How Far and Fast Will the Dollar Fall?

It reached parity with the Canadian dollar today. Paul Krugman writes:

Is This the Wile E. Coyote Moment?: Lots of buzz suddenly about the possibility of a sharp fall in the dollar.... A nice summary at Barry Ritholtz’s blog The Big Picture.... [T]he problem is that I’ve been seeing it coming for several years, and it keeps not arriving.... [T]he U.S. trade deficit is, fundamentally, not sustainable in the long run, which means that sooner or later the dollar has to decline a lot. But international investors have been... betting that the dollar won’t ever decline.

So, according to the story, one of these days there will be a Wile E. Coyote momen... the dollar... who has run off a cliff, looks down and realizes that he’s standing on thin air--and plunges.... Maybe the dollar’s Wile E. Coyote moment has arrived – although, again, I’ve been wrong about this so far...

Comments

[David Lloyd-Jones]

.

The Toronto Globe and Mail this morning ran a graph of dollar/dollar prices over the past few days.

Each day's trading starts with clear open space between the open and the previous day's close. Wile E. Coyote indeed.

.

[anne]

So that we know, Paul Krugman was writing of a Wile E. Coyote moment in the value of dollar from March 2000....

http://select.nytimes.com/search/restricted/article?res=F50611FA38590C758EDDAA0894D8404482

March 26, 2000

Deficit Attention Disorder
By PAUL KRUGMAN

[Remember, the New York Times files are all open now.]

[anne]

Ah, remember as well that paying attention to Paul Krugman is repeately smart. We have not experienced a severe dollar value decline, but there was relative value in competing currencies and investors who looked internationally even at the moment of the beginning of the bear stock market have been awfully pleased. What gives me hope a further decline can be orderly, is that careful investors have been preparing for decline the entire decade.

[wood turtle]

What are all those neoliberal economists going to say now that it looks like Europe's currency is going to be more stable than ours?

It wasn't that long ago that they were all saying the Europe economy was "sclerotic", as in somehow meaning that the Europeans were incapable of molting.

Maybe "sclerotic" was the right way to go.

[andres]

wood turtle: obviously, the US is not the ideal model for Europe. At the same time, though, I would point out that the US and Europe suffer from altogether different problems.

Europe is a classic case of low macroeconomic capacity caused by insufficient physical investment--for whatever reason (excessive labor regulation, excessively high interest rates, not to mention high labor hiring costs due to non-regulatory causes such as language barriers). Europe might temporarily alleviate such problems by boosting consumption (eg through helicopter drops of currency), but in the end the problem is one of increasing employment by boosting capital formation, and the social contract between the State and private businesses in Europe has as yet been insufficient to the task.

The US, by contrast, suffers from classic Latin American disease--political paralysis and institutionalized corruption leading to surging government debt and mounting current account deficits. As long as the Republicans and Democrats continue to rule like the old-style PRI in Mexico, this process will continue and one day foreign banks will decide that, like the Argentinian Austral or the Brazilian Cruzeiro, the US dollar isn't worth the candle.

Just because Europe's economic problems are of a different nature than those of the US doesn't mean that they should necessarily be emulated. (And no, I'm not a libertarian proponent of laissez faire labor markets in Europe; that would only create a different sort of unemployment).

[Chris Jillings]

A question about the Canadian dollar: I know everyone wants Alberta's oil, but perhaps good governance is part of the reason the Canadian dollar is strong. We have had a surplus in the federal government spending (including interest on the debt) for years now:

I found this data:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2007/03/
a_brief_history.html

[Jim]

The amazing thing is the blase reaction of the public at large. The dollar decline means among other things that the USA is getting collectively much poorer. But the masses don't seem to realize it. Maybe when Chinese goods are not so cheap and inflation and interest rates have to go up, they will begin to catch on. But don't be sure. They have all sorts of rationalizations and evasions to use. In any case it hardly supports Franklin's quote that we are a rising sun. Quite the opposite, if one is really honest.

[Roland]

The high Canadian dollar relative to the USD isn't necessarily great news for most Canadians.

We're an export-dependent economy and by far our largest market is the USA.

Petroleum resources are nice, but they are only abundant in certain regions of the country. The petro-boom is creating serious imbalances in the national economy. Moreover, resource royalties boost provincial revenues, not federal. Even in the energy-rich places, the boom is a mixed bag since it is causing a steep rise in the cost of living.

In the long run, despite our fiscal prudence, Canada is going to be seriously hurt by the recent mismanagement of the US economy. After 20 years, the Free Trade Agreements have us in the same boat whether we deserve it or not.

[Barkley Rosser]

Roland's point should be kept in mind by wood turtle and others talking about the Europeans. Today's top story in the International Herald Tribune was about how the Europeans are basically freaking out over the rise of the euro. Sarkozy is calling for the ECB to do something to halt the rise, recession worries are abounding, and the word is the Airbus may have to engage in major cost cutting to remain competitive, or even functional. Many think the policy of the Japanese (if it is a result of their policy and not just people down on them after the fall of Abe) to stay steady with the dollar looks good.

[Maynard Handley]

"Today's top story in the International Herald Tribune was about how the Europeans are basically freaking out over the rise of the euro."

The Europeans? All of them?
What we have here is exactly the same BS as in the US. An organized minority that will be hurt by a higher euro is weeping to the skies, while the great mass of people who will benefit by lower prices stay unorganized and silent.

The fact that this situation exists doesn't mean that we have to buy into it --- the whole point of blogs is to present the truth, not the situation as plutocrats want you to see it.

[anne]

The dollar rises and the dollar falls, and rises. Remember that Paul Krugman was worried about a fall in dollar value in March 2003, when the worry by most was of a stronger than strong dollar.

Though I would suspect the dollar might weaken for a while, 20% against the Euro would not be surprising, we might better be thinking of a strong dollar again even as we should have been thinking of a stronger dollar on a 50% loss in value after the Plaza Accord of September 1985.

[anne]

Were it not for the insane militarism of America, and what might be wrought, I would be entirely confident of an increase on dollar value in a reasonable time. For now, the strong dollar will increase moves to competitive efficiency in Europe, Canada and Australia; while demand from China and India is bolstering developing markets such as Brazil and South Africa apart from currency values.

[Barkley Rosser]

anne,

The US dollar has never gotten anywhere back to near where it was in Sept. 1985 since, not even remotely close.

[s9]

"But the masses don't seem to realize it. "

The masses are smarter than that. What they don't realize is *why* they're much poorer. That's because they've been systematically misled. The masses are smart. You have to be very clever indeed to keep them fooled about something so basic.

[anne]

Golly; I am dreadfully afraid for cheese, any more expensive French cheese and I may have to settle for the free slabs at Whole Foods. Cheese is my worry, the French, lacking the oil of Norway, are preparing for an American cheese war. I want my cheese.

Notice how worried about cheese I am? The dollar rises and falls in value, investing easily makes up for the falls.

[anne]

There is much to worry about, like the insane waste of $200 billion does in the coming year on needless war and occupation. There is an economic harm to us, but as for expensive French cheese I have a 5 year supply in my cheese cellar that will carry me through the coming dollar drop drop drop. Oops.

[divF]

You think Anne is joking about the cheese -- she's not (well, not entirely).

I was at the Cheese Board in Berkeley yesterday (one of the best cheese stores in the US, and run as a left-wing collective, to boot) and all of the talk by the folks there was how they have to check with their suppliers multiple times a day about pricing on their orders because of the Euro run-up.

Anne - if you haven't been there, stop by sometime when you're in Berkeley. I've seen displaced Parisians stand in slacked-jawed awe on walking into the store for the first time.

[Jim]

There are a couple of posts on the Brad Setser website by a Chinese hand who is sitting in for him for a week and they are very interesting. He calls the present "turbulence" the Panic of 2007 and opines that it will soon pass and the march of global liquidity and taste for risk increase, not the opposite. And he sees no particular reason for the US deficit to fall greatly in the near future. It is still in the US interest to keep it going.

[Jim]

The widest selection of cheese I have ever seen is in Portuguese supermarkets, esp. French owned ones. They have all the French and European cheeses plus all the small artisan cheeses from Portugal and the Azores whose production is too small for widespread marketing. Some are beyond delicious, especially the Queijo de Estrela, the premier Portuguese cheese.

[andres]

anne, what's to worry? We do have the CIA after all; a few abducted French, Spanish, and Portuguese cheese makers (hey, North Korea does it; why can't we?), and we'll have all the good cheese we want. Still, I think you're being a tad unpatriotic--all those Wisconsin farmers need a break too, you know ;-)

[anne]

Ah, the Cheese Board in Berkeley is heaven, as are Portuguese cheeses. Which reminds me, when we think of the Azores, what of African cheeses? There must be wonderful African goat cheeses, but I have never asked about any and must.

Because I have come on few complaints from developing markets of currency changes, I may be too cavalier about the effects and must pay closer attention.

The reminders are helpful.