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Gold/Mining/Energy : Big Dog's Boom Boom Room
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To: carranza2 who wrote (93465)11/13/2007 8:35:46 AM
From: KyrosL  Read Replies (1) of 206087
 
I can't say that the dollar has hit bottom yet. I can say that the dollar is now undervalued relative to most currencies. It is hugely undervalued versus some, like the euro.

I don't think huge trade deficits as far as the eye can see are a sure thing. They are symptoms of the unusually low or negative savings rate of the last few years. Americans used to save a high single digit percent of their income not too long ago. The culture of using the house as an ATM has only been around for a few years. Once the idea that house prices don't always go up is established, I think high savings rates will return. If they do, high trade deficits will be history.

Remember our high budget deficits before Clinton? They, too, were supposed to last as far as the eye could see. Clinton's last fiscal year had a deficit of $18 billion, which was less than 0.2% of GDP -- and that excludes the Social Security surplus.

There may be a Goldilocks scenario out there. It assumes that the dollar remains under pressure but does not tank precipitously from current levels. It further assumes that savings rates in America return to historic levels. This greatly diminishes the trade deficit and revives US manufacturing. I am not surprised that Bernanke is not complaining about the level of the dollar. Its current low level must be maintained for a long time to restore balance in the world economy.

Here is a concrete example of a low dollar at work: the US-Canada trade. Canada is running a huge trade surplus with the US. That's because it exports both manufactured goods as well as energy and raw materials to the US. But with the Canadian dollar at parity with the US dollar, Canadian manufacturing imports (such as cars) make absolutely no sense. The US can now manufacture most things much cheaper than Canada, so it makes eminent economic sense that Canada imports its cars from the US, while the US imports some of its energy and raw materials from Canada. Result: a balanced trade with Canada.
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