Tuesday, November 17, 2009

Is The Media Being Hysterical About The Dollar?

Yes. Anyway, that is the way I and Dean Baker see it ("What would a rout of the dollar look like?"). For quite some time now, there have been lots of articles in leading newspapers and magazines, as well as gobs of commentators on TV talk shows, all hyperventilating about the decline of the dollar and how it is likely to get much worse, with a terrible crash likely in the near future, and so on. This story has gotten so widespread that it is now taken as simply a stylized fact. Buried partway down in a front page story today in WaPo was the phrase "rapid decline of the dollar," referring to recent events.

Well, the dollar has been declining with some wiggles since a high around 1.26 per euro in mid-February to 1.48 something a few minutes ago. However, since it hit 1.5 in late October, it has basically been oscillating in a narrow range, no trend, with the Chinese holding the yuan/rmb fixed against it. That high in February recreated a high in November, which followed the upward rush of the dollar (as a "safe haven") in the midst of the general global financial crash following the Minsky moment on Sept. 18. Earlier that summer the dollar was noticeably lower than it is now, hitting 1.6 against the euro at one point. This is just hysteria.

Dean points out that if somehow the dollar were to fall sharply, one would almost certainly see Europeans and Chinese and Japanese intervening in the market to stop it. Why? No way they want to face trade competition from a super low dollar, and indeed, the dollar currently seems to go up when domestic economic news is bad and down when it is good. All of this frothing at the mouth is just congealed propaganda by those who want to see a tightening of monetary policy and an ending of the fiscal stimulus. That the media so widely has bought into it is nauseating.

9 comments:

Anonymous said...

"All of this frothing at the mouth is just congealed propaganda by those who want to see a tightening of monetary policy and an ending of the fiscal stimulus"

The CEO of Alcoa says the dollar is becoming a real problem right now. That doesn't sound like speculative sentiment to me. Do you think it is?

Here: http://www.cnbc.com/id/33225941

There are those on Wall Street who ready to push off from the Titanic now that they are in the lifeboat, but this guy sounds like it is a real business problem.

Walker said...

In the normal course of events, I would agree with Dean and Barkley that the Chinese, Europeans and Japanese have too much at stake to allow a "rout" of the dollar to occur. But in the event of events not running their normal course, I wouldn't be so sure. Remember the Tet offensive? An unexpected political crisis of even seemingly unmanageable proportions could make it difficult for any amount of intervention to save the day.?

Walker said...

As for the "frothing at the mouth of the media" -- most of what comes out of the media's mouth is froth.

Suffern AC said...

You left out radio commentators and snake oil "economist"/"investment advisors"...in general though, there is a tremendous effort to convince the public that the US is already Argentina, Weimar or Zimbabwe. If in a bubble people seek out information that confirms their highest hopes, after it pops, they seek whatever confirms their worst fears.

Dean Baker deals with the high end Washington Post type hysteria. If only it were contained to those organs.

TheTrucker said...

I am looking constantly at the relative value of oil/gold to the dollar. My own opinion is that all the fiat currencies are in a pickle. China and India are making noises and taking actions to lasso up a bunch of gold and move it physically to their own stores.

It wears on a man. We also have the stock market rising past 10k on nothing but hot air. The exchange rate may be beside the point if _all_ the paper money is just paper and nothing else.

When a government cannot tax it is doomed. And I am very much afraid that this is the current position of the Obama government. Even the attempt to raise taxes on the very well off in order to grant health care to the poor is being trashed by the Senate. Taxation is the only thing that gives fiat money any value.

rosserjb@jmu.edu said...

Anonymous,

Checked your link and the guy did not explain why a falling dollar (which has not fallen noticeably for three weeks, btw, which is part of my point: where is this bloody "rapid decline," please?) would hurt his business. He mentioned "cash performance" and concerns about the dollar vs the Australian dollar and the Brazilian real. Really? I find this very mystifying.

What might be a concern, although I have no idea how Australia and Brazil figure into this, is if the price of oil and all energy inputs were to soar. Aluminum (main product of ALCOA) is very electricity-intensive, so the price of electricity is a big concern, and to the extent ALCOA sees a falling dollar as leading to rising electricity prices, there might be a concern.

Walker,

Do please keep in mind that unless a crash of the dollar is triggered by a hyperinflation (which would be a Bad Thing in itself), it would massively help on the US jobs front in terms of competing with foreigners. This is indeed why they would intervene to stop it, if they could.

And, some froth out of the media is worse than other. This is a meme very deeply entrenched now, with lots of repetitive handwaving going on, kind of like all the hysteria over social security that has gone on for years now, although quieted down more recently given the focus on other things (such as health care, cap and trade, housing crisis, and (eeeeeek!) the impending crash of the dollar (eeeeek!)).

Suffern AC,

I did mention commentators on TV talk shows, which implicitly meant on radio as well. Indeed, this meme is all over the place, with CEOs and others weighing in ponderously, if stupidly, on it.

Trucker,

Oh, pushing gold again, eh? I have posted previusly that I think gold is a bubble. Last time I did so I think I said gold could go up in the short run some more, easily to 1200, where it seems headed. But it is only if there is a global hyperinflation that a much higher price of gold looks solid. That looks very remote right now.

Sign that it is bubble is best given by all those claiming that "gold must go up no matter what happens," either inflation or deflation. Nonsense.

Brenda Rosser said...

Isn't US 'Empire' continuing to support the US-dollar?

"The Saudis, rolling in cash, would deliver hundreds of millions of dollars to Treasury, which held on to the funds until they were needed to pay [mostly US] vendors or employees. This system assured that the Saudi money would be recycled back into the American economy...[BjR: Often US dollars never left the US]...It also ensured that the commission’s managers could undertake whatever projects they and the Saudis agreed were useful without having to justify them to [the US] Congress. [4]

[4] Thomas W Lippman, ‘Inside the Mirage: America’s Fragile Partnership with Saudi Arabia’ (Boulder CO: Westview Press, 2004), page 167.
"

From 'Confessions of an Economic Hit Man'

Empire: effective final political and economic authority over other states.

rosserjb@jmu.edu said...

Brenda,

I don't think "supporting the US dollar" is a big focus. Again, many economic interests in the US would prefer a lower dollar to compete with imports or to be able to export better.

Anonymous,

I figured out the deal with ALCOA. It is not the electricity issue, but the bauxite issue, the source of the material input, alumina. Australia and Brazil are major sources of bauxite and ALCOA has refineries for it in both countries.

The Australian dollar has been just about the world's strongest currency in the past year, and the Brazlian real has been stronger than most. So, rises of those two particularly hit ALCOA by raising the cost of its other principal input besides electricity. So, sure, any industry dependent on imported inputs must worry about a weaker dollar, particularly against currencies of the countries with those inputs.

Regarding the central relationship, while many think that Obama must reassure Hu the dollar will not fall too much, for years the pressure from US politicians (reflecting the interests of many of their constituents) has been for China to appreciate its currency against the dollar, which it is not doing.

Brenda Rosser said...

Barkley wrote: "I don't think "supporting the US dollar" is a big focus. Again, many economic interests in the US would prefer a lower dollar to compete with imports or to be able to export better."

Well, there may be now a recent change in the dynamics of 'US Empire' or 'the American Century'. I've said before that 'the American Century' might have a more appropriate name, like the 'Rockefeller, Dupont, Hunt, Rothschild....etc Century'.

A low US dollar may now suit the powerful network of global corporates. Last I read it was of immense use in a global currency 'carry trade'; as the Japanese Yen used to be.

Whatever this new evolution of global capitalism is it looks like there is less and less reticence to leave more and more people without adequate life support.