Doomsday - For the Dollar?

**tarek** · 11 Oct 04,, 18:06

Kupruss

Thank you for that excellent post - I hope more Americans will will read it. I'm not generally a alarmist, but I do think that more educated we are on this issue, the better prepared we will be.

"Perhaps the world currency used to trade commodities should be changed to a stronger currency like the euro. If I was to travel to Europe again I wouldn't need to buy US dollar travellers cheques, just euro ones." Kipruss

What would be the effect of such a change on the US economy and the Dollar? How can such a change begin?? What would be the implication for US intl relations if the vast numbers of Dollars and securities held my other countries should begin to lose their value??

**Kipruss** · 12 Oct 04,, 00:52

I think it is the big unknown what happens to the world if there was such a seismic shift. Given the upheaval it is unlikely to happen. I believe the US will get its act together at some stage. This is just a very bad patch. At most I guess non-americans will go on a buying spree of US assets - land, businesses etc. I could be wrong though...

The theory behind floating exchange rates (not backed by gold) makes sense to me. When a country's economy is weak their currency should fall making their exports more competitive and so improving the international income of their residents. Also, foreign goods should be more expensive and so local businesses get more home sales from import substitution. This of course doesn't work if countries such as China have fixed their currency to the US dollar as then there is no relative change.

**Prodigal Son** · 12 Oct 04,, 19:48

The fixed exchange rate scheme works even worse when you have governments actively intervening to support the dollar.

**Jay** · 12 Oct 04,, 20:26

Its a devilish cycle. The developing world will keep funding US deficits. China, Japan, Taiwan, South Korea and India will keep on buying excessive dollars and treasury bonds from the market to keep their currency stable wrt dollar.
Bcoz US is the biggest customer/marke for them.

Fred Bergsten of the Institute for International Economics calls this situation “a disaster in the making.” How far will the dollar have to fall? The first historical rule of thumb is 10% on the dollar for each percent of GDP’s worth of unsustainable current-account deficit. The second historical rule of thumb is that currencies on the decline tend to overshoot: near the bottom, international currency speculators require a substantial risk premium out of the fear that the currency crash might trigger something even worse.

Asian banks dollar buying spree is actually harming the dollar in long run. They are funding the deficit, which btw says that there is something wrong in the economic equations, so an equilibrium has to be reached, one way or other.
Either the feds can step and reduce/revaluate the dollar (countries who hedge their currencies will get a severe drubbing) or let the economy take its own course.

But if international currency speculators get the scent of near-inevitable profits from an ongoing dollar decline in their nostrils, all Asian central banks together will not be able to keep the dollar high. Only the Federal Reserve can do that – and the Federal Reserve is very unlikely to sacrifice the jobs of American workers on the altar of the strong dollar.

Well, again, its just not Asian countries, but rest of the wold, incld Europe. If dollar slides so will be the profits for some major corporations in Europe, which will result in job cuts in Europe. European Bank already asked the feds to stop dollar's free fall as its hurting them. Again, just by devaluating dollar, manufacturing or white collar jobs will not stay in America. Bcoz the diffeence in manufacuring somehing in China/India is far cheaper than doing the same in US. Other than currency, there are other stuff like taxes, labor benefits, enivironmental issues etc etc.

**Prodigal Son** · 12 Oct 04,, 20:37

The fixed exchange rate scheme works even worse when you have governments actively intervening to support the dollar.

Stupid me. I meant floating of course. Damn dsylexia! -- they both began with 'F'.

**Praxus** · 12 Oct 04,, 21:29

We should use actual gold as a medium of exchange or gold backed bills and the Government shouldn't be doing this.

**Jay** · 12 Oct 04,, 21:53

That will seriously affect the liquidity of the world markets, for good and bad.

**tarek** · 12 Oct 04,, 21:57

And ofcourse wars for control of Gold - The problem will remain, how will US satisfy Europeans and Asians who now own trillions of Dollar denominated securities??

**Jay** · 12 Oct 04,, 22:06

Barter them Gold for the correspnding dollar bonds??

or may be they can substituite that piece of paper with another piece of paper, Gold options/bonds ??

**tarek** · 12 Oct 04,, 22:19

War and not trade will result - those who control the gold, where it is produced, will remain forever in war.

Why wud the europeans want the gold options (more paper)??

**Jay** · 12 Oct 04,, 22:29

Why would they?

They wont, so Gold as an actual medium will not work.

**Praxus** · 13 Oct 04,, 03:07

What I mean was that Government should not be issuing money but people should be able to choose what they want to trade with and in most cases Gold or Gold Backed Money will be used.

**Fonnicker** · 13 Oct 04,, 03:39

Let's go back to the barter system! I got a chicken and am lookin for some new golf clubs. Any takers? Okay...two chickens. Three? Hey, these are perfectly good chickens! I was keeping them for my daughter's daury, but...I really want some golf clubs. Four chickens. Final offer.

**Praxus** · 13 Oct 04,, 17:49

What's wrong with bartering?

What values two people exchange should be completly determined by thoose two people.

**Julie** · 13 Oct 04,, 21:58

Originally Posted by Fonnicker

Let's go back to the barter system! I got a chicken and am lookin for some new golf clubs. Any takers? Okay...two chickens. Three? Hey, these are perfectly good chickens! I was keeping them for my daughter's daury, but...I really want some golf clubs. Four chickens. Final offer.

Hey, there is alot of bartering with my small business. I mean, you really can't help it. For example, people that doesn't have much money may have alot of hunting dogs that need fencing to contain them (which this is the case alot in the south), so my husband loves golf, and he has like 6 different sets of golf clubs that he has gotten in barter, a small 16' fishing boat, fishing poles, and the last bartering he did about 3 months ago, was a 1995 Nissan Pick up truck! Most of these bartering trades were for fence he installed for dog owners.

There is nothing wrong with bartering.