Re: Greenspan concerned with weak dollar

From: devil (devil_at_attglobal.net)
Date: 11/21/04 

Date: Sun, 21 Nov 2004 16:41:01 GMT

On Sun, 21 Nov 2004 09:14:27 -0700, AbsolutelyCertain wrote:

>
> "W_B" <no_one@nowhere.net> wrote in message
> news:bkl1q05j073ius51mo372cfkj0ghakt4j2@4ax.com...
>> On Sun, 21 Nov 2004 02:34:01 -0800, Icono Clast <IClast@jps.net>
>> wrote:
>>
>> >The only way I can imagine paying off the Bush/Republican-created
>> >debt is through significant inflation which I expect we'll see quite
>> >soon,
>>
>> Nope, you can grow the economy out of deficit.
>> You cannot tax your way to prosperity.
>
> A greatly oversimplified and misleading description.
>
> You cannot "grow" the economy, it will grow or shrink as it pleases. It is
> largely intractable, whether you are talking about the short, medium or long
> term. If it were manageable and predictable, we'd all be rich as Cresus.
>
> Taxation, on the other hand, is entirely under our control. We have the
> power to tax and spend responsibly with an eye toward fiscal health and
> appropriate debt management. We don't actually do it, but we have the
> opportunity to do so. (Distracted by phony "values" issues and a useless
> "war on terror," we are sitting here letting the worst wolves in history
> clean out the henhouse while nobody pays attention. Pork barrel spending is
> out of control, and the Republicans have invented new and more efficient
> porcine giveaways. Taxation is shifted from progressive to regressive, and
> the gummint spends like a drunken fishing boat crew.)
>
> Whereas there is no opportunity to tax one's way to prosperity, either by
> raising, or lowering, taxes.
>
> A tumbling dollar and hideously rising national debt are going to do much
> more damage to your prosperity than a dozen of those manipulative, useless
> tax cuts are going to be able to undo. Even with the dollar's precipitous
> decline, you can lie awake tonight knowing that the decline would be worse
> without foreigners propping up the dollar. If they stop doing that, you're
> screwed. Your little George Bush annual spiff is not even going to buy you
> a cart full of groceries and tank of gas.

The dollar falling is in a way a huge tax. Basically, it's a devaluation
of all assets denominated in US dollars. Which pays for the debt
reduction that also occurs as a result of the drop in the value of
dollar-denominated debt.

Of course, that line of argument brings up the issue as to how you do your
valuation. If you take the view that the USD is your yardstick, then
there is no loss. That view is, however, a bit of wishful thinking, at
least in the sense that what you can purchase with your dollar drops whem
it gets devalued. Both because the price of imported stuff goes up and
because the raise in price of imports feeds either into inflation or a
growth of interest rates. The "either" having to do with a choice between
protecting investors or borrowers from the effect of the drop.

There was of course a time when foreign trade was very marginal to the US
economy. To the extent that nowadays, foreign trade or at least imports
is mostly with Asian countries which have pegged their currency to the
USD, the imbalance remains mostly within the dollar block, for which
foreign trade still may be relatively marginal. Thus the scenario above
may not be happening yet.

However, countries such as China will not be able to maintain the parity
with the dollar forever, or if they do, they will be subject to inflation
because of the increase of USD-denominated resource prices. So either the
price of the junk imported from China will go up or, more likely I would
say, China will let the RMB float or at least go up. China can't go on
financing the US deficit and the Iraq follies forever. I suspect a good
deal of the current drop in the USD is because China is diversifying their
debt holding and selling papers denominated in USD.

When the USD was king, the US did get a bit of a free lunch. But these
times are over, I am afraid (not).
  

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