, as you had contended.

It is true that the increases in total compensation are going pretty much straight into the pockets of HMOs. This is why I didn't never mentioned the total compensation figures, as I don't think the picture they paint is any different than that illustrated by real wages. At any rate, Americans are already plenty mad about health care costs and flat wages, and this has a lot to do with why the Democrats did so well yesterday. Don't expect the situation to persist much longer. With a proper set of medical reforms, pay increases can start going back into wages instead of into ever-pricier health benefits.