The spiraling dollar

Those of us that get paid in dollars but live in the most expensive city in the world watch in dismay as the dollar continues to spiral downwards. There must be a floor after which the dollar will begin to rise ? After all the US economy is still one of the most robust in the world, despite the huge trade deficit. And for those that think that the explosive growth in China is eclipsing the value of the $ forget that the relationship between China and the US is akin to a big bank and it’s largest borrower. One cannot fall without taking the other down…..


…. so was the dollar so hugely overvalued 4 years ago when it started to seriously slide ? If so, what has really changed :
a. The perception of the dollar as the prime trading currency of the world ? Does that mean that the dollar’s strength lay in it’s being the currency of trade, rather than the US economy. But everything is still quoted in dollars – and the euro has not caught up yet.
b. The huge trade deficit in the US. Don’t get that one either. It just means that the robust consumer in the US is supporting manufacture and services in the rest of the world. It also means that US companies are shifting production and services abroad to make US companies more competitive and the pockets of the US corporations bulge. And as long as the profits are brought back and evenly distributed within the US – then there wealth creation within the US.
c. Of course if the wealth so created gets concentrated into a fewer hands, then massive unemployment could provoke a major depression in the US – but the treasury will never let it happen.
d. And if the spiraling dollar was seen as a major threat to the US economy or to it’s politics, the Federal reserve would have stepped in by now.
So I need help !! Would someone explain this to me please ? Do I need to get out of the dollar
Shekhar

22 Responses to “The spiraling dollar”

  1. tushar says:

    hi shekhar,
    earlier in the day, came across this article related to the same issue but from a somewhat america-bashing perspective…
    http://www.rediff.com/money/2007/jun/11dollar.htm
    would love to read ur reaction to this…
    cha,
    tushar

  2. shekhar says:

    Tushar, I just scanned the article in rediff.com. It has an inherent fallacy. It assumes that if the dollar fails to remain the currency of trade, and especially that of trade in oil, then there is (or must be) a unit of trade that is ready to take over. The article assumes that unit could become the Euro, which seems the only alternative.
    However of the dollar is a promissory note that cannot redeem it’s value, then can the revalued Euro be a promissory note that can ? I doubt it.
    Also the value of a currency is measured is the context of another currency. They have no absolute values any more. The article is correct in assuming there is no Gold Standard anymore – and even the Gold Standard assumed there was an inherent demand for Gold more than it’s supply – without which even Gold becomes a promissory note that cannot be redeemed.
    So the assumed (as per the article) collapse of the dollar means a meteoric rise in the value of the Euro that is not even as sustainable as the dollar. I doubt therefore the sensible economists in the Middle Eastern countries would load themselves with a currency that is will become so completely overvalued.
    Shekhar

  3. kedar says:

    dude…
    most of the businessmen who appear on CNN for an interview or talk shows etc…i look at them while surfing the channels… and one thing i notice is that earlier i used to feel a vast difference in THEIR appearance or fashion and OUR appearance and fashion… but now a days if next channel is say NDTV and some other Indian interview is going on there ,then the interviewer as well as the one who is getting interviewed are so well dressed… best garment, best suits and latest color schemes… Yeah ..i mean Blue suit and Dark red tie is an out dated combination… but on CNN you will find it very common… America is no more setting Fashion trends…
    earlier Hollywood played major role in setting up fashion trends…but not now, it seems…
    and from this i judged that business power is getting divided, other countries are surely becoming more powerful day by day…it will take time…America is too big a power!… but it appears like a lazy rich kid!
    a very frivolous CHAOS theory…hahaha… America’s fashion sense is declining and so is dollar value!
    (American films hardly surprise me now a days… in terms of story or look…the same thing… same old plots, same old locations, same old fashions!!!.. and my friend who is working on some good projects there was telling me there are cafes in LA full of screen writers with their lap tops… what are they writing? Eight LEGGED FREAK ?
    most of the films are becoming too much techno savvy…
    the predictability is so dangerous for any artist or art industry… imagine someone telling Agatha Chritise or dashiell hammet that your are becoming predictable…’ )
    sorry …the comment is too long …and the topic Shekhar put forward is different… but yeah…some where it is linked… every thing is…!
    kedar

  4. Shekhar,
    In 1922 one US dollar was equivalent to Rs. 3.48 and before 1900 Indian currency was bigger than the dollar.Change is the law of nature. Romans faded away with time, so as Britons and spanish. Dollars, euro and sterling are just the scales and will remain the scales for ever. But the creative and spiritual ability of yours is beyond that. William wordsworth , Shakespeare and so many others like Munshi premchand and Anton Chekhov…names are endless, their work will stay and sustain for ever regardless the currencies scale going up and down. So Shekhar I will suggest you, not to worry about getting in or out dollar…you will survive in what ever currency parameters you go to. Any how check the dollars history as compare to other world currencies here.
    http://www.measuringworth.com/datasets/exchangeglobal/result.php?year_source=1922&year_result=2006&countryE%5B%5D=India
    Regards
    Sanjay,NJ

  5. Aditarya says:

    oh yes shekhar I think u r right. Dollar will rise very soon. US is almost a monopoly in the world today and so it has too much power to bounce back. This is not the time for its decline. But currency valuation is a very complex issue and it is possible that dollar was just overvalued earlier.

  6. Himanshu says:

    Dear Shekhar,
    There is a famous saying on Wall Street: When people are fearful, you should be greedy and when people are greedy, you should be fearful. Warren Buffett has always abided by this principle and become the world’s greatest investor. Going by this logic, this is the best time to load up on dollars and go against the tide. I will always be bullish on the dollar, and that is mainly because I firmly believe the fed knows what it is doing. An economics professor in my business school told us that to be toppled from the top you near a replacement and that is not going to happen anytime soon, not even in the next 20-30 yrs, so you should enjoy reading the statistics, but never run away from the fact that the US is so far ahead.
    Thank you,
    Himanshu – NY

  7. heather says:

    Dear Shekhar
    As the rest of the world’s power and wealth increases, US currency appears to become devalued. As the world becomes “flatter”, economic discrepancies between countries become smaller.
    If the US had not outsourced so much work to India, China, Phillipines, etc., over the past 25 years, fewer of its dollars would have left the US, and its currency would be appear to be very strong, and the rest of the world would appear to be much weaker than it currently is.
    Time to make some Bollywood films? 🙂
    love, Heath

  8. Rahmi says:

    Hi
    There is going to be a Blogcamp in India on 16th of June. Around 250 bloggers will be taking part in the event.
    This is what they say on their blog: “The way unconferences work is that, you don’t have an agenda, rather we will put up a white board, where participants will themselves add the topics they are interested to speak upon. Depending upon the number of speakers we will go for multiple threads. There will be some intense discussions, we will have a lot of fun and yes there will be blogging, video blogging, photo blogging, podcasting … everything under the blogger sun.”
    The registrations have started. We are planning to have 250 participants from all over the country. There are some people taking part virtually, using youtube, slideshare, skype etc. if you are interested please add your name to the wiki.
    Check the:
    wiki: http://barcamp.org/BlogCampPune
    official blog: http://www.blogcamppune.blogspot.com
    rashmi

  9. Rudra says:

    Heather,
    Your comments on outsourcing smack of a lack of information – call it ignorance.
    US is a mercantile nation with an army and no country has ever done more with its military to prop up its dubious currency value than US.
    Many of the technological and economic achievements US boasts of , are thanks to enlightened Immigrant people – for example , the US Aerospace , Electronics and Automotive industries owe their eminence to some brilliant brains of Indian origin . From stealth technologies to Pentium Chip – to the revitalising of the Silicon Valley – there is a tremendous inpout from Indian Brains.
    Outsourcing of Maufacturing jobs is the greatest threat to America – that is the real outsourcing . Software outsourcing is a phenomenon of the last 10 years – and is almost all cases Indian Companies or consultnats have shone above and beyond their compeetitors in Quality and Economic margins.
    No wonder American Industry is afloat with some surplus finds to invest back in the society. When the US imposed economic sanctions on India after the 1998 Nuclear Tests- they realised it hurt the US economy more than India.
    Things have changed since – US economy is a study in encouraged chaos – right now as i write this , US economy is at the mercy of China .

  10. heather says:

    Dear Rudra
    What purpose the charged comeback? Did you read resentment into my comment? There wasn’t any there. I’ve been an advocate of the flattening of global power and resources for a very long time. No matter what diminuation the US has to suffer over the next decades, it’s nothing less than fair. The US has had too great a monopoly on many things for a long time. Not only will sharing the wealth be fair towards the rest of the world, it will also improve the spiritual health of US citizens and residents, many of whom are currently too involved with trivia and meaningless materialism. I view the reduction in the value of all things American as a necessary and long-overdue correction.
    love, Heath

  11. d gopinath says:

    Hai Kedar
    Interesting to read your assesment.I took my son recently to watch Pirates and Spiderman3. Could not help wondering what the fuss was all about. It was like show me something that astounds or surprises me but nothing like that ever happened. Looking at the grosses worldwide, i have to admit they have managed to fool the world. Just like how they fool the world into believing that the U.S is all out help Africa and to eradicate Aids and blah blah blah. Could it be the world is finally catching up on the lies that the U.S have been propagating all this years. Now with their guns aimed at China maybe Asia should take the opportunity and form a new power base in the world. Wishful thinking but who knows in the distant future.
    d gopinath
    Malaysia

  12. Yuva says:

    Shekhar, I am not pro.
    UN had warmed that US debt will trigger dollar collapse. http://pressesc.com/01180629622_dollar_falls
    but China has trillion and most in $.. they will try to keep $ stable for economy reasons as long as they don’t have any political/military impact.
    for your portfolio– best is to keep equal share in $, eur, gbp ofcoure rupee. and may be in russian rubles(17% increase in last year)
    our PM’s vision is to freeup currency market so that we could become leader in south east asia. which only means that rupee will get stronger in long term.

  13. mehernosh tarapore says:

    shekar the reasson why the dollar stays up is because of opec prices its oil in dollar on the brent crude exchange the day opec moves on to a euro bourse the dollar will tumble further. this is one of the reasons why saddam was disposed in 2000 and 2003 before he was taken out iraq was selling its oil in euros. the same reason why hugo chavez was almost taken in 2003 in a coup sponsored by langley . the real fun will start when the iranians open a bourse trading in euros.that why the americans are sabre rattling iran about it nuclear program. a couple of years our ex foreign minister of petroleum mani shankar aiyar wrote a book on oil diplomacy he stated that the whole central asia along with asia and russia and middle east would build a trading oil bourse selling and trading in euros. the american ambassdor to india had him removed from his post. if you want read more about these topics visit this web site globalresearch .ca thank you waiting for your movie hope to see you in toronto for the film festival.

  14. Harpreet says:

    I too am not an expert on economics but common sense tells me something:
    Has any one really studied or thought about the sharply stengthning rupee vs dollar and its actual effect on the Indian growth rate.
    As the salaries in rupees people get here is not linked with such changes(especially in Public sector which constitutes a large part of the working populace),with the same money people will be buying more and thus consuming more and thus producing more.
    And in such low inflation times this should fuel the growth engine more vigourously than earlier as the PPPs change.And domestic inflation does not have an effect on international or US MRPs.Import of quality products for individual consumption will benefit.
    I imagine the linear GR that we generally like to peg at 9% today could actually move up exponentially as growth starts feeding on growth and its effects.

  15. K.Mohan says:

    USD VS INR..well the rupee is stronger as the Forex reserves in India are surging and the need for Dollars to finance imports isn’t as dire as a decade back. 200+ billion dollars of Forex reserves and growing. What could hurt the apple cart is the surging oil prices.Indian consumption of abt 2.1 mbpd is slated to increase substantially in the near future ..historically all nations which grew had done so with a concomittant voracious appetite for the black gold. The increase in consumption is happening at a time when the rate of increase of production of global crude is far less than rate of increase of consumption. Oil prices will remain high and a geo-political cataclysm will show sharp spikes. The rupee vulnerability will be tested.
    In the long run ( 2 years) the USD is bound to gain on the rupee..look at the historical relationship of USD with the Yen.
    Best Regards,
    Mohan

  16. Zack says:

    FYI, to follow up on USD-Indian Rupee comparison, see discussion in latest Economist article —
    “India’s strong rupee”
    June 27, 2007
    http://www.economist.com/displayStory.cfm?Story_ID=9396854
    — which basically makes the point that FDI into India has driven increasing currency strength vis-a-vis USD (though, some fear of INR inflation).
    To Shekhar’s original question, I also am no pro, but i think, setting aside the complex variables, that a currency is basically worth what we think it’s worth — Berkeley’s percepe esse est.
    For years and years — decades — if you had a lot of money and you wanted a strong, stable place to park it, you invested in US. US bonds, US stocks, US startups — whatnot. (Even other countries keep their gold reserves in the US — least likely place to be invaded, the thinking goes.)
    I don’t think that confidence in the US — as an economic vehicle — has diminished that much. After all, where do most governments (China, etc.) put their money?
    (That said, one could argue that the confidence SHOULD be less.)
    What’s changed is the increasing comfort of parking money elsewhere — EU, Dubai, Singapore, or, say, (tactically at first but flood gates now) in India.
    The perception is that “emerging markets” aren’t so risky as they used to be (perceived).
    So, in short, there’s more competition for where to park one’s wealth. More options outside of US –> Less need for USD –> Less value of USD.
    All the other things — US debt, trade deficit, etc. — are true, but I just don’t think they go to the heart of the matter, like the “competition for confidence.”
    Fwiw, I think the best thing US can do is ratchet up every effort to increase transparency in its markets. Transparency is valuable — both smart and risk-averse investors know transparency is not just a “perception.”
    Thanks for raising this topic, Shekhar. I’ve wondered for some time, too.
    Regards,
    z

  17. oi says:

    Yes, as someone said the US is almost a monopoly and why? Because of their imperialistic hegemonistic approach.
    http://indianinheritance.wordpress.com/2007/07/01/confessions-of-an-economic-hit-man/
    I am sure someone will call this mindless American bashing again, without even reading the post or finding out more about the subject.
    And Shekhar, with all respect, all costs taken into consideration NY is not the costliest city in the world, Moscow is, and has been since at least the last two years.

  18. Niranjan says:

    Hi Shekhar
    This is Niranjan Gadgil. I am an entereprenuer and long term resident of Japan. There were a few ideas about which I wish to get your opinion. Can you please let me know your email ID where I can write to you.
    BTW I tried to send mail to admin@shekharkapur.com but that bounced with error “mtp;550 5.2.2 Delivery failed: Over quota”
    You need to probably download all the accumulated mails from the server to your local PC.
    Thanks
    Niranjan

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