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Strategies & Market Trends : The coming US dollar crisis -- Ignore unavailable to you. Want to Upgrade?

To: dybdahl who wrote (1112)	9/25/2007 5:52:47 AM
From: stan_hughes	Read Replies (2) \| Respond to of 71454

dybdahl - I'll take a crack at answering the substanbce of this for you. The Yuan is more or less pegged to the USD. Therefore as the USD falls, no exchange rate adjustment takes place -- that's what the US has been bitching about all these years. The USD needs to devalue probably ~33% against the Yuan on a trade-weighted basis here -- whether that devaluation happens gradually or abruptly and the implications thereof is the primary topic of this thread. In the meantime, the USD is already slowly eroding against most of the world's floating currencies subject to the dynamics involving those trading partners -- when it suits the Chinese, they too will eventually allow the Yuan to properly adjust to the USD. Like any declining currency, eventually the USD will get so low that it should achieve a 'production cost equilibrium' if you will, at which level US goods would theoretically be competitive even against China. Unfortunately, the US has been de-industrializing itself and moving manufacturing facilities to other countries for so long now that it has seriously impaired its own capability to produce goods that the world wants, except for maybe food, airplanes and network servers (and I'm not sure about the servers). So while it might seem that devaluing your currency gets you back into the ball game, that only works if you still own your own baseball equipment and can get back on the field. Now, one potential Economics 101 cure for that situation would be to drive the USD say, another 33% into the dirt to create a cost advantage (rather than just cost equilibrium), whereupon (in theory at least) foreigners would begin locating their factories back into the USA to take advantage of the new low-cost regime. The bad news in all this is that: (a) by de-industrializing and then having to lure factories back, you've turned your economy into somebody else's branch plant; (b) it takes a long, long time for these kinds of paradigm shifts to play out, and you're going to suffer a lot in the meantime while the changes take place, and; (c) by collapsing the USD currency to become competitive, you also make everything else the world produces wildly expensive to buy for US residents, reducing the US standard of living to that of what perhaps a Cuban enjoys now. The really bad news is that it appears that this decline in US living standards toward the Havana lifestyle has already begun. So to answer your question -- yes, the US deficit will be addressed eventually, but 98 out of 100 Americans are not going to like how it feels very much