11/15/2010

The Decline of the U.S. Dollar?

In the article, The Dollar: Soon to Swooth, the author quotes Mohammed El-Erian who is the head of the world's largest bond fund. El-Erian states that the dollar is destined to decline and lose its status as the world's reserve currency. El-Erian also states that the most serious risk is a "disorderly decline." This may be true from his point of view, but from the point of view of Americans the most serious risk is the decline itself. The article states that in the 80's there was fear that the dollar "was loosing out" to the Japanese Yen. This fear was squashed, however, through the 90's by strong growth in the U.S., and by narrowing the deficit. It is interesting that the growth in the 90's occured only after strict fiscal policies were adhered to by the Reagan Administration. In this article, Warren Buffet, is quoted saying that the future of the dollar is in the hands of Congress. It is good that the majority in the House has been regained by potentially more fiscally conservative republicans. The deficit must be reduced for the U.S. dollar to remain as the world's leading currency.

3 comments:

Baden said...

Kimball advocates responsible fiscal policy. I agree and believe that entitlements programs such as Social Security, Medicare, Medicaid, Unemployment Benefits, and Disabled Benefits, etc, need to be at the forefront of economic and political debate in our country. Sound policies would not only benefit our nation and economy but would also serve individuals better by changing programs from encouraging entitlements to encouraging self reliance and instilling personal responsibility as the life blood of our nations citizens. Instead of looking for loopholes and handouts individuals would seek to do all they could to better themselves. By saying this I am not inferring that all individuals that receive assistance from entitlement programs are lazy and irresponsible I am only stating that such behaviors are present in the system. I side with Benjamin Franklin, “I am for doing good to the poor, but I differ in opinion of the means. I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. In my youth I traveled much, and I observed in different countries, that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer.” - November 1766
http://www.marksquotes.com/Founding-Fathers/Franklin/index2.htm

Rhett said...

I believe that the dollar experiences as many fluctuations as a stock price, but no one really knows how to measure it or forecast it. They do about as well as forecasting stocks. People are worried with this financial crisis and the topic of value of the dollar always seems to come up. I have heard for years know that the dollar is going to fall and be replaced by the Euro and I have yet to see that. It seems to me that yes the dollar has shown signs of dropping, but also show signs of life, especially right now with the problems in Ireland. "The 10-year U.S. Treasury yield soared 17 basis points on Monday for its biggest one-day rise since June 2009, giving a broad lift to the greenback. There is still life in the dollar"*. I believe that if European countries cannot fix their current economic problems (even though U.S. still has theirs they are not as bad off as Ireland) and Japan experiences similar problems, that the demand for the dollar will increase and so will it's price.

*This was quoted from an article in Yahoo News. http://sg.news.yahoo.com/rtrs/20101116/tbs-markets-forex-7318940.html

Dr. Tufte said...

Here's some free advice: every time you hear someone grouse about the value of the dollar, tune it out. So Rhett is on the right track here.

I think El-Erian is right - the dollar is edging away from being a reserve currency.

And you should care because ...

If you don't have an immediate answer to this - and just about no one does - you're probably being sold a lot of crap.

Being a reserve currency - the one used by other countries to manage their accounts - has almost no value for consumers, and makes the policy problems for your government more difficult.

We are the reserve currency because a flexible exchange rate system probably needs one, we're the biggest economy (and have been for many decades), and also because we haven't run completely ignorant policies like many other countries. The part about this that is changing is that our relative size is going down, and it isn't clear that our policies can continue to be OK if we keep running up future liabilities.

So, Baden has run with this idea a bit, and I think it's overblown. It's all good, but it's using the issue of reserve currency to veer into other areas ... just like the media and policymakers do.

FWIW: Reagan's fiscal policies weren't that strict. This is an urban myth, especially popular in Utah. They were stricter, and a change in the right direction. But they were not as strict a combination as came out of the Clinton administration paired with a Republican-controlled Congress.

IMHO: people are obsessed with things getting bigger, and the inference is that bigger is better. Worrying about something like reserve currency status is like a parent arguing that they're more important than their kids because they have to make them dinner. Kids laugh at that sort of nonsense. You too should laugh at people who worry about our usefulness as a reserve currency.