What are the implications when the dollar is devalued? Thanks in advance

[NNN0LHI]

http://ap.tbo.com/ap/breaking/MGAZ3GWD7ND.html

Dollar Hovers Near All-Time Lows Against Euro, Gold Up in Europe

LONDON (AP) - The U.S. dollar hovered near an all-time low against the euro and was mixed against other major currencies Wednesday in European trading. Gold prices rose.

The euro was trading at $1.1929 in late morning trading Wednesday in Europe, up from $1.1896 Tuesday. It had reached $1.1973 in late trading Tuesday in New York - the highest level since the euro was introduced in 1999.

Traders began selling dollars following news that the Bush administration has granted U.S. industry requests to impose temporary quotas on some imports of Chinese textiles. That fed concern about trade wars developing between the United States and key trading partners.

Other dollar rates in midday European trading compared with late rates Tuesday included: 108.77 Japanese yen, up from 108.35; 1.3003 Swiss francs, down from 1.3073, and 1.3005 Canadian dollars, down from 1.3035.

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[girl gone mad]

1. Lowers our credit rating,

so to speak. Foreign investors will not want to buy US securities, because they can't keep up with inflation and other investments are more attractive.

If foreign investors don't buy, we can't fund the deficit. More of our tax dollars will be flowing overseas.

[Gin]

2. I still dont understand all of this....foreign investors are the ones who

purchase the debt..right? and we pay them the interest payments on the debt..right? if we don't pay..they call the loan..right? (not sure of the implications of that) and we pay up or go belly-up..is that the premise?

[Yupster]

9. We pay the interest in dollars

if they don't want dollars because they get ripped off trading them in for Euros they may not want to buy our bonds.

Personally, I wouldn't worry about that. Foreignors who buy our bonds are already accepting very low interest rates to get the safest long-term investment in thw world. No one buys US government bonds for the attractive interest rates. You buy them for the safety.

[Midwest_Doc]

3. It Will Help Bush

Makes US goods cheaper in Europe and European goods more expesive in the US. Europeans will buy more US made goods - stimulating the US economy. Americans will buy fewer European goods, helping the balance of trade.

Our European vacations will be more expensive. Europeans will see cheaper prices when travelling in the US.

[CWebster]

4. What US goods?

the ones made in China or Mexico?

[Beetwasher]

6. Nope, wrong

That only works if you're not involved in trade wars with Europe and China AND you have lots of goods to sell overseas.

The international community hates the US right now and is NOT buying US and NOT travelling to the US. The trade deficit is running at record levels now as is the federal deficit. A weak dollar is NOT going to help, especially w/ interest rates going up....

[Catfish]

22. Interest rates are another issue

If interest rates rise, the dollar will strenghten absent other changes.

[dusty64]

29. Interesting.

Another big story that gets hardly any attention.

[Deja Q]

17. That's great, now all those in manufacturing can rejoice and party!

All the new prosperity!

Oh yeah, all the manufacturing industry et al have moved OVERSEAS to take advantage of sweatshop and other immoral conditions.

The phrase "US Economy" is a sham and is propped up by very little that's US anymore. x(

[Catfish]

21. Agree

but it also makes imports here more expensive for us and a fair number of jobs are import related (I don't have any numbers). Also, there's a significant amount of imported parts used in what manufacturing is left here.

I meant this as a reply to Midwest_Doc but messed up.

[Yupster]

5. Don't go to Europe

the trip will cost too much.

There won't be any Europeans there anyway. They'll all be visiting here because things will be so cheap here to them.

Same thing with goods. French wine will get more expensive, but American beef will be cheaper for them to buy.

[in_cog_ni_to]

7. Well, on a more personal note

it will put me out of business. I buy all of my stock from Belgium. When I started my business the Euro was only a couple of penny's more...no big deal, but at the rate it's growing, I'll probably go out of business. The merchandise I sell is not made here in the states. It's a European item.

[Catfish]

24. Yes

it will hurt you and others who depend on imports for their business.

[ShaneGR]

26. Better start buying Chinese or Mexican.... lol

They're gonna be the only ones cheaper than us some day.

[JackRiddler]

8. That depends...

on how radically the dollar is devalued, and how quickly.

According to the standard pollyanna economists, a gradual devaluation is supposed to help with the trade deficit and potentially bring export-oriented jobs to the States. But there is no evidence that this is happening; the trade deficit is up again this month, despite the ongoing dollar slide.

In fact, 2/3 of all imports to the U.S. are actually within companies, e.g. American companies importing parts or services sold to their own domestic divisions, or big U.S. retailers bringing in products made by manufacturers they own abroad. These companies are not going to see a big incentive to pull production out of Indonesia, China or Mexico and shift it to the U.S. just because of a small drop in the dollar; U.S. wages will still be much higher than in those countries. Furthermore, a drop in the dollar may depress U.S. demand, further cutting the incentive to bring productive investment to the U.S. (and putting downward pressure on the dollar).

The largest single chunk of imports to the U.S. is of petroleum; demand for this will not be dropping soon unless the U.S. economy itself begins to shrink, and our increasingly depleted domestic oil resources cannot serve to replace a significant proportion of the foreign oil.

How far could the dollar drop?

Basically, the value of the dollar is insupportable based on the actual financial data. The U.S. has run high trade deficits for more than 30 years. Japan, China, Europe and others produce in exchange for our air-dollars, while the U.S. consumes and consumes. This cannot be kept up forever, but the whole world economy is currently oriented to demand from the supposedly inexhaustible pockets of the U.S. consumer. They, in turn, have been spending on ever-available credit, for many years now. (One euphemism used to describe this is "negative savings," i.e. spending more than you earn.)

The foreign producers are themselves trapped in this mutual dependence, but if U.S. consumers stop buying, the house of cards comes down. They will be left with a surplus of productive capacity in the form of at-first empty factories, but Americans will be left with their devaluated air-dollars. Who do you think holds the initial advantage for the future then?

The whole world is awash in dollars that could never actually be backed by the value of American production. These have been pumped into U.S. assets, which are inflated as a result. Everyone knows this, but no major foreign investors have an incentive to pull out of U.S. assets too quickly, or they will cause the asset markets to plunge. The big investors are pulling out, gradually.

Another pillar of the dollar is in its use as the marker for oil prices. Everyone needs oil, so they need to hold dollars to buy it, and they have a further incentive to send their goods to the U.S. in exchange for our air-dollars. However, this petrodollar hegemony is deeply unstable because of the increasing use of the euro. Iraq had switched to euro pricing, which was one reason Saddam had to go. Now, Russia has switched to euro pricing - are we going to invade Russia to change this? If OPEC follows this example, the dollar is in big trouble!

So we are looking at a high chance of a dollar meltdown, for several reasons. A radical and rapid devaluation would trigger inflation in the States, depress U.S. consumer demand, and seriously erode the attractiveness of U.S. investments, probably without seriously reducing the trade deficit as a percentage of GDP. The only advantage to this is that the crushing U.S. total debt is denominated in dollars, so it becomes easier to pay off. (Most countries, when they devalue their currency, get killed because their debt is denominated in dollars; the U.S. has the advantage of being the center of this dollar-denominated world.)

However, that debt really is crushing: higher than the levels of 1929 in all categories. I'm talking about private, corporate and government debt - with as you know the highest federal deficits in history, more than 50 percent financed by investment in T-bills from abroad. Debt has financed a very long free ride, but this is dependent on the world's goodwill. Don't expect that to last forever, either.

A bad pickle, on the whole.

[Beetwasher]

10. EVERYONE SHOULD READ THIS ANALYSIS

Awesome! Thank you!

[JackRiddler]

12. gee, thanks.

[CWebster]

23. yeah

I thought it was pretty interesting too.

[SEAburb]

14. China pegs it's currency to the dollar,

so how will it effect trade with China? Is the devaluation an attempt to get China to float their currency?

[JackRiddler]

16. I doubt it...

the devaluation is very logical, it responds to something like a force of nature.

China pegs to the dollar because it orients its export economy to the U.S. market. But that's China's choice (any country can do it). If the dollar plunges too far, or if pegging to the dollar proves to be otherwise disadvantageous, China can decide to remove the peg, float the currency, peg to euro, adopt the gold standard, whatever... this is not for the U.S. to choose but for the Chinese.

[Tatiana]

31. Excellent analysis, Jack!

In addition, the Venezuelan President Hugo Chavez (also president of OPEC) wants to replace the dollar with the Euro. This could prove interesting and cause the dollar to devalue even further.

A move by Venezuelan President Hugo Chavez Frias to replace the US$ with the €uro is seen as upsetting Washington more than when Iraq's Saddam Hussein started using the €uro for oil transactions last November... precipitating the US-led action to invade Iraq. Beltway bullies are now said to be angered by Venezuela's decision to barter oil with thirteen other Latin American countries, dealing moves to dollarize South America currencies. Intelligence reports say that while the US was able to pull the wool over the international community and ally with Britain's Blair to bulldoze action against former Iran War ally Hussein, the situation with Venezuela is proving more difficult.

http://www.globalpolicy.org/nations/sovereign/dollar/2003/0624euro.htm

[Spazito]

11. Take Walmart, for example....

One of the reasons they are able to offer low prices is because most of their stock comes from Asian countries. If imports become more expensive prices will rise. If prices rise, Walmarts profits go down, they start laying off because with prices more expensive there are fewer buyers. It is a spiral downward, imo.

The other thing I find interesting is that the repubs say this will help to boost domestic sales but US manufacturing is way down, less is made in the US than can provide for it's needs so the trade deficit will continue.

[JackRiddler]

13. vanity kick

[John_Shadows_1]

15. In theory, it works like this ...

... let's say you go to European country X, and you want to buy some goods, say S&M DVDS. Now, if the dollar is low, you can only get a few Euros, so you can't buy as much of these cultural gems.

So it's harder for X to sell it's exports to America

On the other hand (or by the same token - I report , you decide) , let's say that an Xer wants to buy something off of you, something American like, say, some Handguns. Because the dollars are cheap, he can buy an ass of them with his Euros, and he can afford more guns that way.

So it's easier for X to buy imports from America.

So, in theory, the lower dollar should boost our exports, lower our imports, and thus diminish our freakish trade deficit.

I hope this helped.

[ShaneGR]

27. Correct..... there's a problem though

In order to produce the goods at a cheaper rate (Dollar) you need to pay less workers less money. If everyone was making a lot of money, you need a strong dollar to prevent too much inflation.

[KoKo]

30. The other problem is: what do we manufacture here, anymore that we could

export. Weapons and airplane parts, and a few other big ticket items, but, most of the stuff we import far outweighs what we export. This has been going on for decades, but accelerated in the 90's.

So, if we have a trade war, say goodbye to those $5.00 Sweatshirts in 5 colors sold at Target. There will be less of them and they will cost more. Plus there will be shortages of goods to buy here in the US if Chimpy starts fussing around with the "balance of trade."

[BlackFrancis]

18. part of it has already occured

Foreign investment in the US dropped 90% last month.

The US economy is floating on an ocean of foreign investment. It's already happened and the effects are already apparent. Gold rises, and despite the fact that I heard about a billion consultants say that inflation is the least of our problems, this is denial. The declining dollar will force the fed to raise interest rates. This in turn will end whatever slim hope there was for a recovery and destroy the housing market.

That's just the beginning, real estate boom is going to fall down and go boom when the interest rates rise. This was the only thing propping up what's left of the economy.

This is traceable to a large extent on pronouncements made by the treasury department that mirror some comments above about the desirablity of a weak dollar. If you are a foreign investor and you think the administration is seeking a weak dollar policy the only course of action is to bolt.

[JackRiddler]

19. Yup...

Good comments. I figure the bogus announcement of a 7.3% annual growth rate last month (soon to be corrected) was in preparation for an attempt to raise interest rates without having the bottom fall out as investors exit for greener fields (well, less brown fields, let's say). Major investors are not going to buy it, however, it's entirely for the domestic small-change chumps (please stick another dollar into the slot machine, this time you'll win I swear).

It's been close for years, but it sure looks like the end of bubblenomics is at hand.

[maggrwaggr]

20. inflation

the price of everything imported will go up. Which is just about everything these days.

Your money is worth less every day.

Go Bush!

[ShaneGR]

28. Well, actually

The object is to NOT buy imports. Because it's much cheaper to just buy America. And everyone will have to work for less to keep those American goods so cheap.

[mmonk]

25. One risk

with a devaluation coupled with trade sanctions against China, foreign dollars that prop up our debt may begin to pull out of the treasury market (and China is a big purchaser of US debt, that's one of the reasons why they don't float their currency, because of the margins; the other being exports).

[NNN0LHI]

32. Good comments all. Thanks again for all your help with my question n/t

[skeptic9]

33. A ONE-TIME devaluation has its advantages, but anticipated FUTURE ...

... devaluation can have devastating consequences for interest rates, inflation, and unemployment.

A one-time devaluation makes our exports cheaper and our imports more expensive. As long as OPEC remains in check, demand for American exports rises and new jobs are created by a one-time devaluation. But if oil import prices got out of hand, even a one-time devaluation could have negative consequences for the economy.

The proportion of US debt held by foreigners is one-third and rising. As this debt matures and new deficits soar, the Fed has three choices: (1) pay it off, as we were doing under Bill Clinton, (2) roll it over into new debt, or (3) default and destroy our capacity to borrow in the future.

Dubya's epic mismanagement makes choice (1) impossible. The second-best course requires either higher interest rates or devaluation to get foreigners to keep lending increasing sums to us. A "cheaper" dollar attracts more buyers, just like a cheaper car. To a certain extent, recent devaluation has substituted for higher interest rates in enticing new buyers for maturing and new debt.

But once lenders get the idea that devaluation will be ongoing indefinitely, they will shy away from investing in dollars. Why buy something you know is going to fall in value for the forseeable future?

Once lenders start anticipating future devaluations as far as the eye can see, interest rates will skyrocket, imports will generate runaway inflation, and unemployment will become spectacular. The devaluation game is a very dangerous one, though devaluation can "juice" an economy for a period of time (such as the year until the next Presidential election).