Phil > Who knows, maybe the dollar will rise, but what about the growing debt which will simply grow quicker for every uptick of the dollar. If the dollar falls instead, commodities rise. It seems to me that the US must choose between a strong dollar and ever increasing trade deficit & debt or a weaker dollar and diminishing trade deficit but increased economic activity and employment.
In the last three years the USD has fallen by a third, from index 120 to 80 (approx). Has this done anything towards alleviating the US debt or the proclivity to create it? Nothing. Zilch. Not one iota. Indeed, to my knowledge, the debt has risen faster while the present US administration has been power than than at any previous time in history.
So what do we learn from this? To me the answer is obvious -- the US is not going to change its ways, come hell or high water. Economists can cry debt, inflation and end-of-the-world till they are blue in their face and it will not make the slightest difference.
Why? Because the game has changed. The US no longer regards itself as a territorial entity but a global one. People think of the US as being in North america and China as being in Asia. Geographically, that's true, but not when it comes to business. Because the US buys and borrows and China sells and lends people say that's terrible. Why? Because people believe that every nation, like every person, should keep his own house in order.
Well, the US isn't playing that game any more. Doom-and-gloom expert, Stephen Roach, says this:
morganstanley.com
>>Today’s global imbalances are very much an outgrowth of the world’s new uni-polar growth dynamic. Over the 1995 to 2002 period, the United States — which has a share of about 30% of world output — accounted for fully 98% of the cumulative increase in world GDP. Putting it another way, the remaining 70% of the world economy accounted for only 2% of the cumulative increase in world GDP over this same period. These results are calculated at market exchange rates. As such, they reflect both a widening of the real growth disparities between the US and the rest of the world, as well as a sharp appreciation of the dollar over this seven-year interval. Rebalancing will undoubtedly involve reversals on both counts — growth disparities and currencies. Not only will this entail a shift in the mix of global consumption away from the US, but it will also require a further decline in the dollar and a concomitant increase in US interest rates. Only then can the world get on with the heavy lifting of global rebalancing.<<
As far as I am concerned, Stephen R sees the problem and then, like most observers, reverts to the traditional solution -- the problem is imbalance and therefore it has to be rectified, rebalance has to occur, for everyone to be happy again. Well, it ain't gonna happen, and certainly not the way Stephen R says it will, if it does.
As I see it, US and China may be separate nations, each with its own agenda, in fact I don't think they even like each other, but as far as business is concerned, they are locked together in a symbiotic arrangement where each benefits the other and, by so doing, they dominate the world. So, US is not going to stop buying and borrowing from China and China is not going to stop selling and lending to the US. The simple truth is they can't. The US because it "makes" money like no other nation can and China because no nation can compete with its production, well, not easily.
> Every country in the world is now complaining about the weak dollar.
Sure. And why? Because the stronger all the other currencies become in relation to the USD, they also become stronger against the renminbi. So, the more the US devalues its dollar, the more China smashes the exports of every country in the world, besides the US.
The obvious truth is that the US and China have the rest of the world by the balls. And one can be sure that Europe and Japan are on their knees praying that the USD stops devaluing. They are not talking about "rebalancing" of the US' books, like Stephen R is, they are talking survival. Already their growth is peanuts. If things continue as they are, they'll be in recession.
That is why I don't think in the overall scheme of things the US debt is all that important. And certainly not as important as the gold messiahs make out. Yes, the US balance sheet doesn't look nice, not to those who want it "balanced". But to those who live in the real world what matters is exports, not "correctness", and, while the USD devalues, they can't.
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