Video: The Inevitable Collapse of the Dollar

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Yes, I know of Lord Keynes. What I mean is that we should not try to prevent the economy from changing due to the possibility of short run losses. We should instead focus on the long-run good making whatever short run adjustments are necessary through fiscal and monetary policy. The government isn't going to do a good job by nationalizing every industry and restricting every trade and I think that most Keynesians today would agree with that.

Not exactly.

Here is an example with Canada, rather than the asian countries. I will use it instead because our dollars are closer in value and it will show more correctly how it works.

Someone mentioned the car companies in Michigan. Well they are there, but you should know that a lot of the production happens in Canada, in Ontario. Those Canadian subsiduary companies are yelling about our higher dollar; its very bad for them. In that regard, that work will come baqck to the states.

This is still a problem for the states. It shows that (USA)domestic automobiles are priced to a point where the production is exported. It could be brought back, but wage expectations will still be too high, and like it or not, labour is the bulk of expense in manufacturing.

In this case, export production is specifically geared towards the American market. It wouldnt make sense to to look for other markets for those cars; US and Canada are the only ones interested, and Canadas automotive needs are met. With 10% of your population, the slack is simply not going to be absorbed here.

Meanwhile, as disposable income drops in the US, less people buy those cars, or they buy cheaper imports such as Hondas.

Likewise, a 100 dollar pair of athletic shoes has one real market; the US. Most of what is produced by American companies in foreign countries is high end luxury goods. By their very design they are meant to interest only one market; the United States.

Now what about returning profits?

Firstly, The bulk of the gross income of a company is spent on labour, and next to that, materials. I'd think that the next biggest would be advertising or perhaps the salaries of the executive officers.

The whole point of exported production is to lower labour costs. Local people are paid, and regardless if its in US funds, or their own national currency, they take it home and spend it there. It never comes back to the US. Its gone. Likewise, the material costs are eaten up.

That leaves the executive officer(s) income. Presumably, most of them are nationals of the countries where production happens. They surely report and answer to the parent companies, but the highest echelons would be Americans living in America. This is the only income that comes back to continental USA.

Therein lies the problem. These people have enough money to buy whatever they want, and anything left over is simply banked, or more probably, invested in other ventures. In any rate, those dollars dont have a high turn over in the economy, if they stay in the American economy at all.

What returns from foreign production benefits a tiny fraction of the american public, and its ratio of stimulation is low.

The absolutely biggest stimulation to an economy is food. Everyone has to eat, nobody wants to eat less, and everybody could theoretically eat more. What you eat today must be replaced tomorrow, and for the rest of your life. Shelter and clothing would follow. By the way, this would be what the foreign workers spend their money on(produced in their home countries).

In contrast, a rich guy buying boats planes and cars will hit a saturation point. He'll run out of want, run out of brands and options, and what he does have will not much contribute; they will sit there and not consume fuel, tires, lubricants, or the labour associated with these. Whether he banks it, or spends it, the money will largely rot in purgatory.

I don't know what you mean by "ratio of stimulation", but I disagree that what returns from foreign production benefits a tiny fraction of the american public. Can you imagine how expensive computers and cameras would be if they were manufactured in the USA?

Also, we would be completely naked if it weren't for imports.

Dow Dives More Than 210 Before Thanksgiving

NEW YORK - Wall Street resumed its slide Wednesday as unease about the wilting mortgage market and the broader economy triggered selling ahead of the unofficial start of the holiday shopping season. The Standard & Poor’s 500 index and the Dow Jones industrial average each fell by more than 1.5 percent, with the Dow giving up more than 210 points.

The decline in the S&P 500 left the index in negative territory for the year. Many investments such as mutual funds either track or are measured against the S&P.


Rest of story: [HERE]

Yes, because simply printing off more money is ALWAYS good for the economy. Just ask post-WWI Germany.

Wow! Strawman-y goodness! I mean, of course that is my position! MONEY FOR EVERYONE!! ! Dude, the federal reserve increasing the money supply a bit more is pretty far away from causing hyper-inflation. In fact, the more academic and respectable argument against this is that it will a) increase inflation expectations, or for a more fringe argument one can use b) that it will promote a maldistribution of wealth through moral hazard and the problems of distribution inherent in monetary policy. Hyper-inflation is too far off in this case to be that concerned about it.

OK, so I oversimplified a bit. My point is that the Fed just keeps printing off tons of money, and they have nothing to back it with. Look at price levels over the past several years- they've gone up quite a bit. And the devaluation of our currency, contrary to your initial assertions, have NOT helped us increase our exports, as we still have an enormous trade deficit. The Federal Reserve is not even supposed to have any control over the money supply, as that responsibility is given in the Constitution to Congress, not private banks.
I don't know how you can claim our currency is "overvalued" when it keeps hitting new record lows against the euro, the pound, and commodities such as gold, silver, and oil. I just checked the currency conversions- the US dollar is still lower than the Canadian! And you claimed that America's trade deficit will not hurt us? Feel free to explain how that works. Trade deficits with China helped wreck the Roman economy, and they're doing it again.

So? We gave up "backing" money a long time ago. It does not need to be backed by anything but what it exchanges for. Heck, that is the basis of money, the fact that its value is derived from what it trades for. I know that price levels have increased, but some of it is due to oil and a lot of it is due to problems in other sectors of the economy as the main things mentioned such as houses, medicine, and education are going through problems in those selected markets and that prevents them from necessarily being good measures of inflation. I know we still have a deficit, but it is an application of logic that cheaper money will lead to higher exports and frankly, the big drops have just started popping up. Congress set up the Federal Reserve and whoever told you it is a private bank is stupid, it is a semi-governmental agency with some private influence but with a chairman who is accountable to congress and put into power by congress. Even if it were private though there is historical precedent to set up a truly private bank over the US.

Ok. I didn't think that Rome traded with China and really, can you back that up with a source as your answer must be examined, especially given that we likely live in a different monetary structure than they did, also because of the common claim by many "no nation has been destroyed by trade"(ok, maybe Athens sort of). Also, explain your position of how a trade deficit will hurt us? The only way it can hurt us is if there is a very sudden economic change that disrupts the workings of the current system, which is a hard thing to sensibly bet for. All a trade deficit means to me is greater investments by foreigners in US things.

Last edited by Awesomelyglorious on 22 Nov 2007, 10:35 am, edited 2 times in total.

"Trade deficits with China helped wrch the Roman economy, and they're doing it again": What are you talking about?

The fact that the US dollar continues to hit new record lows, and will probably continue falling for the foreseeable future, indicates that the dollar is over-valued. Otherwise, it would be going the other way.

The trade deficit hurts some people, benefits others.

Straight from my World History textbook. There was significant trade between Rome and the East, largely China but also India, via the Silk Road. However, as Romans, who grew rather fond of luxury in the later days of the Empire, imported more from China than they exported to it, Rome's stores of gold were largely transferred to China. This leakage of wealth out of Roman hands made it more difficult for later Roman leaders to raise the revenues they needed to successfully run the state.
Now, as for the idea that the dollar is overvalued... the reason our trade deficit with China persists is because China's government has pegged the value of the yuan to the dollar, artificially keeping it at a lower value than it should be. This prevents the current imbalance of trade from resulting in an appropriate adjustment to the values of both currencies, which would then cause the trade deficit to even out as the Yuan rose in value relative to the dollar. The dollar is only overvalued in relation to the Yuan, and China will not permit market sources to correct that overvaluation properly, so the dollar simply keeps plummeting against the other currencies such as pound, euro, loony, etc.
You also asked me to explain how trade deficits are bad for us. When we import more than we export, it means we must pay for the exports with our stored wealth (namely dollars), meaning there is a net flow of wealth out of America and into China as a result of the trade deficit. As China artificially maintains that trade imbalance through an undervalued yuan, we continue to import from them and our industrial base has nearly vanished; despite having among the most abundant natural resources of any country in the world we are not producing nearly as much as we could, and it's gonna hurt a lot when China decides they don't want to accept empty promises of later payment. As you said, the dollar is backed by the assumption that other people will pretend it has value and thus allow us to exchange it for goods and services. What happens when there is no more faith in the dollar? Chavez and Ahmadinejad have been bad-mouthing the dollar lately, and China has been indicating that it may no longer hold the dollar in good faith.
I personally would love a return to the gold standard, which keeps the value of money much more stable and limits government over-spending financed by the printing press. I know we gave up backing money a long time ago, and I think that was a bad idea. By the way, high inflation encourages more borrowing and less investing, and right now America certainly could do with less debt and more investment.

Right, a different monetary system was in existence and heck, even a different economic structure if one looks at this matter a little bit. We had what was essentially a fixed exchange rate system under an economy that was dominated by an aristocracy with inequalities of wealth not found in America. Really though, your World History textbook is not a good source for economic theory as it wouldn't surprise me if they don't actually examine these details as finely as they should and probably don't refute bad ideas such as Mercantilism as thoroughly as they should.

I don't think that this scenario is plausible as if we were just running deficits with China then why not surpluses with everyone else? We were running deficits period and the entire system wasn't balancing out as it should. The fact that one country pegged is not what is essential for understanding this problem because of how the other currencies will interact. Now, you are perhaps correct in arguing that a completely unfixed system would be better, but one currency is not likely to destroy a nation and with readjustment might actually be more harmful to that one nation.

Net flow of wealth? What are we now? Mercantilists? We are trading in an international economy where both parties benefit. Your entire framework starts off at a bad point. Our industrial base has "vanished" because that is not America's strong point, we don't have the cheap labor that would make us highly competitive at this endeavor. Factories are not flying away, they are closing down because it is not efficient to do this. Our GDP per capita is very high and our growth is relatively high as well, I don't think we are somehow less efficient for taking cheap goods. Empty promises? What is the point of just holding dollars? The people are investing dollars because just holding money is costly. If there is no faith in the dollar then the economy will collapse, and that is always what happens when people lose faith in an economic structure though. If we were on a gold standard then what we would have instead of a currency nobody valued is instead we would have no currency, so the difference between the 2 regimes is not of import.

No, the gold standard keeps the value of money a LOT less stable. "But because economies under the gold standard were so vulnerable to real and monetary shocks, prices were highly unstable in the short run. A measure of short-term price instability is the coefficient of variation, which is the ratio of the standard deviation of annual percentage changes in the price level to the average annual percentage change. The higher the coefficient of variation, the greater the short-term instability. For the United States between 1879 and 1913, the coefficient was 17.0, which is quite high. Between 1946 and 1990 it was only 0.8." http://www.econlib.org/library/Enc/GoldStandard.html It just has less inflation, but with its variability the issue of deflationary spirals becomes a much bigger issue. The government's use of seignorage is not a massive issue either as we do not have super high inflation. Inflation has little effect on anything if it is a stable level of inflation and if that level is not incredibly fast. Borrowers and lenders adjust in the long run. If you want more investment then I would advise you to look at fiscal policy because of the crowding out effects of deficits.

Sorry. there is a better term for it. But I fail to draw it forth. By ratio of stimulation i mean that a dollar in the hands of a working class person rotates through the economy faster than that of a rich person: the rich persons money moves slower, and is more idle.

What I mean by what returns from foreign production is the raw money. I was replying to cyanide who said:


which is neither export nor import. What was being discussed was American bound products being diverted to other countries due to the falling dollar. Its of little benefit to the American public, and only saves the asses of the shareholders of that company and its executive staff.

Part of the problem is just that: you would be completely naked if it were not for imports. America cannot produce even a fraction of its domestic needs, let alone wants. Suddenly you cannot afford it so well from abroad, and you cannot produce it at home either(at least not for lower cost). You end up doing without, and hope that its not vital items like food, fuel and shelter.

Price levels between 1879 and 1913 were not unstable because of the gold standard. Gold had been used for a very long time before then without such instability. The causes of the instability in the period you're talking about were very complex. For one the idea of gold vs. silver was a huge political issue and people were unsure of what their money was going to represent the day after elections, contributing to a sense of insecurity in holding money. We also had issues still lingering from the Civil War, trying to deal with the federal bonds issued to finance the war, Reconstruction, etc. Probably most important to price instability in this time was the fact that production-both industrial and agricultural- expanded MUCH faster than demand ever could. Without a discussion of the basics of supply and demand, you should realize what this did to prices. The plummeting prices of agricultural produce-still a problem for years afterward and a contributing factor in the Great Depression- threw the economy into chaos at times. Also, the transition of America into a modern industrialized state in this time posed its own challenges, and during such a period of transition you can't exactly expect total stability. And I will now quote the same article you cited.
I could just attribute that growth to gold, but instead I think I'll be honest and say that it was mostly due to industrialization. You can pull out quotes that appear to support your views, make sure they actually do before you present them as irrefutable evidence.

I've heard this theory thrown around, but it assumes that oil purchases comprise a large part of total global purchases, when in reality it's a fraction of a percent. Much too small a segment of global trade to make a big difference.

The US is dependent on imported oil, in fact part of the reason why nominal oil prices have risen so much is that they're set in dollars and dollars are worth less than before - so just by virtue of the dollar's decline oil imports will get more expensive for the US, which will eventually hit prices at the pump and the broader economy. Likewise, the dollar's fall will also affect the price of imported manufactured goods, etc. Realistically, it would take a long time for the manufacturing sector to make a comeback, so a weaker dollar means, eventually more expensive manufactured goods for Americans (which stokes inflation).
The dollar's decline also makes the US less attractive for investors (except in very export-oriented sectors) - if your profits are in dollars (and this includes dollar-denominated securities) then they are less than before if the dollar's value falls, and hence less attractive.
About deficits (this applies to both trade and fiscal), the thing with borrowing is that the money has to be paid back, plus interest. If you are chronically dependent on borrowing, it's like mortgaging the house to buy groceries - next month you'll still have to buy groceries, and you'll have mortgage payments on top of that.
The problem in my view is simply that the US is living well beyond its means (hence massive borrowing from abroad, little in the way of savings). There is little monetary policy can do, raise interest rates and you make problems such as the subprime crisis worse, lower them and you make the dollar's decline (and hence the rise of oil prices) worse. Restraining borrowing is the only long term solution; at a government level, this means cutting spending, raising taxes, or both. Borrow-and-spend policies are unsustainable in the long run.

But the fact that gold is a commodity does not help the matter now does it?

There are elements of other things involved in this time period, but don't we see people many many different elements impacting the economy at all times? I would say so. Are you blaming overproduction for economic problems? The idea is ridiculous from my perspective as you claim that too much wealth prevents wealth, the Great Depression's big issue ended up being the big blow to the financial sector. Now, the argument isn't perfect stability, only that 17 and .8 are very very different and we would have to have some major problems for that to be completely due to other processes and I don't think that your case for that is particularly strong.

But the author is not attributing this growth to gold as he names other factors, he did attribute the variance of price levels gold. Just take the monetarist equation MV = PY. If P suffers huge changes then M is not adjusting well enough to changes.