finance - can someone explain how a weak dollar is bad?

[xyyz]

i get that exports become more expensive and it's more expensive to go overseas, but i'm more interested in the impact the weak dollar has on the following:

1. trade deficits
2. foriegn investment in our currency

i'm particularly interested in the second. i've read if the dollar continues to slide, it will cause a run on the dollar, because foreign investors will refuse to buy more treasury bonds and look to dump them and invest in some other form of currency, particularly the euro. this would cause a financial crisis. what i'd like to know is how this would cause a financial crisis and what sort of impact would that have on day-to-day life within the US.

 

[Format C:]

Originally posted by: xyyz
i get that exports become more expensive and it's more expensive to go overseas, but i'm more interested in the impact the weak dollar has on the following:

1. trade deficits
2. foriegn investment in our currency

i'm particularly interested in the second. i've read if the dollar continues to slide, it will cause a run on the dollar, because foreign investors will refuse to buy more treasury bonds and look to dump them and invest in some other form of currency, particularly the euro. this would cause a financial crisis. what i'd like to know is how this would cause a financial crisis and what sort of impact would that have on day-to-day life within the US.

Well, I'm by no means an economist and definitely out of my league with your question, but, I'll take a stab at part of it while you're waiting for a more qualified answer. As far as trade deficits go it would stand to reason that a trading partner would be paying less for the goods of ours they buy, so they might would buy more for the same money, depending upon how the law of supply and demand would come into play. That would mean that things might stay relatively even or not depending upon the goods. If the demand were to increase sufficiently it might would be of benefit to us by way of increased production demand leading to higher employment. On the other hand, the cost of their goods to us would go up with a weaker dollar so unless their is an over-riding demand issue then we would probably purchase less of theirs. Would that increase or decrease our trade deficit with them? I'd guess that would depend upon the nature of the goods going each way. As for your second question, it would seem to me that foreign investors in the dollar might view the slump in price as an investor in the stock market might. An undervalued stock and time to buy. If the price remained low long term or continued to fall then you might would see the "run" and disinvestment you refer to. A lame answer to be sure, but I think I'd sum up my views on the matter as "time will tell". Hopefully someone with some real economics sense will come along and straighten us both out.

 

[xyyz]

i can understand how not purchasing treasury bonds will have an impact. it'll reduce the amount of money the treasury has to work with, because you no longer have this influx of outside capital buying your bonds. again, this is just what i see, i don't know if it is at all accurate.

however, how does a mass sell off hurt? for you to sell the bonds, you need to have someone who is willing to buy them. it's not like these bonds are obiliterated. the treasury isn't required to buy them back before the mature are they? if this is the case, then i can see the problem. now you need to de-invest cash in other fields to buy back these bonds.

again, this is just me thinking. i'm pretty sure none of this is actually the case.

comeon... expert... help us both out here!

 

[Forsythe]

A weak dollar might not be bad, and it might not be good. But a weak currency means something is wrong with the economy, it's allways meant that.

 

[Spencer278]

Do you have any idea how many US dollars are out there? About 2/3 are out side of the US. If the people with those dollars try and sell them we will get hyper inflation. How, a great demand would be placed on US made goods far in execise of our ablitiy to meet the demand would cause a bidding war between buyers as they try and get out of the dollar. If enough people try and get ride of dollars at the same time the market would be flood with dollars causing the value of a dollar to drop and increasing the pank in investors. Also a weak dollar is in effect a pay cut because you can no longer buy as many goods as you could before.

 

[xyyz]

Originally posted by: Spencer278
Do you have any idea how many US dollars are out there? About 2/3 are out side of the US. If the people with those dollars try and sell them we will get hyper inflation. How, a great demand would be placed on US made goods far in execise of our ablitiy to meet the demand would cause a bidding war between buyers as they try and get out of the dollar. If enough people try and get ride of dollars at the same time the market would be flood with dollars causing the value of a dollar to drop and increasing the pank in investors. Also a weak dollar is in effect a pay cut because you can no longer buy as many goods as you could before.

how do you get hyper inflation when investors want to sell the dollar? ultimately don't you need a buyer for the currency? if no one wants to buy dollars, wont that in effect stagnate any downward slide?

wont a weaker dollar help a trade deficit? the US isn't as inclined to purchase expensive foriegn goods, whereas foriegn markets are much more inclined to purchase much cheaper US goods. an a weak dollar impact the defict in a negative way, looking at it from the perspective of a purely free market system, w/o the looming threat of any trade sanctions?

 

[pickuplines]

a falling dollar leads to inflation and high interest rates. because imports cost more, and people dont want to own bonds in a time of rising or high interest rates.

 

[Spencer278]

Originally posted by: xyyz

Originally posted by: Spencer278
Do you have any idea how many US dollars are out there? About 2/3 are out side of the US. If the people with those dollars try and sell them we will get hyper inflation. How, a great demand would be placed on US made goods far in execise of our ablitiy to meet the demand would cause a bidding war between buyers as they try and get out of the dollar. If enough people try and get ride of dollars at the same time the market would be flood with dollars causing the value of a dollar to drop and increasing the pank in investors. Also a weak dollar is in effect a pay cut because you can no longer buy as many goods as you could before.

how do you get hyper inflation when investors want to sell the dollar? ultimately don't you need a buyer for the currency? if no one wants to buy dollars, wont that in effect stagnate any downward slide?

A seller doesn't need to sell there dollars for curreny then can sell them for goods. For example a trade in japan sees the dollar as a bad investment he could purchase a billion dollars of US steel to get out of the dollars. Now anyone want to get steel would need to pay more. That kind of sell could lead to a crash if people get pankicted. Like if bunch of countries that matter decided to drop the dollar standard or something. Or if wal-mart decided that they will no longer accept the dollar.

wont a weaker dollar help a trade deficit? the US isn't as inclined to purchase expensive foriegn goods, whereas foriegn markets are much more inclined to purchase much cheaper US goods. an a weak dollar impact the defict in a negative way, looking at it from the perspective of a purely free market system, w/o the looming threat of any trade sanctions?

A weak dollar does reduce the trade deficit but only because it is a pay cut for the US works. Sure it is good for companys that export lots of stuff but overall most companies input and those will be hurt.

 

[SuperTool]

Falling dollar generally means inflation, and there will be inflation in natural resources and European/Japanese made goods, and the natural resource component of all product costs. In terms of affordable consumer goods, they are made in China, so there are two possibilities. If Yuan stays pegged to the dollar, there will not be high inflation in those prices, but US jobs will keep being exported to China. If Yuan floats, then there will be inflation in those goods, but the reason for that inflation is that it will be more expensive to manufacture those goods in China in USD terms, so fewer US jobs will move overseas. So it's not all good or all bad. You just have to pick your poison.

 

[Farvacola]

I believe that the strength of the dollar is a very good indicater of our net trade index, and that, at this time is very negative. We are currently importing more then we are exporting. By doing so, we are strengthening others currency from whom we purchase and we are weakening our currency by focusing on foreign goods too much.

 

[justly]

SuperTool, I think your explaination demonstrates a profound wisdom that I normally don't see in this fourm... bravo.

It is refreshing to hear an opinion that isn't based on political party views.

 

[Kibbo]

Also, to add to SuperTool's excellent post, remember that the low dollar hurts the importing of productive capital (computer equipment, etc) and if it is a long-tem trend that could be bad for productivity.

The fact that the Yuan is pegged to the dollar is bad in two ways. First, as ST suggested, it eliminates much of the benefits of having a low dollar, since your manufacturers still have to compete with Chinese imports, which are not getting cheaper.

The second is more speculation than anything else. The Chinese keep the Yuan pegged by buying American assest on the financial market. (Actually, people do this in some financially arcane manner that I don't understand, but it's economically equivalent.) If ever they stopped, (possibly to reduce thier own resource costs, since their currency is effectively falling too,) the value of the dollar would fall even more, since the Chinese demand for assets in american dollars would drop. The US dollar has a lot of built-in value since it is the preferred currency for international trade, even between two foreign countries. If the instability of the currently low dollar spooks them, and they start using other currencies, there could be a catastrophic run on the dollar, which could disrupt the entire global economy.

This is a bit of a doomsday scenario, so take it with a grain of salt. But economic doomsdays have happened before.

 

[GrGr]

China has problems of it's own and will not do anything rash or drastic with the Yuan.

China: What's with the dollar

Meanwhile the weakening dollar is impacting markets abroad:

Dollar's woes causes Asian concern

Strong euro, oil hit German morale

Low dollar hits Europe

 

[Vic]

Inflation and high interest rates without corresponding wage/salary increases means the buying power of the American middle class could be significantly reduced. A big problem is the T-bond issue. If bonds get dumped, mortgage rates could go sky-high. As home values are already so high that a high percentage of borrowers have difficultly qualifying on debt/income ratios (I'm a mortgage banker), a drastic increase in mortgage interest rates could price out an even more significant portion from buying. This could lead to a large drop in housing prices, as desperate sellers lower their prices so that buyers can qualify, and that could lead to a rash of foreclosures, as desperate sellers without equity are forced to just give the property back. The effect dominoes, or "bubbles", and leads to a crash.

 

[sandorski]

This issue is very complex. In the Ideal a lower $US would lead to increased Exports, but the current situation is far from Ideal.:

1) As Supertool and Kibbo mentioned/explained, the biggest Trade deficit is with China and no matter how low the $US goes, the current Yuan relationship to the $US prevents any kind of advantage for the $US.

2) When you go to Walmart(or other large chain) to buy things, you'll notice very few "Made in USA" items. There will be some, no doubt, but the amount of "Made in.." China, India, or other place items will be quite telling of a few things:

a) Much of the former US Consumer Production has been Outsourced/Moved
b) There are a wide variety of Product segments that simply have no US based competitior at all. Meaning that no matter how low the $US goes, certain Products will always be Imported.

3) One major issue with a low $US is that while Oil priced in $US remains relatively stable, at least based upon Currency value(Supply and Demand are different considerations regarding Price), the Price of Oil is actually going down for European and Asian competitors(except for China), as they now can buy a lot more $US for Oil(and other Commodities) Purchases.

4) As already mentioned, as the $US slides, the Purchasing Power of Americans decreases as well. OTOH, the Purchasing Power of Europeans and Others increases. This is a Major issue for the US since its' Economy is very much focussed on Consumption. If Consumption is reduced, so is Economic Activity.

5) It would take years just for the US to begin to take advantage of the Competitive advantage of a lowered currency. In the meantime Inflation could become rampant and take years just to fix causing even more problems.

6) If the $US is abandoned as the International Currency for Trade in Oil or other Commodities, there would be a loss of Cost Stability in Commodities that the US currently enjoys. Producers of Commodities priced in $US are tempted to do just that, since many actually lose some of their Profits due to the weakening $US.

7) Much of the US success has been in attracting Experts in various Professional fields from Foreign sources(Canada, Europe, Asia) because the stron $US made Economic sense to these Experts. With the devaluation of the $US, these same Eperts may find that going back to their Nation of Origin now makes more Economic sense, thus causing a Brain-Drain from the US instead of the reverse.

I can see the value of a lower $US in relation to the Trade Deficit, as it is totally out of hand, but while the Yuan is valued as it is and with equally large Government Deficits requiring large Foreign Capital inflows the Short to Midterm Economic prospects of the US looks rather grim. Add in the High Cost of the Iraq War and other looming Costs the situation just gets grimmer(more grim?).

 

[dmcowen674]

Originally posted by: Forsythe
A weak dollar might not be bad, and it might not be good. But a weak currency means something is wrong with the economy, it's allways meant that.

Apparently not anymore, it no means the Economy is booming more than it ever has in History. All the bad stuff is everyone's imagination according the P&N Economy experts and the Bush Regime.

 

[dmcowen674]

Originally posted by: Vic
This could lead to a large drop in housing prices, as desperate sellers lower their prices so that buyers can qualify, and that could lead to a rash of foreclosures, as desperate sellers without equity are forced to just give the property back. The effect dominoes, or "bubbles", and leads to a crash.

Careful Vic, the resident FLL on P&N will jump all over you for suggesting there could ever be a "crash" while they and their Fearless Liar is ruling the roost.

 

[Kibbo]

Well, Dave, many of the resident "economy experts" are advocating caution. You see ghosts everywhere, don't you? Or do you just like being a drama queen?

 

[Engineer]

Originally posted by: Vic
Inflation and high interest rates without corresponding wage/salary increases means the buying power of the American middle class could be significantly reduced. A big problem is the T-bond issue. If bonds get dumped, mortgage rates could go sky-high. As home values are already so high that a high percentage of borrowers have difficultly qualifying on debt/income ratios (I'm a mortgage banker), a drastic increase in mortgage interest rates could price out an even more significant portion from buying. This could lead to a large drop in housing prices, as desperate sellers lower their prices so that buyers can qualify, and that could lead to a rash of foreclosures, as desperate sellers without equity are forced to just give the property back. The effect dominoes, or "bubbles", and leads to a crash.

Not to mention a crash to the millions of folks who build homes during this housing boom. Lots of jobs would be lost in the construction industry.

 

[Engineer]

Originally posted by: sandorski
This issue is very complex. In the Ideal a lower $US would lead to increased Exports, but the current situation is far from Ideal.:

1) As Supertool and Kibbo mentioned/explained, the biggest Trade deficit is with China and no matter how low the $US goes, the current Yuan relationship to the $US prevents any kind of advantage for the $US.

2) When you go to Walmart(or other large chain) to buy things, you'll notice very few "Made in USA" items. There will be some, no doubt, but the amount of "Made in.." China, India, or other place items will be quite telling of a few things:

a) Much of the former US Consumer Production has been Outsourced/Moved
b) There are a wide variety of Product segments that simply have no US based competitior at all. Meaning that no matter how low the $US goes, certain Products will always be Imported.

3) One major issue with a low $US is that while Oil priced in $US remains relatively stable, at least based upon Currency value(Supply and Demand are different considerations regarding Price), the Price of Oil is actually going down for European and Asian competitors(except for China), as they now can buy a lot more $US for Oil(and other Commodities) Purchases.

4) As already mentioned, as the $US slides, the Purchasing Power of Americans decreases as well. OTOH, the Purchasing Power of Europeans and Others increases. This is a Major issue for the US since its' Economy is very much focussed on Consumption. If Consumption is reduced, so is Economic Activity.

5) It would take years just for the US to begin to take advantage of the Competitive advantage of a lowered currency. In the meantime Inflation could become rampant and take years just to fix causing even more problems.

6) If the $US is abandoned as the International Currency for Trade in Oil or other Commodities, there would be a loss of Cost Stability in Commodities that the US currently enjoys. Producers of Commodities priced in $US are tempted to do just that, since many actually lose some of their Profits due to the weakening $US.

7) Much of the US success has been in attracting Experts in various Professional fields from Foreign sources(Canada, Europe, Asia) because the stron $US made Economic sense to these Experts. With the devaluation of the $US, these same Eperts may find that going back to their Nation of Origin now makes more Economic sense, thus causing a Brain-Drain from the US instead of the reverse.

I can see the value of a lower $US in relation to the Trade Deficit, as it is totally out of hand, but while the Yuan is valued as it is and with equally large Government Deficits requiring large Foreign Capital inflows the Short to Midterm Economic prospects of the US looks rather grim. Add in the High Cost of the Iraq War and other looming Costs the situation just gets grimmer(more grim?).

:thumbsup:

 

[dmcowen674]

Originally posted by: Kibbo
Well, Dave, many of the resident "economy experts" are advocating caution. You see ghosts everywhere, don't you? Or do you just like being a drama queen?

Hey save the "Drama Queen" stuff for the Gays that the resident P&N FLL folk hate.

 

[dmcowen674]

Originally posted by: Engineer

Originally posted by: Vic
Inflation and high interest rates without corresponding wage/salary increases means the buying power of the American middle class could be significantly reduced. A big problem is the T-bond issue. If bonds get dumped, mortgage rates could go sky-high. As home values are already so high that a high percentage of borrowers have difficultly qualifying on debt/income ratios (I'm a mortgage banker), a drastic increase in mortgage interest rates could price out an even more significant portion from buying. This could lead to a large drop in housing prices, as desperate sellers lower their prices so that buyers can qualify, and that could lead to a rash of foreclosures, as desperate sellers without equity are forced to just give the property back. The effect dominoes, or "bubbles", and leads to a crash.

Not to mention a crash to the millions of folks who build homes during this housing boom. Lots of jobs would be lost in the construction industry.

Naaaw, wouldn't lose as many jobs as you think. Our southern citizens would just move back to Mexico.

 

[xyyz]

ST, when you say there will be inflation in natural resources, how do you mean? Is there are standard pricing for natural resources, other than oil? For example, will lumber, or any other natural resource based in the US also be impacted by inflation? As for inflation, it will only affect non-US and chinese made products right?

vic, the foreclosures would only impact those who have variable interest rates right? explain how sellers w/o equity will be pressed to give their property back.

sandorski, explain this in more detail: "It would take years just for the US to begin to take advantage of the Competitive advantage of a lowered currency. In the meantime Inflation could become rampant and take years just to fix causing even more problems. " you also mentioned a bit about the attraction of experts. looking at it a bit differently, how would this touch outsourcing? will it make less sense to outsource, or is outsourcing still cost effective, even with a weakening dollar?

Also, can someone explain this business about pegging the yuan on the dollar in a bit more detail? how is it good/bad for china? Kibbo's post has peaked my interest.



finally, for those on the tail end of this thread, please don't thread crap. this thread was going very well, in that it was purely informational for a while. i rather not polute it with silly remarks.

 

[LunarRay]

It would seem to me that imports that are not 'pegged' to the dollar will be more costly. Given that we consume them and there are no alternatives that I can see within the cost structure of the imported items we will increase our biggest problem.. the current account balance! Sure we'll export a bit more but that will not offset the imports. We'd have to cut way back on imports and that won't happen. We'll consider the price increase as a bit of inflation.

The dollars problem stems from the trade imbalance and the funds to cover it. The falling dollar for froeign folks holding US assets is problematic. They have just lost a goodly percentage of the value as recorded in their currency. Russia is moving to the Euro for oil denomination if it hasn't already. Many Europeans like the idea of contracts let in the Euro... makes for stability in their price structure and that is pretty important.

The question one must ask is: What is the real basis for valuation of a currency. We're not on any standard. So how can one look to something tangible from which to make that evaluation? One can't. It then becomes subjective to a whole myriad of considerations and manipulations. That is the game that is currently afoot. What occurs when the dollar is at 1.50 to the Euro? Do they eat the loss on their exports to maintain share? Is it a move by the US to actually bolster our manufacturing base? Seems to me it is. Airbus and Boeing, Ford and Mercedes... these are big players here and around the world.. and many US jobs at stake.

 

[miketheidiot]

Originally posted by: xyyz

Originally posted by: Spencer278
Do you have any idea how many US dollars are out there? About 2/3 are out side of the US. If the people with those dollars try and sell them we will get hyper inflation. How, a great demand would be placed on US made goods far in execise of our ablitiy to meet the demand would cause a bidding war between buyers as they try and get out of the dollar. If enough people try and get ride of dollars at the same time the market would be flood with dollars causing the value of a dollar to drop and increasing the pank in investors. Also a weak dollar is in effect a pay cut because you can no longer buy as many goods as you could before.

how do you get hyper inflation when investors want to sell the dollar? ultimately don't you need a buyer for the currency? if no one wants to buy dollars, wont that in effect stagnate any downward slide?

why don't you try your your at at a supply-demand curve. Increasing supply and no demand equals rapidly faliing price.

wont a weaker dollar help a trade deficit? the US isn't as inclined to purchase expensive foriegn goods, whereas foriegn markets are much more inclined to purchase much cheaper US goods. an a weak dollar impact the defict in a negative way, looking at it from the perspective of a purely free market system, w/o the looming threat of any trade sanctions?

The trade deificit will be helped, however this will be by foriegners buying up our real estate and capital in droves. Basically we lose the future of our country.