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There are growing signs of a major shift in world currency alignments. Since March, the US dollar has steadily declined, depreciating by 13.3 percent on a trade-weighted basis. Last week the decline accelerated, driving gold prices to record levels and prompting a number of Asian central banks to intervene on currency markets to slow the dollar's fall.
Rather than warning of the implications of this erosion in the value of the world's major trading and reserve currency, prominent financial publications and economic commentators are arguing that the trend should be welcomed and the long-term value of the dollar should be allowed to fall further.
On Saturday, the Financial Times of London published an editorial entitled "A Strong US Needs a Weakened Dollar." The newspaper wrote that "this fall in value, while large, should neither be feared nor obstructed... It would actually be rather helpful if the dollar were to weaken further... the effect of a cheaper dollar would be to help American exporters while making imports to the US dearer. This is what America - and the world - needs. In the medium term, as Mr. Summers [Obama's top economic adviser Lawrence Summers] put it earlier this year, ‘the rebuilt American economy must be more export-oriented and less consumption-oriented.' In short, the US must start living within its means, and the rest of the world must stop relying on its profligacy."
Monday's Financial Times carries a piece by economic columnist Wolfgang Munchau headlined "Making the Case for a Weaker Dollar." He advocates a rebalancing of the world economy in which the massive US current account deficit would be sharply reduced, the Asian surplus would be pared down, and the 16-nation eurozone deficit would grow "somewhat larger."
"In the long run," he writes, "such a world would require significant reform of the international monetary system. In the short term, a fall in the dollar's exchange rate would help get us there."
He suggests that the "strong-dollar pledges" by US officials are disingenuous and the US is encouraging a further decline in the dollar as part of an export-led recovery strategy.
Munchau goes on to say that the necessary long-term reform of the international monetary system involves a permanently reduced global role for the dollar. He predicts that the world is moving toward a "dual system in which the dollar and the euro act as the world's de facto reserve currencies."
These and similar commentaries evade the immense risks that would inevitably accompany a permanent devaluation of the dollar and dilution of its reserve currency status. Such a project contains the seeds of a breakup of the world market. The assumption that this change could be carried out in an orderly manner, without sparking competitive devaluations by Europe and Asia, the formation of currency and trade blocs, the eruption of trade war and, ultimately, military conflict between the major powers, is highly dubious.
Among the most shallow commentaries in favor of a weaker dollar is that provided by US economist and New York Times columnist Paul Krugman. In an op-ed piece published Monday, he dismisses those who worry about the long-term implications of the decline of the dollar as little more than cranks.
Without considering the international implications of a continued fall in the dollar, or its consequences for social relations within the US, he says of the "current uproar" over the declining dollar: "The truth is that the falling dollar is good news."
A lower dollar is "good for US exporters," Krugman writes, "helping us make a transition away from huge trade deficits to a more sustainable international position." He argues for leaving the benchmark interest rate, now effectively at zero, "on hold for the next two years or more." He says nothing about the consequences of a depreciating dollar for the US currency's status as the world reserve currency.
=> What is certain is that the loss of the dollar's status as the unchallenged world reserve currency has devastating implications for the American working class.
A strong and stable dollar was the bedrock of the international capitalist monetary system that was established at the Bretton Woods conference at end of World War II. The dollar has served for nearly seven decades as the world's supreme trading and reserve currency. The unique and privileged position of the dollar - which brought with it immense advantages for US capital - was based on the unchallenged economic supremacy of the US at the end of the war. That, in turn, was founded on the global dominance of American industry.
The long-term decline of American capitalism, reflected most importantly in the decay of its industrial base, resulted in the massive global imbalances between debtor nations - first and foremost, the US - and creditor nations, such as China, Japan and Germany, which led to the implosion of the world economy a year ago. It is the transformation of the US from the industrial powerhouse of the world to the center of global financial speculation and parasitism that, in the final analysis, underlies the erosion in the international position of the dollar.
To allow the dollar to continue to fall is to acknowledge the reality of America's decline and the necessity for world capitalism to find a new basis for growth. At the heart of such a global economic "rebalancing" is a fundamental restructuring of class relations within the United States.
The Bretton Woods framework gave the American bourgeoisie a huge advantage in managing social relations within the US. The US ruling class could utilize deficit spending and inflationary policies to make concessions to the demands of the working class because the world accepted the dollar regardless. Without that advantage, the US must adhere to onerous fiscal and monetary restraints, the burden of which is to be placed on the working class.
This process is already well underway. In the name of global economic rebalancing and reform at home, the Obama administration is seeking to cut the consumption of the working class, slash production costs and drive up US exports.
This amounts to subjecting American workers to the type of economic "shock therapy" that the US-dominated International Monetary Fund has prescribed for a host of indebted Third World countries over the past quarter century. Currency devaluation, accompanied by cuts in state expenditure for social services and the use of mass unemployment to drive down wages and increase exploitation - these are the methods that are now being employed against the American working class.
The process by which the US closed down its manufacturing facilities and farmed out production to cheap labor havens around the world - which produced the unsustainable reliance of the US on infusions of credit from surplus nations such as China and Japan - is to be reversed. Industry in the US is to be revived, but on the basis of the destruction of the wages, working conditions and living standards of the working class.
The US is to become a low-cost producer of goods for the world market. The American working class is to experience levels of exploitation which it hasn't faced in a century. Its wages and living standards are to be brought more closely in line with those faced by the super-exploited workers of Asia.
This policy of class war underlies Obama's assault on the jobs and wages of auto workers, his refusal to provide aid to bankrupt states and localities, and his drive to gut health care benefits for workers and attack entitlement programs, beginning with Medicare.
America will once again set an example for world capitalism - by serving as the model for similar attacks on the workers of every country.
The working class of the United States, however, has no intention of submitting to its own impoverishment. The stage is being set for a revival of the class struggle in the US and internationally on a colossal scale.
Article found online at: Link… (WSWS.org)
Kevin Carmichael
It's both a symptom and a cure.
The acceleration of the U.S. dollar's decline in recent days is creating anxiety for exporters in Canada, Europe and Japan. But in the search to create a post-crisis economy that's less prone to financial catastrophe, the U.S. dollar's decline is widely accepted as a necessary ingredient.
Before the crisis, countries grew overly reliant on U.S. consumers, who created an unsteady platform for the global economy based on debt-fuelled spending supplemented by a favourable exchange rate. Now, policy-makers in the Group of 20 nations are trying to spread out consumer demand to Asia and elsewhere, a process that will both result in, and be facilitated by, a weaker dollar.
"What's wrong with the dollar weakening?" said Sophia Drossos, a currency strategist at Morgan Stanley in New York and a former economist at the U.S. Federal Reserve. "There needs to be a rebalancing. I think it's moving in the right direction."
An index that measures the value of the U.S. dollar against six major currencies, including the loonie, the euro and the yen, fell to the lowest in 14 months Tuesday because investors seeking short-term gains are gaining confidence in the global recovery.
When the world economy appeared on the verge of collapse last autumn, investors rushed to the dollar, seeking safety in a legal tender that's accepted most everywhere and backed by a government that has never defaulted on its debt.
A year later, investors are back on the hunt for yield, selling their dollars to buy everything from futures contracts on commodities, to European debt, to Brazilian reals - anything that looks better over the next few months than the assets of a country with a record budget deficit, a benchmark interest rate near zero and one of the slowest growth rates among major economies.
Canada's dollar topped 97 U.S. cents for the first time in 13 months Tuesday, continuing a rise toward parity that Prime Minister Stephen Harper Tuesday called a "concern." As the loonie rises, Canadian goods become more expensive in international markets already suffering from a lack of demand.
But that kind of pain is what policy-makers accepted when they pledged last month at the Group of 20 Summit in Pittsburgh to adopt - and in some cases, resist - policies that will reshape the global economy into something that is less prone to financial meltdown, if a little less dynamic.
For Americans, the falling dollar will make imports more expensive, curbing the American consumer's impulse for debt-fuelled spending. At the same time, the country's battered manufacturing industry should get a lift as its exports become more competitive, offering the hope of employment in an economy badly in need of jobs.
In the same way that a crisis in the world's largest economy sunk the world into its deepest recession since the Second World War, a rebound in the United States should translate into stability elsewhere, investors and economists said.
"This is kind of good for the global recovery," said David Baskin, president of Toronto-based Baskin Financial Services, which manages assets worth about $300-million. "It's unclear to me that you can have a U.S. recovery and have no one else recover."
Paradoxically, the U.S. dollar's weakness is the result of rising confidence in the global economy's prospects. The drop picked up speed last week when the Australian central bank raised its key interest rate, citing a strengthening global economy, especially in Asia.
The Australian move triggered expectations other countries will eventually follow suit, including Canada. Though the Bank of Canada has said it expects rates to remain at rock-bottom levels until next summer, there is upward pressure on some rates. Just Tuesday several major Canadian banks hiked five-year mortgage rates by 0.35 percentage points to 5.84 per cent.
The longer-term benefits of a weaker U.S. dollar will test the resolve of politicians who face explaining them to constituents who will bear the brunt of the short-term pain.
Mr. Baskin said he fears the gyrations in foreign-exchange markets will stoke reactionary policies aimed at protecting exporters, but which will ultimately end up slowing trade and the recovery.
The political impetus to mitigate the harmful effects of the U.S. dollar's descent is understandable. In Canada, for example, Canadian Manufacturers & Exporters, a trade association, estimates that the country loses 25,000 factory jobs for every one-cent increase in the loonie against the U.S. dollar...
Last week, Finance Minister Jim Flaherty said the biggest factor behind the U.S. dollar's weakness is the budget deficit, which, according to the Congressional Budget Office, was $1.4-trillion in the fiscal year that ended Sept. 30, greater than India's GDP.
Fmx: That's worth repeating... "the biggest factor behind the U.S. dollar's weakness is the budget deficit, which... was $1.4-trillion in the fiscal year that ended Sept. 30, greater than India's GDP."
The U.S. dollar's decline also reflects a broader recognition by international investors that Asia is taking on a greater role in driving the global economy, investors and economists said. The U.S. economy will expand 1.5 per cent in 2010, compared with 9 per cent in China and 6.4 per cent in India, according to the IMF.
"This is what you would expect with a transition like this from one region to another," said Daniel Bain, president and chief investment officer at Thornmark Asset Management Inc. in Toronto. "When currencies move, they move in broad trends. I don't see anything that is going to shift away from current trends."
Article found online at: Link… (TheGlobeAndMail.com)
Art Carden
In 2002, President George W. Bush helped make us poorer by signing off on higher steel tariffs. In 2009, President Barack Obama helped make us poorer by signing off on higher tire tariffs. Is this supposed to be change we can believe in?
Economic analysis shows that trade creates wealth. The law of comparative advantage demonstrates that when we specialize and trade, we produce more wealth using the same resources. Preventing trade means that we use more resources to produce less wealth.
A simple example illustrates the essential logic of comparative advantage. Suppose Amy can produce either one hundred oranges or ten tires in a day while Chen can produce either ten oranges or two tires in a day. At first glance, it doesn't look like they have anything to gain from one another: Amy is much more productive than Chen.
When we compare their opportunity costs, however, a different story emerges. The opportunity cost is what you have to give up to get something else. To produce one hundred oranges, Amy gives up the opportunity to produce ten tires. Her opportunity cost of an orange is one tenth of a tire, and her opportunity cost of a tire is ten oranges. Chen's opportunity cost of an orange is one fifth of a tire, and her opportunity cost of a tire is five oranges.
In terms of tires, it is cheaper for Amy to produce oranges because she only gives up one tenth of a tire to produce an orange while Chen has to give up one fifth of a tire. In terms of oranges, it is cheaper for Chen to produce tires because he only gives up five oranges to produce a tire while Amy gives up ten oranges to produce a tire.
They can both have more oranges and more tires if they specialize and trade. Suppose Chen offers Amy one tire in exchange for seven oranges. Chen would be better off because he would get seven oranges in exchange for one tire, whereas he would only get five oranges in exchange for one tire if he produced them himself.
So if Chen is better off, Amy has to be worse off, right? Wrong. This is an attractive deal for Amy too, because she can get a tire for only seven oranges, which is fewer than the ten oranges she would have to give up if she produced tires herself. At any "orange price" of tires between five and ten, Amy and Chen are both better off.
Economists have shown that the same logic applies to trade between countries as well. Simply replace "Amy" with "the United States of America" and "Chen" with "China," and you can easily see that both countries are better off if they can specialize and trade.
This law of comparative advantage is one of the most important and most poorly understood ideas in economics. It is also an anvil that has worn out many hammers. In spite of repeated objections from noneconomists and even a few theoretical counterexamples from economists, the law of comparative advantage remains robust.
Tire protectionism has other unintended but predictable consequences as well. Since we are poorer, we have fewer resources to invest in education, health care, and innovation. Also, higher tire prices means that some people will drive on worn-out tires longer than they otherwise would, which increases accident risk and will likely lead to more highway deaths.
There is another effect that goes beyond simple economics 101. In addition to an introductory course, I also teach courses in economic history and the history of economic ideas. In these classes, I focus on the role of institutions, ideas, communities, and secure private property rights in historical economic change.
The president's capitulation to special interests tells people that they can expect the government to take care of them when things do not go their way. It encourages people to invest resources in picking others' pockets rather than producing wealth. History is littered with the dry bones of civilizations that encouraged Peter to get rich by robbing Paul. Protectionism is a step toward the dustbin of history.
The salutary effects of trade are sometimes hard to see, but they are very real and very important. By embracing protectionism, President Obama has adopted a policy that works against his supposed concern for Americans' well-being by reducing innovation, destroying wealth, perverting incentives, and encouraging destructive nationalism. Protectionism gives politicians an opportunity to appease special interests, but we're all worse off for it.
Article found online at: Link… (Mises.org)
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