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Author Topic: Death Knell for the US Dollar
arborman
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posted 11 December 2003 01:33 PM      Profile for arborman     Send New Private Message      Edit/Delete Post  Reply With Quote 
Currently, oil worldwide is traded in $USD. One of the only countries to ever switch to selling their oil in Euros was Iraq, about 2-3 years ago. (Hmmm...)

In order to buy oil, which everyone needs, every country in the world has had to stock and hold large reserves of US Dollars. This has gone a very long way to make up for the $60 billion/month trade deficit the Americans currently have. They import far more than they export, but then the rest of the world buys their paper money, in essence transferring wealth back to the US.

That is one of the few remaining props of the staggering US economy, and some suggest it is one of the underlying motivations for the invasion of Iraq. (One of the first things the occupiers did was change back to selling in $USD).

Now, however, OPEC is talking about selling in Euros, which means that the rest of the world might no longer be forced to subsidize the US trade deficit. Russia talked about it a little while ago, but backed off.

If they all have even the option of buying in Euros, demand for $USD will plummet, followed shortly thereafter by the $USD. Their economy will no longer have the capacity to import anything. In case nobody has noticed, they don't produce much anymore, since most of their manufacturing has gone overseas.

This is both worrisome and uplifting news. It is worrisome because if OPEC makes the switch, or even just opens the door to another currency, our biggest customer will go very broke, very fast (at about -$60B/month they won't last long). This will have a strong ripple effect around the world for all the export economies.

Expect the US to pressure OPEC hard, but expect Europe to do much the same. With the snub the other day towards European countries (and Canada) regarding reconstruction contracts, don't expect them to do the US any favours. Ditto Russia.

It is still just open speculation by the OPEC, but the mere fact that this is out in the open implies that they are at about the end of their patience with American adventurism and unilateralism. Bush may well be the cause of the American collapse.


From: I'm a solipsist - isn't everyone? | Registered: Aug 2003  |  IP: Logged
paxamillion
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posted 11 December 2003 01:36 PM      Profile for paxamillion   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
Before the invasion of Iraq, some folks felt that this was the real reason for it. Apparently Saddam wanted to trade in Euros and encouraged others to do the same.
From: the process of recovery | Registered: Jul 2002  |  IP: Logged
DrConway
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posted 11 December 2003 01:45 PM      Profile for DrConway     Send New Private Message      Edit/Delete Post  Reply With Quote 
I've heard Russia is interested in denominating its oil in Euros in order to sell to the EU. Russia still has large oil and gas reserves, and so if Russia wants to accumulate hard currency (well, the ruble's convertible now, but who the hell wants to hold onto an unstable currency ), that's one way to do it.

Even though Russia isn't in OPEC, a decision like that would prompt renewed discussion at OPEC's meetings, and reinforce Hugo Chavez's notion of a South American version of OPEC, and we all know how much of a burr in Bush's saddle Chavez has been.


From: You shall not side with the great against the powerless. | Registered: May 2001  |  IP: Logged
'lance
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posted 11 December 2003 02:01 PM      Profile for 'lance     Send New Private Message      Edit/Delete Post  Reply With Quote 
Though it doesn't talk much about oil, Slate had an interesting take on the US dollar yesterday:

quote:
...the United States needs European cooperation to finance something even more crucial than the reconstruction of Iraq. We rely on Europe—Old and New—to finance our private companies and, to a lesser extent, our government. After all, the United States' biggest exports today aren't movies or software programs. They're paper products—stocks, bonds, and other securities. The Europeans are among the biggest purchasers of these goods. But recent data and recent currency market action, which has seen the dollar plummet to record lows against the euro, suggest our erstwhile continental friends may not be buying what we're selling. If that continues, it could spell trouble for the already weakened dollar.

The United States exports dollars to buy food, oil, and manufactured goods. Our foreign trading counterparts tend to send dollars back to America by purchasing U.S. government bonds, U.S. dollars, so-called agency debt—which consists largely of mortgage-backed securities—and corporate stocks and bonds. By recycling the capital we export, foreigners fund our debt, keep interest rates low, and keep currency ratios relatively stable.

...

To a degree, in fact, the decline of the dollar against the euro is a logical outcome of our policies. Winking at a weak dollar surely doesn't encourage foreign investors to jump in. Why buy something today when you think it'll be worth less tomorrow? Our interest rates remain remarkably low, with Federal Reserve Chairman Alan Greenspan yesterday signaling he won't raise them anytime soon. It's obvious to European investors that they can get higher rates of return on government debt in stable economies elsewhere.



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redshift
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posted 11 December 2003 02:05 PM      Profile for redshift     Send New Private Message      Edit/Delete Post  Reply With Quote 
heard a report on CNBC last week that China was trading USbucks for Euros. in a global economy, this could make things interesting.
there is some interesting speculation here;
http://www.gold-eagle.com/editorials_03/wallenwein072603.html

From: cranbrook,bc | Registered: Oct 2001  |  IP: Logged
josh
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posted 11 December 2003 02:39 PM      Profile for josh     Send New Private Message      Edit/Delete Post  Reply With Quote 
quote:
Originally posted by paxamillion:
Before the invasion of Iraq, some folks felt that this was the real reason for it. Apparently Saddam wanted to trade in Euros and encouraged others to do the same.

Yes, this is true. The administration was worried that OPEC was going to convert to the Euro. Which sent up a big red flag to the two oilmen in the White House.


From: the twilight zone between the U.S. and Canada | Registered: Aug 2002  |  IP: Logged
humbleman
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posted 11 December 2003 02:55 PM      Profile for humbleman     Send New Private Message      Edit/Delete Post  Reply With Quote 
First of all if any country refused to accept USD$ for oil it would mean effectively war. Lets not kid ourselves here, democrat or republican administration would undermine that government and move in under the banner of "to keep peace, we are here for the people".

Oil is the real key to US. Without easy access to cheap oil bad things happen in the US. Whats cheaper than trading fiat dollars for oil?

Actually the whole world economy is built on a contridition famously pointed out by Robert Triffin in the 60's.

http://www.foreignaffairs.org/19781201faessay9893/robert-triffin/the-international-role-and-fate-of-the-dollar.html

Friends, now for minute just ignore the date of the article 1978. Just read the content and adjust the billions of dollars to current numbers. Its pretty striking that this article could be written today.

I bring you

"Triffin's Dilemma"
http://www.imf.org/external/np/exr/center/mm/eng/mm_sc_03.htm


BTW the system is still screwed up and faces the triffin Dilmma. Basically today we face the glut of dollars problem. There is too much USD$ floating around the world which is undermining the status of the US dollar as a reserve currency.

In regards to oil either the price will go up, if priced in dollars or oil will be priced in different currency or basket of currencies. Look it from the point of view of the middle east producer. Your main export is sold in US dollars but you buy most thing from other parts of the world. Saudi purchasing power is sinking.


From: Oakville | Registered: Oct 2003  |  IP: Logged
Stephen Gordon
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posted 11 December 2003 03:02 PM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
quote:
Originally posted by arborman:
Currently, oil worldwide is traded in $USD.

In order to buy oil, which everyone needs, every country in the world has had to stock and hold large reserves of US Dollars.


Not quite.

If Canada wants to buy oil from Britain, it's a simple matter to take the US$ price, the C$-US$ exchange rate and the C$-UK pound exchange rate in order to calculate a price in C$ or UK pounds. No-one needs to buy US$ first.


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DrConway
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posted 11 December 2003 04:30 PM      Profile for DrConway     Send New Private Message      Edit/Delete Post  Reply With Quote 
Sure, but the world oil price is currently stated in US dollars. If it were stated in Euros, the psychology at work here is that the Euro is deemed stable enough and important enough to be the currency to use for purchasing energy.

The capital markets work via human emotions as much as they do on price-to-earnings ratios and numbers.

So, if the Euro is given this imprimatur by OPEC, it's just another boost in favor of currency speculation on the assumption that the Euro will continue to rise against the US dollar and maybe even the UK pound sterling.

Incidentally, in direct response to your statement, Mr Cromwell, if we take the case, instead, of South Africa, which has to domestically produce oil alternatives, or buy oil on the world market, its currency, the rand, is not going to necessarily be automatically accepted by the seller of oil. The seller will likely want US dollars, and so *.za is going to need to keep US dollars around to make available as needed to people who want to exchange rand for US dollars so as to import oil.

PS. Quick conversion from 1978 dollars to 2003 dollars: Multiply by 3.

[ 11 December 2003: Message edited by: DrConway ]


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arborman
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posted 11 December 2003 04:36 PM      Profile for arborman     Send New Private Message      Edit/Delete Post  Reply With Quote 
That's true, but nobody really buys oil from Britain. Everybody buys oil from OPEC, for the most part, and they sell in $USD. We could buy in Zlotys or rubles if they were being sold in those currencies, but OPEC sells in $USD.

It's true that if ONE country decides to sell in Euros or a currency mix that the US will no doubt find a pretext for invasion, coup or some other change of government. We've seen it happen. But if all of OPEC decides, and other countries follow suit, the US cannot invade, coup or overthrow everyone. They can barely handle what they've got now.

They are on the brink of a very serious economic catastrophe. I think the Bush cartel is quite aware of it, and it underlies their somewhat desperate attacks on the rest of the world. Unfortunately for the US in general, the Bush cartel is not particularly good at nuance or diplomacy, and has just managed to alienate most of the countries in the world. Not many are as willing as they once were to prop up the $USD, and if they have an alternative, they might well use it.

This particularly applies to countries like China, who stand to benefit significantly if the US loses its pre-eminence in the world. They hold a lot of the US debt, and large quantities of $USD as well. Ditto Europe. If Bush continues being antagonistic towards them (and he is likely to) their loyalty to the American economy is likely to diminish.

Given a choice between social models that I would like to see succeed, I'll take Europe, warts and all, over the US. Nothing against our American friends, but they have missed the boat on the whole human dignity, social programs thing.

Ironically, Bush and co. in their panicked attempts to use global intimidation to perpetuate the smoke and mirrors affair that is the US balance of trade and economy, have managed to alienate and offend most of the other participants in the magic show. Without the willing participation of all the countries and OIL PRODUCERS in that smoke and mirrors show, they are going down a path to rapid and serious decline.

On the upside, if they can't pay the troops, they can't invade. If they can't buy supadupa high tech weaponry, they can't bomb the world to pieces. Ont he downside, they might resort to the relatively cheaper NBC option to keep the world cowed. Of course, that would require a corporatist capture of the levers of power. Oh, shoot...


From: I'm a solipsist - isn't everyone? | Registered: Aug 2003  |  IP: Logged
Stephen Gordon
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posted 11 December 2003 04:57 PM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
[Reply to DrConway's post. arborman posted in the meantime]

That makes more sense than the original post. Currently, the USD is pretty much the only widely-held reserve currency, and this fact has been used to explain why its price is higher than what the 'fundamentals' would suggest. If the euro emerges as a credible (and yes, this depends very much on peoples' perceptions) alternative, then the USD won't get the automatic premium of being the only reserve currency.

But perceptions aren't the only story. The huge US trade deficit is probably a more important factor. The perception isn't just based on pure animal spirits.

[ 11 December 2003: Message edited by: Oliver Cromwell ]


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Stephen Gordon
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posted 11 December 2003 05:15 PM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
quote:
Originally posted by arborman:
Everybody buys oil from OPEC, for the most part, and they sell in $USD. We could buy in Zlotys or rubles if they were being sold in those currencies, but OPEC sells in $USD.

Again, the USD is just the unit of account. If Japan buys from Saudi Arabia, all that need to be done is to use the USD price and the dollar-riyal exchange rate to get the price in Saudi riyals. The Japanese importer then uses the yen-riyal exchange rate to transform the required number of yen into the necessary number of riyals. No-one has to buy a USD.


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hibachi
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posted 11 December 2003 05:47 PM      Profile for hibachi   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
Paul Martin has stated that he wanted to see Canada catch up to the US in GNP/capita. If the US dollar keeps falling, and Canada keeps growing we could come out ahead by default. The problem is that if the US sinks to Latin American levels that won't be anything we will want to emulate anyway.

Unlike the US, we have stuff that China and Japan and Europe wants. Readjustment away from excessive trade with the US would be painful but we could probably survive. We have a much more outgoing population, and we have links all over the world.


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Cougyr
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posted 11 December 2003 06:31 PM      Profile for Cougyr     Send New Private Message      Edit/Delete Post  Reply With Quote 
The US$ has been inflated for years. It's been a money bubble similar to, and related to, the tech stock bubble. The high US$ has caused much of the world, including Canada, a great deal of problems. Therefore, I'm in favour of any action that brings the US$ down where it belongs, roughly par with the Canadian$.
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Stephen Gordon
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posted 11 December 2003 07:12 PM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
A few years ago, I spent part of my sabbatical year in San Diego. Probably not the most representative city to visit, but that's where we were.

At the time, the CAD was (I think) around 2/3 USD, so I was expecting the the prices in the local currencies to be roughly 2/3 times what we saw at home. Our first visit to the grocery store was a shock - the prices were exactly the same as back home, only in USD. Ouch.


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person
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posted 11 December 2003 07:56 PM      Profile for person     Send New Private Message      Edit/Delete Post  Reply With Quote 
you are missing the significant influence of currency exchange. your anecdotal evidence doesn't really represent much especially in terms of the international oil trade
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Stephen Gordon
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posted 11 December 2003 08:04 PM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
That doesn't make any sense.

My anecdote was my own 0.02CAD contribution to Cougyr's point that the CAD-USD exchange rate should be around 1:1.


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humbleman
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posted 11 December 2003 10:55 PM      Profile for humbleman     Send New Private Message      Edit/Delete Post  Reply With Quote 
I dont think that 1:1 dollar would be bad, after all no country got anywhere debasing its currency. I suspect the problem is the fact that this dollar change would explode supply chains across the border.

A whole lot a good jobs would be crushed, canadian industry has been addicted to the cheap dollar. Give it tens years to move from 0.62 to 1.00, but if that happens in 2 years I think we are talking about a very serious recession in Canada. 30% of GDP is export in Canada, and 80% minimum goes to the US. Manufacturing would be decimated.

BTW the productivity is also code for unemployment == the famous "jobless recovery". I kinda suspect that there will be a blood letting are the next election. Bay street does not want to make currency issues an election issue for the martin corporate party.

I am really surprised that the current move in the CDN dollar has not really impacted the country.

BTW read up on the "Paris Accord", I doubt its gonna happen this time around. The yanks will bring down the dollar by debasing their own country independently of others.


One thing though I doubt is that the CDN government would accept a significant current account deficit because the US dollar fall.


From: Oakville | Registered: Oct 2003  |  IP: Logged
Pogo
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posted 11 December 2003 10:57 PM      Profile for Pogo   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
quote:
Originally posted by Oliver Cromwell:

Again, the USD is just the unit of account. If Japan buys from Saudi Arabia, all that need to be done is to use the USD price and the dollar-riyal exchange rate to get the price in Saudi riyals. The Japanese importer then uses the yen-riyal exchange rate to transform the required number of yen into the necessary number of riyals. No-one has to buy a USD.


I don't buy oil but our company buys from about 20 different nations. Many of them bill us in US dollars. They expect US dollars to be paid. As we do significant business in US dollars we have a US dollar account to handle this business. Alternatively, when we owe Japanese Yen we go to the bank, buy Japanese Yen with Canadian dollars. The point is when customers specify payment in a currency (sometimes they will give two options) they expect the money to arrive in that currency.


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Lard Tunderin' Jeezus
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posted 11 December 2003 11:01 PM      Profile for Lard Tunderin' Jeezus   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
My travels through the U.S. in the past two years support Oliver's observations.
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humbleman
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posted 11 December 2003 11:13 PM      Profile for humbleman     Send New Private Message      Edit/Delete Post  Reply With Quote 
Pogo I think your comment highlights quite well the idea that the US recieves a tithe or tribute from the fact that the world uses its currency for a unit of account. World trade is financed on the back of the US dollar, Oliver consider Pogo situation.

If Pogo's company or suppliers decide to settle their accounts in anything but dollars it means that there is measured drop in the demand for the US dollar. One company is insignficant but consider that I think the US dollar finances 85% of the world trade, if people deside on a different country or just decide on using 60% to settle accounts there is a difference. Pogo and others may decide to close US accounts and open Euro/YEn/whatever===far fewer dollars being bought.


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Tackaberry
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posted 11 December 2003 11:44 PM      Profile for Tackaberry   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
Pogo, thats because youre buying from the US and Japan. If the Japanese company set a price in US dollars to make things easier for them, you wouldn't pay them in Us dollars, you would just convert directly to yen.

The price is in US dollars for simplicity sake (like most commodities) but no one actually buys Us dollars, they assume the currency market has everyone's currency adjusted properly, and just do the ocnversion no?
Payments for goods and services are (almost) always paid in the supplier's currency right?
Can someone confirm that oil bought from Opec is actually in US dollars?


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Cougyr
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posted 12 December 2003 12:17 AM      Profile for Cougyr     Send New Private Message      Edit/Delete Post  Reply With Quote 
quote:
A whole lot a good jobs would be crushed, canadian industry has been addicted to the cheap dollar.

humbleman, you are right. However, if cheap currency was good, Argentines would be rich and Swiss poor. The reason that American companies have been able to buy up so many Canadian companies is because the Canadian $ has been low and the US $ high. This is the root of the softwood lumber issue, but few people talk about it. It is the reason the Americans are getting so protectionist (economically).

I agree that the leveling out process should take several years so as not to sink the boat. However, emotionally, I'd like the US$ to plummet so far that Canadians could buy back our industries.


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humbleman
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posted 12 December 2003 12:26 AM      Profile for humbleman     Send New Private Message      Edit/Delete Post  Reply With Quote 
Tack, I am pretty sure the whole transaction depends on the terms of the contract. Supplier and buyer agree on terms of payment,delivery,etc. I am pretty chummy with the manager of the purchasing department at my work place. She has access to a US dollar account and we recently set up a euro account. Very rarely she buys parts from europe, and she has run into a couple companies over there who demand payment in Euro. Euro wire transfer. So we actually buy the currency required to complete transaction.
From: Oakville | Registered: Oct 2003  |  IP: Logged
arborman
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posted 12 December 2003 01:31 AM      Profile for arborman     Send New Private Message      Edit/Delete Post  Reply With Quote 
Tackaberry:

The currency of international trade, at present, is usually the $USD, because it is seen as the most secure. If I buy something from you in rubles, by the time you deliver the ruble might have dropped so much that you are selling at a loss. You don't want that.

$USD have, until recently, been seen by oil selling nations and OPEC as a way of stabilizing their income. They know what they are getting. However, that has been changing as the current administration squanders all their good credit and good will around the world. Thus the $USD is losing it's perceived stability.

Meanwhile, the Euro, specifically created to offer an alternative to the $USD and get the Europeans out from under dependency on the Americans, is looking stable and secure to many countries. Also, European countries, at least most of those using the Euro, aren't invading any OPEC countries.

A very high proportion of international trades happen in $USD. If that proportion drops, like pogo says, the demand for $USD will also drop, and its relative value will do so as well.

If that happens, the US will not be able to sustain their balance of trade. Currently, they ship $60B out of the country every month through buying imports. That would drop with their currency, which would drive prices up in the US, possibly out of the reach of a great many Americans.

However, the main point is that they would still be shipping a lot more cash out of the country than they are bringing in each month. Anyone who has ever had a bank account can tell you what the long term effect of that is.

Currently, they replace that $60B by printing more money, basically. We all buy it around the world, which essentially means we send whatever value in currency we trade for the dollar to the US. At the same time, they get a lot of foreign investment, which further helps to replace the trade deficit.

They've maintained this careful balancing act for a long time, and even got a few bonuses out of it like the tech bubble (where lots of investment flowed in and then dissipated). It depends on 2 things, however:

First, the $USD has to be the currency of trade, especially in oil. If it isn't, then the rest of us don't need to buy as many of them, and we aren't shipping our cash (in the form of purchased currency) to the States anymore.

Second, and equally as important, the US has to appear to be a good place to invest. Given the current deficits and debt load being developed by the government there, that is starting to change. If investors perceive Europe, or Canada, to be more likely to give them a good return, the money will flow elsewhere. If they perceive the US as likely to be a big money loser, it will fly out of there as fast as it did out of Mexico or Argentina. When the house of cards does come down, it will come down HARD.

If the $USD continues falling, and accelerates, investment in the States will be seen as a sucker bet. If I invest a US dollar at 125 cents Cdn, I would want to get 126 or more back (to oversimplify). If that US dollar will be worth less than I bought it for 1 year from now, my return will have to be so high that it makes up for that loss in value. The risk/return ratio becomes a lot nastier, and a lot less investment will flow that way as a result. In fact, if it really starts moving, capital flight will occur, which is the global financial equivalent of a toilet flush.

The Federal Reserve has some tools to stem or stop the flow. They can buy up US dollars to keep the value high, but even they don't have enough to replace it all, and I'm not sure they have all that much left right now anyway. They can borrow money to fill the gap, but that can't last forever either (and they might well be doing that now). It also depends on other countries being willing to lend it to them, which could change as well (the old return on investment thing again).

Many other countries have an interest in propping up the $USD. However, they will cut and run at some point as well, if things get bad. Some may have an incentive to reduce US power, such as China or Russia. Others may just want to avoid draining their own treasuries to finance US wars.

Canada will be in a tricky position if all this starts happening. We account for a lot of those imports, and if they can't buy, we will have to sell elsewhere. On the other hand, we will be able to buy back a lot of our industries at firesale prices, and then upgrade them a lot more cheaply. I'd like to start with the West coast mills....

Not much we can do about it either way. If OPEC switches we need to get VERY busy VERY fast at finding other markets for our goods, and concentrating on homegrown industries and markets as much as possible. We will likely have a nasty recession or worse, though not as bad as our southern neighbours, who may well end up with riots in the streets or worse.


From: I'm a solipsist - isn't everyone? | Registered: Aug 2003  |  IP: Logged
Pogo
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posted 12 December 2003 02:45 AM      Profile for Pogo   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
quote:
Originally posted by Tackaberry:
Payments for goods and services are (almost) always paid in the supplier's currency right?
Can someone confirm that oil bought from Opec is actually in US dollars?

No, goods from country X are not always paid for with the currency of country X. This is the usual case though. However many companies will set up US dollar accounts for their receivables to make life easier for customers. Especially if they need to use the receivables to buy US supplies, it makes sense for them to be receiving some of their revenue in US$. Indeed, a few US companies give us the opportunity to pay in Canadian with a set exchange or US funds. There are also a few companies that ask us to pay in US funds (often because the local currency is unstable).


From: Richmond BC | Registered: Aug 2002  |  IP: Logged
Tackaberry
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posted 12 December 2003 08:19 AM      Profile for Tackaberry   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
Okay thanks. Especially Arborman, I can see the worry on specualtion of currency between the time the sale is reported and payement received.
The only thing is it seems to creating accounting nightmares for tax purposes and stuff. I assume internal corporate trade, ie, a parent and its subsidiary, are in (if an American based multi-national) US dollars?
Does this happen at the date of transfer/sale, or do they wait for the US dollar to fall or?

Thanks both of you.


From: Tokyo | Registered: May 2001  |  IP: Logged
Stephen Gordon
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posted 12 December 2003 10:47 AM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
arborman:

The fact that OPEC uses the USD as a unit of account does *not* mean that everyone needs to buy USD to buy oil. And even if (for administrative reasons) they insist on payments in USD, what would the OPEC country do with the USD that they get?

There are 3 reasons to buy USD:
1) To buy goods and services in the US.
2) To buy US assets.
3) Most central banks use the USD as a store of value.

The only way that OPEC's use of the USD would prop it up if were OPEC used those dollars to buy US goods, services and assets. If they want to buy something or pay employees in a country other than the US, they have to immediately turn around and sell their newly-acquired USD in order to buy the currency they need to get what they want. The net effect is a wash.


The USD is falling because they have a huge trade deficit, because US assets no longer generate the returns they once did, and possibly because the euro has emerged as a credible reserve currency.

If OPEC switches to the euro, the only people who will notice or care are the accountants and currency traders.


From: . | Registered: Oct 2003  |  IP: Logged
Cougyr
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posted 12 December 2003 12:55 PM      Profile for Cougyr     Send New Private Message      Edit/Delete Post  Reply With Quote 
quote:
If OPEC switches to the euro, the only people who will notice or care are the accountants and currency traders.

Oliver Cromwell, I think you're missing something there. Check a report called, "AILING DOLLAR STRIKES AT EURO IN IRAQ WAR." It's on the net in pdf. Sorry, my copy is on my machine. I've quoted part of it below.

"Imagine this: you are deep in debt but every day you write cheques for millions of dollars you don't have -- another luxury car, a holiday home at the beach, the world trip of a lifetime. Your cheques should be worthless but they keep buying stuff because those cheques you write never reach the bank! You have an agreement with the owners of one thing everyone wants, call it petrol/gas, that they will accept only your cheques as payment. This means everyone must hoard your cheques so they can buy petrol/gas. Since they have to keep a stock of your cheques, they use them to buy other stuff too. You write a cheque to buy a TV, the TV shop owner swaps your cheque for petrol/gas, that seller buys some vegetables at the fruit shop, the fruiterer passes it on to buy bread, the baker buys some flour with it, and on it goes, round and round -- but never back to the bank. You have a debt on your books, but so long as your cheque never reaches the bank, you don't have to pay. In effect, you have received your TV free. This is the position the USA has enjoyed for 30 years -- it has been getting a free world trade ride for all that time. It has been receiving a huge subsidy from everyone else in the world. As it debt has been growing, it has printed more money (written more cheques) to keep trading. No wonder it is an economic powerhouse! Then one day, one petrol seller says he is going to accept another person's cheques, a couple of others think that might be a good idea. If this spreads, people are going to stop hoarding your cheques and they will come flying home to the bank. Since you don't have enough in the bank to cover all the cheques, very nasty stuff is going to hit the fan! But you are big, tough and very aggressive. You don't scare the other guy who can write cheques, he's pretty big too, but given a 'legitimate' excuse, you can beat the tripes out of the lone gas seller and scare him and his mates into submission. And that, in a nutshell, is what the USA is doing right now with Iraq."


From: over the mountain | Registered: Nov 2002  |  IP: Logged
arborman
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posted 12 December 2003 01:20 PM      Profile for arborman     Send New Private Message      Edit/Delete Post  Reply With Quote 
It isn't lost on much of the world that Iraq was one of the first, if not the only, country in the world to switch to the Euro for their oil sales. They did it about 2 years ago.

However, the US can't invade the whole of OPEC. They can alienate them, make enemies of them, try coups, any number of things but they simply don't have the capacity to invade them all. So if OPEc switches, or even just opens up their pricing to other currencies, there will be big changes.

Who else might have an incentive to trade in something else?

Russia
China
India
OPEC (esp. Venezuela)
Europe (Euro states)

Who might have an incentive to limit the power of the Euro?

Countries that haven't joined it in Europe.
USA


From: I'm a solipsist - isn't everyone? | Registered: Aug 2003  |  IP: Logged
Cougyr
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posted 12 December 2003 01:47 PM      Profile for Cougyr     Send New Private Message      Edit/Delete Post  Reply With Quote 
I think this is another instance of American selfishness coming back to haunt them. After WWII, the Breton Woods Conference set up currency stabilization mechanisms. Richard Nixon unilaterally (as usual) took the US out of the Bretton Woods agreement (essentially killing it) for purely American purposes. Read that as screw the rest of the world. Well, the rest of the world is getting tired of being screwed.
From: over the mountain | Registered: Nov 2002  |  IP: Logged
Stephen Gordon
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posted 12 December 2003 06:53 PM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
Cougyr's next to last post:

OK, so a Japanese importer has to buy USD to buy oil from Saudi Arabia. This purchase increases the demand for USD, and so its price goes up.

My point is that this is not the end of the story. What does the Saudi oil exporter do with his (ordinarily I'd say his/her, but that doesn't seem appropriate in this context...) newly acquired USD? If he uses it to buy goods, services and/or assets from the US, then there will be no subsequent downward pressure on the USD. But that's only because the Saudi importer wanted US goods, services and/or assets - see my previous post.

Now suppose that the Saudi want to pay his workers, or wishes to buy yet another mansion on the French Riviera. Either way, he has to get rid of his USD in order to obtain the currency he needs. This means that he has to *sell* his USD holdings, so there will now be downward pressure on the USD.

If the initial purchase of USD required to buy the oil is counterbalanced by the subsequent sale of USD on the part of the oil importer, then there will be no sustained increase in the value of the USD.


From: . | Registered: Oct 2003  |  IP: Logged
SHH
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posted 13 December 2003 03:01 AM      Profile for SHH     Send New Private Message      Edit/Delete Post  Reply With Quote 
I have a trade deficit with Safeway
quote:
If the two balances, trade and federal, are not the most important and reliable indicators of economic performance and prospects, what are the preferable harbingers of things to come? These would include the rate of growth in productivity (both labor productivity
and “total factor productivity”) insofar as we are able to measure it in an economy in which information is a key input; the economy’s
“openness” to competition (in terms of numbers of new start-up firms, openness to competition from imports, and limited and clear
regulatory restrictions); the level and growth of employment opportunities; the state and progress of the educational system; the stability and predictability of the money supply, the price level, and the currency’s exchange value; the level and rates of change in domestic savings and investments; and, as a summary, aggregate measure, the economy’s rate of real economic growth.
Challenge the message, rather than the messenger.

[ 13 December 2003: Message edited by: SHH ]


From: Ex-Silicon Valley to State Saguaro | Registered: Oct 2001  |  IP: Logged
MacD
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posted 13 December 2003 12:45 PM      Profile for MacD     Send New Private Message      Edit/Delete Post  Reply With Quote 
quote:
Who might have an incentive to limit the power of the Euro?

Countries that haven't joined it in Europe.


Which of the European coalition members (U.K., Italy, Spain, Denmark, Netherlands...) have or have not signed on to the Euro?


From: Redmonton, Alberta | Registered: Apr 2002  |  IP: Logged
Catus
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posted 14 December 2003 12:41 AM      Profile for Catus     Send New Private Message      Edit/Delete Post  Reply With Quote 
Great Britain, Sweden for sure and I think Denmark as well. All expansion nations were required to join the Eurozone prior to admission in to the EU.

About the US dollar.
http://www.weeklystandard.com/Content/Public/Articles/000/000/003/473kshep.asp


From: Between 234 and 149 BCE | Registered: Nov 2003  |  IP: Logged
Pogo
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posted 14 December 2003 03:21 AM      Profile for Pogo   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
Getting back to currency choices, I am not convinced by the macro economic arguments. As said above if I have to buy US dollars to pay a bill and the foreign company I pay then sells these dollars the net effect on the US economy is minimal. I am willing to consider that there are macro economic arguments about the currency exchange, but I would guess that they would be fairly complicated and deal with money supply volumes and such.

To me the biggest benefit of a foreign nation asking for payment in US dollars is the subtle effect this has on other business dealings. If enough money is needed in a particular currency, it justifies having an account set up in this currency This lowers the transaction cost and allows hedging(cost uncertainty is an expense). to minimize currency fluctuations. To the extent that these are a benefit (lets say 3% per transaction for example) it is a disincentive or surcharge to do business in other countries' currency.


From: Richmond BC | Registered: Aug 2002  |  IP: Logged
Stephen Gordon
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posted 14 December 2003 10:05 AM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
This is pretty much the reserve currency story. If everyone decides to hold a certain amount of USD for reasons that have nothingto do with buying US goods or assets, then the price of the USD will be higher than what trade flows would explain.

When I was a graduate student in the mid-80's, the USD was - by any measure anyone could think of - overvalued, and many were trying to explain why. An interesting hypothesis was the role of the USD in the drug trade. The idea was that almost all transactions were denominated in USD, and those guys wanted cash. That meant that there was a large stock of US currency circulating throughout the world that was always being used to finance drug transactions, and was never actually used to buy US goods and services.

I don't know what happened to that idea. Among other things, getting reliable estimates would have been a challenge.

I wonder how many drug deals are done in euros these days.


From: . | Registered: Oct 2003  |  IP: Logged
Tackaberry
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posted 14 December 2003 11:37 AM      Profile for Tackaberry   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
Any drug buying, err, my friends have done was in Cdn dollars.

But yeah that's interesting about the global drug trade. Is it true though, or is it a Hollywood thing?


From: Tokyo | Registered: May 2001  |  IP: Logged
Stephen Gordon
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posted 14 December 2003 01:10 PM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
That's the thing - it sounded plausible, but I don't know if anyone came up with hard evidence.
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SHH
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posted 14 December 2003 10:33 PM      Profile for SHH     Send New Private Message      Edit/Delete Post  Reply With Quote 
Exchange rates among the large western economies are almost exclusively a function of the interest rates set by the Central Banks. The Euro is gaining against the dollar because Euro bonds pay a higher interest rate. It has to yield more because it’s more risky and Europe is in more danger of the ‘liquidity trap’ we’ve seen in Japan.. Soros is aggressively ‘shorting’ the dollar (some say it’s his hatred of Bush).

But the US isn’t like Asia, or Mexico, or Argentina because its foreign debt is in dollars, thus the US can’t get hit with the double-whammy seen in these other countries.

Productivity, GDP, Consumer Confidence; those are the numbers that matter. The rest is just financing.


From: Ex-Silicon Valley to State Saguaro | Registered: Oct 2001  |  IP: Logged
Hinterland
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posted 14 December 2003 10:44 PM      Profile for Hinterland        Edit/Delete Post  Reply With Quote 
quote:
Challenge the message, rather than the messenger.

Apparently, no one took you up on that, eh, Shh? Your disappointment must have been acute. Anyway, where did Soros enter into this discussion? By the way; all economists have no idea what they're talking about -- pass it along.


From: Québec/Ontario | Registered: Apr 2003  |  IP: Logged
MacD
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posted 14 December 2003 10:55 PM      Profile for MacD     Send New Private Message      Edit/Delete Post  Reply With Quote 
quote:
By the way; all economists have no idea what they're talking about

They know what there talking about. It's just that what they're talking about has such a tenuous connection to reality.


From: Redmonton, Alberta | Registered: Apr 2002  |  IP: Logged
Stephen Gordon
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posted 14 December 2003 11:15 PM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
quote:
Originally posted by MacD:

They know what there talking about. It's just that what they're talking about has such a tenuous connection to reality.

Ever talked to an economist?


From: . | Registered: Oct 2003  |  IP: Logged
humbleman
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posted 14 December 2003 11:21 PM      Profile for humbleman     Send New Private Message      Edit/Delete Post  Reply With Quote 
Hinterland

Well said hinterland, ecomonics is a social science.


SH

Come on the spread between US + Canada rates is 2.00% or so. That does not explain the dollars drop. When the US was dropping rates everybody else was dropping rates too so the relative spreads were similar. People are getting worried about twin deficits in the US. Call me crazy but I kinda think the US trade deficit is a structural thing because of the export of a sizeable part of US manufacturing base.

As for the liquidity trap worries, if europe was concerned about a that they would have rates at japanese levels. The bubble was centered in the US not Europe.

Off the top of my head(ballpark figure)

Japan .15%
US 1.00%
Europe 2.50%


BTW does anybody know any examples of the "carry trade" in action.

I am fimiliar with the US treasury carry trade, burrow short lend long. And the yen/USD trade, borrow yen at .25% convert to USD and buy short term securties at 1.00% or so. But I suspect hedge funds playing the yen/USD trade are getting nervous. The japanesse are losing the battle in trying to strengthen the USD vs. yen.


From: Oakville | Registered: Oct 2003  |  IP: Logged
the grey
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posted 15 December 2003 12:51 AM      Profile for the grey     Send New Private Message      Edit/Delete Post  Reply With Quote 
quote:
Currently, they ship $60B out of the country every month through buying imports.

And how much of the profits are shipped back to the American shareholders of Trans / Multi National Corporations?


From: London, Ontario | Registered: Jan 2003  |  IP: Logged
Stephen Gordon
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posted 15 December 2003 08:46 AM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
Not as much as you may think.

The data are here:

http://www.bea.doc.gov/bea/international/bp_web/simple.cfm?anon=136&table_id=1&area_id =3

The 2003Q2 numbers:

Line 2 - Exports = 247 b$
Line 19 - Imports = 371 b$

So there was a trade deficit (Line 73) of 123 b$.

How much was sent back as profits? It's on Line 12 - 63 b$

But that's not the end of it; 61 b$ (Line 29) of profits were also taken out of the US. The net gain for the US (Line 74) was 2 b$ - compared to a statistical discrepancy of 9 b$ (Line 70).

You can get some regional breakdowns here:

http://www.bea.doc.gov/bea/international/bp_web/list.cfm?anon=136®istered=0

The trade balances are still on Line 73 and net income flows are on Line 74.


Latin America:
Trade deficit = 16 b$
Income deficit = 2 b$

Other Asia-Africa:
Trade deficit = 56 b$
Income deficit = 1 b$

In both of these regions, the US ran a trade deficit, and there was a net income flow *out* of the US.

So the US isn't using profits from abroad to finance their trade deficit. What's happening? Foreigners are buying up US assets. US holdings of foreign assets (Line 40) increased by 107 b$, but holdings of US assets by foreigners increased by 255 b$ (Line 55). The net gain on the part of foreigners was 149 b$.

[ 15 December 2003: Message edited by: Oliver Cromwell ]


From: . | Registered: Oct 2003  |  IP: Logged
humbleman
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posted 17 December 2003 11:53 AM      Profile for humbleman     Send New Private Message      Edit/Delete Post  Reply With Quote 
http://quote.bloomberg.com/apps/news?pid=10000080&sid=aT7obCQ0DD7s&refer=asia

Update from the currency wars. The dollar is in retreat on the Euro front. Japan rallies in defence of the dollar and reinforces. So far this year the Japanesse have sold 120 billion worth dollars of yen in keeping the yen from rising. They are running out of cash for market operations and are going to get more. Warchest of $372 USD billion is being built for next 15 months. Think about the fact that the Canadian government spends 170 CDN(around there) on all budget items(military/health/etc). The Japanesse are saying they will spend 3 times that amount in defending the dollar/cheapenig the yen. Things are getting kinda crazy now.

Japan Will Seek $372 Billion to Stem Yen Gains (Update3)
Dec. 17 (Bloomberg) -- Japan's government will seek authority to sell at least 40 trillion yen ($372 billion) of its currency in the coming 15 months, more than twice the amount it has spent this year to stem the yen's gains against the dollar, two Ministry of Finance officials said.

Japan spent a record 17.8 trillion to curb the currency's 11 percent rise against the dollar, adding to that amount as recently as last week when the yen reached a three-year high of 106.74 per dollar. Budgeting the money may show that Japan is determined to protect exporters including Canon Inc. and Sharp Corp., which drove six quarters of economic growth.

The government is ``clearly saying there is no limit to these funds, so they remain a force,'' said Steven Saywell, senior currency strategist in London at Citigroup Inc., in a televised interview with Bloomberg News. ``We should be nervous of intervention.''

About 21 trillion yen of the allocation would be included in a supplemental budget for the fiscal year ending March 31, and the rest would be part of the budget for the coming fiscal year, the ministry officials familiar with the plans said.

Hiroshi Watanabe, director-general of the finance ministry's International Bureau, confirmed that the ministry would seek additional money next fiscal year to buy foreign currencies, though he declined to comment on the amount.

The yen was at 107.65 to the dollar at 10:12 a.m. in London, from 107.50 yen in New York late yesterday. The dollar's drop against the yen this year has been smaller than its 15 percent slide against the euro.

Group of Seven

``The dollar would have dropped more and faster against the yen should Japan have stayed away,'' said Junya Tanase, a currency strategist at J.P. Morgan Chase & Co. in Tokyo. ``Look how much more the dollar has dropped against the euro.''

read the entire article its interesting, the amounts of money involved are getting utterly huge.

[ 17 December 2003: Message edited by: humbleman ]


From: Oakville | Registered: Oct 2003  |  IP: Logged
arborman
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posted 17 December 2003 12:06 PM      Profile for arborman     Send New Private Message      Edit/Delete Post  Reply With Quote 
Utterly huge and ultimately unsustainable.

Admittedly the beneficiaries of that trade deficit will work to keep it going, but things that can't go on forever, won't.

I ask again, what are WE in Canada going to do to mitigate the effects on us when the collapse does come (if it does, there are no certainties).


From: I'm a solipsist - isn't everyone? | Registered: Aug 2003  |  IP: Logged
rasmus
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posted 17 December 2003 01:17 PM      Profile for rasmus   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
Canada doesn't have jackshit for a policy. The weak dollar has also meant the government could get away with not having an industrial policy. It still has no industrial policy.

As for the Japanese announcement -- announcements of this nature are meant to have the effect of the actions they announce, obviating the need to go through with some or all of said actions. The market is a coordination problem in which the assessment of probabilities is influenced not only about your beliefs about the facts, but your beliefs about others' beliefs about the facts, and so on. If the Japanese announcement looks credible, then it is reasonable to believe that it will look credible to others. Then it is reasonable to believe that there will be relatively fewer buyers of yen than there would have been had the announcement not been made. Which means that the Japanese government will likely have to spend less money than it otherwise would have.

I believe the Japanese are prepared to use that quantity of money to keep the yen down, but obviously they are hoping they won't have to.


From: Fortune favours the bold | Registered: May 2001  |  IP: Logged
humbleman
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posted 17 December 2003 02:42 PM      Profile for humbleman     Send New Private Message      Edit/Delete Post  Reply With Quote 
Since our elite bought into the idea of "let the market decide" its difficult to have an policy. Actually we have had a sort of policy in the last 20 years. Namely economic intergration into the US, lower trade barriers in North America and then let the market decide.

Lets recap. Canada depends for roughtly 30% of economy on exports. Something like 80 to 85% of these exports go to the US. Now if one accepts that there is big USD dollar correction coming you have to conclude, looking for just the right phrase here, we are screwed big.

I suspect that there may more talk of dropping inter provincal trade barriers. Long over due considering we are a country. Hopefully this could mean that trade flows internalize a bit. And then start looking for markets outside the US. And here is the real bankrupty of the policy of the last 20 years. Canada has bet it all on the US and now we will pay.

First of all if one accepts that the US trade deficit must come down, one must accept the fact that 500 billion in global demand will disappear. Canada will take pretty good hit. Becuase Europe will not accept 500 Billion trade deficits, the local would riot a bit too often. Canada will not accept a trade deficit of any real magnitude.

I dont doubt for a second that Japan will spend 342 USD billion and go for more. At the end of the day the Japanesse are savers, they have never welcomed foriegn capital. If your population saves alot you dont need foreign money and are not held hostage to your domestic bond market.


From: Oakville | Registered: Oct 2003  |  IP: Logged
arborman
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posted 17 December 2003 03:30 PM      Profile for arborman     Send New Private Message      Edit/Delete Post  Reply With Quote 
And yet when I go to a grocery store in August, in Vancouver, I can't find peaches from BC. They are all shipped up from California etc.

Buy Canadian is a very important first step. We should also take advantage of the low US dollar to upgrade equipment etc. as much as possible while we can.

We should also look at new ways of structuring our economy, but I'm a realist and Paul Martin is PM.


From: I'm a solipsist - isn't everyone? | Registered: Aug 2003  |  IP: Logged
hibachi
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posted 17 December 2003 05:01 PM      Profile for hibachi   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
If we move from a Trade-based economy to a Service-based economy, we will be less vulnerable to what goes on in the outside world.

That includes serving each other as human beings. Serving the old and the young and the weak and the vulnerable. There is tons of work to be done in this field.

In addition, there is tons of work to be done in cleaning up the environment and improving the social and economic infrastructure.

Should we suffer a 30% drop in living standards, we will still be better off than most countries in the world. We will still have enough to eat, and we will still have shelter and clothing. Some people might have to live more modestly, but they will get used to it as many of us already have had to.

Improving interprovincial trade will be of some benefit, and so will opening up of foreign markets. However it looks like the market will take care of those things, as the Chinese and the Indians will want more of our resources and maybe even cars and car parts.

Because of the very fact that we have a smaller population, we can adapt more quickly to new circumstances, and in the right conditions we can grow like any Asian tiger.

If the world loses confidence in the US dollar based on their trade and fiscal deficits, they will see Canadian trade and fiscal surplusses, and that we are still very much open for business. This will also mean that trade with the US will decline, as part of the market taking care of things. I.e. the Canadian dollar climbing to par (and even above) its US counterpart.

Losing a US market to a much newer market that has a lot further to grow will only be a benefit. Our talented and multilingual population will be able to service that market well. We have been preparing for this as a society for a very long time, even while our Anglo-Franco establishment has been been moderately comatose at the switch.


From: Toronto, Ont. | Registered: Jul 2001  |  IP: Logged
SHH
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posted 17 December 2003 09:22 PM      Profile for SHH     Send New Private Message      Edit/Delete Post  Reply With Quote 
quote:
SH
Come on the spread between US + Canada rates is 2.00% or so. That does not explain the dollars drop. When the US was dropping rates everybody else was dropping rates too so the relative spreads were similar. People are getting worried about twin deficits in the US.
It’s all ROI, Humbleman. ROI vis-à-vis risk. Nobody seriously thinks any of the large Western economies are going into full tail spin anytime soon, so the risk is much the same.

That gets us back to ROI, or, interest rates. The spot rate of any given day is meaningless; it’s the trending that can tell a story. The EU/Dollar discount/premium trend of late seems to suggest that bond holders think the ROI, for the average maturity period of their particular brand, will do better in Euros. Seems logical. Eurobonds are generally yielding a higher rate and there’s a much better chance than not that it will stay that way. [I’m greatly over-simplifying here because Eurobonds aren’t necessarily denominated in Euros!]

The US GDP is growing faster overall and accelerating even faster. Despite this, there is no sign of inflation because productivity is also up sharply. Thus, no need to raise rates...even on the horizon.

Europe faces a different set of facts.

quote:
The United States had the highest annual growth rate (3.6%) while France and Germany had the lowest (-0.2%).
Facts that Michael Milken might best summarize by saying:There’s a reason junk bonds pay 20%!

If I were a reactionary bozo I’d scream this was proof that the Euro was finished...that this recent ascension was just proof that the vultures of the doomed-and-desperate were picking the bones of the terminal at their most desperate moment. Soros would never do such a thing, eh?

While the twin deficits of the US are real, and maybe even important, there are the two other twin deficits of stagnant growth and chronically sustained unemployment that are important as well. I think more important.

It might strike some as counterintuitive, but, there’s hardly anything a US based multi-national CEO hates more than a strong dollar.

[ 17 December 2003: Message edited by: SHH ]


From: Ex-Silicon Valley to State Saguaro | Registered: Oct 2001  |  IP: Logged
humbleman
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posted 17 December 2003 09:57 PM      Profile for humbleman     Send New Private Message      Edit/Delete Post  Reply With Quote 
hibachi,

I dont want to give the impression that I am doom and gloom because I am generally a half full glass kind of guy. But I just believe that the US trade deficit will correct eventually, maybe this is not even the great dollar correction people are talking about. I really dont know. What I do know is that we have a heavily intergrated economy with the US. As things stand we sink or swim with them for the moment. Even if some sort of diaster occured I dont think we get dinged for 30%. What ever happens things will turn out ok we just have to avoid reactionary politics if things get tough.

As for the service economy I am not really sure that will be the answer. It sounds good in theory but all the countries crowing about service economies are running serious current account deficits ie US/Britian. And the British are about to get more serious as the decade progresses, their energy resources are running out in the north sea. I think I read that by the end of the decade the they will be net importers of energy products. Going from a net oil exporter to importer will make the situation worse. My problem is that you have to trade value for value. I guess the west can buy asian manufacured goods but what exact service will the chinesse accept in return? Maybe its the answer but I am not convinced at the moment.

SH,

there is much to say on the subject but I must hit the gym so for now I would adress the return on investment.

Lets look at the Japan, one of the articles I posted in this thread talked about japan spending 120 billion USD this year to cheapen the yen. Plus another 342 billion USD waiting for the next 15 months.

I am not sure how return on investment could explain why the Japanesse are throwing away money to keep the dollar strong vs the yen. Somebody on the other side is demanding yen in huge numbers, it cannot be because they want to buy Japanesse securities yielding almost nothing. I remember even I think 2 years ago the bank rate dipped into negative yields. In theory the japanesse central bank was paying people borrow yen. What exactly is the rate of return in japan these days. A large segement of the banking sector and commerical sector in general are bankrupt. The only reason they are alive is that the banks giving away yen at .15%. The demographics of the country are worst of any western country. And still foriegners are beating each to own yen. You mentioned the liquidity trap, but everybody still wants yen. How does this fit in your general theory that its all to do with ROI.

[ 17 December 2003: Message edited by: humbleman ]


From: Oakville | Registered: Oct 2003  |  IP: Logged
DrConway
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posted 18 December 2003 01:20 PM      Profile for DrConway     Send New Private Message      Edit/Delete Post  Reply With Quote 
quote:
Originally posted by hibachi:
If we move from a Trade-based economy to a Service-based economy, we will be less vulnerable to what goes on in the outside world.

We need manufacturing. Not just services.

Addendum:

I'm not sure why Japan needs US dollars to "cheapen the yen". If Japan wants to drive the value of the yen down against the US dollar, all it has to do is print money until the world is awash in yen - and it'll go from 100 to the US dollar up to 200, to 300, or whatever.

[ 18 December 2003: Message edited by: DrConway ]


From: You shall not side with the great against the powerless. | Registered: May 2001  |  IP: Logged
Rufus Polson
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posted 18 December 2003 01:48 PM      Profile for Rufus Polson     Send New Private Message      Edit/Delete Post  Reply With Quote 
quote:
Originally posted by DrConway:

We need manufacturing. Not just services.

Addendum:

I'm not sure why Japan needs US dollars to "cheapen the yen". If Japan wants to drive the value of the yen down against the US dollar, all it has to do is print money until the world is awash in yen - and it'll go from 100 to the US dollar up to 200, to 300, or whatever.

[ 18 December 2003: Message edited by: DrConway ]


Agree entirely on manufacturing. You can't have a pure service economy--it's like those mythical guys on an island getting rich by trading hats with each other.

I was wondering about the printing-money solution, too--but I think the point of the announcement is more to head off any clever-clever ideas by currency traders at the pass so they don't have to spend the cash in the first place. But you'd think Japan could use a little dose or two of inflation anyway.


From: Caithnard College | Registered: Nov 2002  |  IP: Logged
Stephen Gordon
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posted 18 December 2003 08:23 PM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
quote:
Originally posted by Rufus Polson:

Agree entirely on manufacturing. You can't have a pure service economy--it's like those mythical guys on an island getting rich by trading hats with each other.


Sure you can - if you can trade your services for manufactured goods produced elsewhere.


From: . | Registered: Oct 2003  |  IP: Logged
SHH
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posted 20 December 2003 04:00 PM      Profile for SHH     Send New Private Message      Edit/Delete Post  Reply With Quote 
Some reading.

And more.

What is pushing the yen higher is better answered with what is pushing the dollar lower. It’s the trend from where it was to where it is that needs explaining. As you note, BoJ has been at near-zero rates for years. The US Fed interest reductions were more recent thus the relative shift. Also, lately, is appears Japan may have suffered enough to now rebound, while the US has moved less so with its budget and trade deficits. My ROI thesis assumes relatively stable levels of risk and comparable situations; Japan is an altogether unusual situation both in stature and policy precedents.

The BoJ is so inflation adverse that the printing of more Yen never even occurs to them.

Japan and the UK finance the US debt. That makes them stakeholders because the financial instruments are denominated in Dollars. So they sell the US a Toyota for a thousand sweatshirts and an IOU. (The shirts actually come from China, but I’m trying to over-simplify). The IOU is cashed in at Riyadh and the DOLLARS are shipped to the Bank of London. It’s all Dollars in the end; ie, the Mother’s Milk. It’s a systemic advantage that the US will never relent.

Remember when Baker (the ‘Godfather’) met with Nakasone? China and Japan sure do. Chirac and Schroeder just got a taste as well. A call from Baker is rarely a good thing.

[ 20 December 2003: Message edited by: SHH ]


From: Ex-Silicon Valley to State Saguaro | Registered: Oct 2001  |  IP: Logged
person
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posted 20 December 2003 04:33 PM      Profile for person     Send New Private Message      Edit/Delete Post  Reply With Quote 
quote:
Originally posted by Oliver Cromwell:

Sure you can - if you can trade your services for manufactured goods produced elsewhere.



maybe if you had a really small population. for canada or any other country with more than 500 people, not at all (not considering tourism which is not really a sustainable or desirable option anyway).


From: www.resist.ca | Registered: Nov 2003  |  IP: Logged
hibachi
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posted 20 December 2003 05:02 PM      Profile for hibachi   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
Although the BoJ may not 'print' Yen, they seem to have an inexhaustible supply of them when they need to prop up the US dollar. Where do all these Yen come from?
From: Toronto, Ont. | Registered: Jul 2001  |  IP: Logged
Stephen Gordon
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posted 20 December 2003 05:22 PM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
David Andolfatto is one of the best young economists in Canada. His response to this point is over here.
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DrConway
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posted 20 December 2003 06:14 PM      Profile for DrConway     Send New Private Message      Edit/Delete Post  Reply With Quote 
I don't see that deflation has particularly helped Japan, and furthermore, Andolfatto's piece clearly shows that his "lens" is rather biased towards the interests of rentiers, who would rather not see a fall in the value of money, since this in turn means their assets become eroded away over time.

Oopsie. I guess watching Japan's unemployment rate creep up steadily over the years is preferable to seeing a few asset-holders get wasted in the process of putting Japan back on an even keel.


From: You shall not side with the great against the powerless. | Registered: May 2001  |  IP: Logged
Stephen Gordon
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posted 20 December 2003 08:37 PM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
I'm pretty sure you misunderstood Andolfatto's article. His point was not that increasing the inflation rate in Japan wouldn't be a good idea. The problem is that the BoJ doesn't have the tools to do it on its own. The yen it prints has to find it way into the economy, and that can't happen unless the Ministry of Finance gives its OK. And the Japanese government - like many others - has been known to focus such largesse on its political base.

[ 20 December 2003: Message edited by: Oliver Cromwell ]


From: . | Registered: Oct 2003  |  IP: Logged
humbleman
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posted 21 December 2003 09:56 PM      Profile for humbleman     Send New Private Message      Edit/Delete Post  Reply With Quote 
Folks your in for a treat. I ran across an article in May from the Federal Dallas Reserve Bank. I looked around and I found it on there web site

http://www.dallasfed.org/research/indepth/2003/id0304.pdf

Almost same article but this time its an offical document released by the bank.

http://www.dallasfed.org/research/swe/2003/swe0304a.pdf


Among other thingd they are talking about the infamous "carry tax", I first heard about it in late 2002.

[ 21 December 2003: Message edited by: humbleman ]


From: Oakville | Registered: Oct 2003  |  IP: Logged
Stephen Gordon
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posted 21 December 2003 10:56 PM      Profile for Stephen Gordon        Edit/Delete Post  Reply With Quote 
Those are good surveys. And I'd never heard of the 'carry tax' idea before. An interesting way around the zero nominal interest rate barrier, but implementing it would be quite another matter.
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Pogo
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posted 21 December 2003 11:58 PM      Profile for Pogo   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
Liked the article, but I was left wondering why the author believed currency devaluation was such a difficult task.
From: Richmond BC | Registered: Aug 2002  |  IP: Logged
humbleman
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posted 07 January 2004 03:30 PM      Profile for humbleman     Send New Private Message      Edit/Delete Post  Reply With Quote 
http://biz.yahoo.com/rf/040107/markets_forex_intervention_1.html

Another undate on the currency wars. Japan spends 28 billion USD over 2 days but dollar still weakens.

As for why it is difficult to devalue a currency? Because your trading partners can decide to devalue their curriences at the same time. So relative to each other the currencies stay the same. Only a nominal devalution.


From: Oakville | Registered: Oct 2003  |  IP: Logged

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