Remember a few weeks ago when the pundits were screaming about OUR high dollar .... at 1.10 US no less!
Even before that when the Sawbuck dropped to parity with the loonie!

So let's see how this so called crisis plays out.

I predict that heavily subsidized EU industries will be threatening massive layoffs and shutdowns unless further subsidized. Labour groups will be wailing and demanding government intervention to support them. Industries and governments will demand protectionist tariffs and more such plays from the the old European Handbook of flimsy economic policy.

While the correct course of action would be to buckle down and tough it out. For the unions to give up their ridiculous expectations and entitlements. For businesses to make the necessary adjustments and restructuring. For governments to reduce the strain on the economy of taxation. etc......
I predict that they will do all the wrong things .... just like they always do.

All of europe's good people are over here anyway... Screw the rest.

I'd love to see the yanks pull their bases out of europe.

Yurop??? Sorry, I'm wondering why we should care. Last time I looked Canada's trade with that continent was minimal (due to the aforementioned subsidies) and their interest and intent in fulfilling their obligations to us under NATO were laughable.

#^$& 'em.

This can be really well illustrated by watching the spread between what is known as Club Med bonds those issued by Mediterrean states such as Italy, Greece,Spain,Etc. And Germany. The stronger economies can't forever keep supporting their weaker cousins. The bund is heading higher yields dropping like a stone vs the Club Meds which are dropping in price and yields moving higher. No one wants the risk. It is so serious that many wonder if EU can hold together.

As is typical in Europe, lots of calls for regulation especially currency regulation. Wanna see europe hit a wall and money run away fast really really fast. Put in currency controls.

Sarkozy seems to be the only one with some kinda clue. The strikes he is battling and seemingly winning is to rationalize the Unions in other get the governments finances in order and the people appear to be with him. However he is advocating currency controls of some kind and has been for sometime.

What puzzles me is I get the chance to chat with joe average EU guy. Belgian, German, and Danish all seem to be quite happy with the EU thing. So who knows.

Basically in my opinion if they don't get this social welfare stuff under control cut taxes and shrink government they are toast. Cradle to grave is gonna put em in their grave as it where.

A cheaper US dollar means, theoretically anyway, a huge jump in competitiveness of US exports on world markets. It also dampens the effect for the American economy of the huge jump in oil prices, since the rising oil prices are paid for with falling dollars. It also makes imports to the US more expensive and less competitive to domestic US products.

Since Canada's economy tends to mirror the US economy, with a lag time in the cycle, I'd guess the benefits of the falling US$ will overall outweigh the costs of the rising Loonie. This is particularly so since such a large proportion of Canadian exports to the US are raw materials and since we have NAFTA to buffer our bilateral trade from the severe vicissitudes of the global markets.

If OMMAG is correct in his predictions of the EU trying to enhance European protectionism that will ultimately backfire on Europe, my guess is that OMMAG is right.

I'm speaking from the vast background of two semesters of Economics. And of course, the old joke is that if you get any two economists together to discuss any economic topic, you'll get three opinions.

We've got a lot of smart and sensible folks here at SDA. Does anyone have any other comments on all this?

For the past 50 years the American dollar has been the world's reserve currency. That worked well for decades but now that the greenback is in virtual freefall every other unpegged currency goes up in value in relation to the Yankee buck. It's NOT that the other currencies are so strong it's that the American dollar is so weak and unfortunately it's destined to become even weaker. The reason the American dollar is weak is that Ben Bernanke and the Federal Reserve are currently creating many tens of billions of new dollars out of thin air and the law of supply and demand dictates the more there is of anything the less value that thing has. The reason Bernanke has to create these many billions of new dollars every day is that the USA is running a massive current account deficit and foreign investors and governments are no longer willing to finance that deficit. This means the deficit must be financed from within which results in printing tens of billions of new dollars. The more dollars printed the less value each dollar has. A vicious circle indeed.

You really should have a pic of a Turkey up with this.

I got back from Germany last week and would like to casually mention that my family and friends there roll their eyes when the EU is mentioned. Most prefer that Germany should reestablish its own currency if only to create an image of a "keystone" like strength and stability in a tenuous union of bickering and in quite a few cases weaker and/or less viable states. I think more accurately, their sentiment lies mainly to separate Germany from a sinking ship so as not be dragged down with it.

Anyway, I remember something Helmut Kohl had said years ago which stuck to me. He said (paraphrasing) that without the EU, Europe would descend inevitably to waring factions yet again. I decided to do a search on this, to refresh my memory, and I came up with this article: http://findarticles.com/p/articles/mi_qn4158/is_19960203/ai_n14026648

The article in summation; Kohl feared a reemerging Germany as a "superstate" would be perilous to the fate of Europe. Although, in this matter I cannot agree with Kohl (much as I like and respect him I don't see a powerful Germany leading necessarily to a bad outcome) I can only conclude, the more things change, the more they stay the same.

Thanks for posting that article, Kate.

In % terms, the US Deficit is really quite small - less than 1.5% of GDP, smaller than pretty much any European country (not inc the UK), but that is still a damn big absolute number. The US$ is getting a lot of hate lately, some of it based on real economics, some on pure politics. The problem for the Euro is not that it has gone up (it was too low in 2001) but rather that it has gone up so fast, and does not have the economic strength to justify it. Sure Germany has finally put the eastern wing of its house in order (and that was a decade long suck on the German/Euro economy, but even there consumers are feeling a real inflationary pinch. The Germans a being great exporters, but lousy consumers. The US the opposite - and neither is sustainable.

Farmers and wine makers get charged with criminal misconduct when they add some water to their products diluting it.

Yet finance ministers in countries can arbitrarly add dollars to the money supply, thereby diluting the most important product a country can produce - money (ok, after food).

Fiat currencies backed only by the BS of elected governments are not good for the workers in any country in the long run.

The US negative balance of trade that has gone on for yrs and now increased by the trillion dollar war, has weakened the US economy to the point of being next to useless to help control the world's economy.

A smug Europe and a host of other smaller world events is combining to make the Perfect World Economic Storm of 2008-2011.

Talk of $200/bbl oil, possible disruptions in world oil supply, nuclear capability in nations with marginal leaders, poor world grain crops, and general world turmoil, subprime mortgage economics, China's currency manipulation, Darfur and Africa in general, Iraq and Afghanistan, India and Pakistan, all combine for a major world headache.

And then add 'leaders' like Chavez (the dolt who has absolutely no comprehension of what $200 oil would do to HIS OWN economy), Rotten Robert Mugabe, the North Korean idiot, and the religious idiots, etc.

We may be the unfortunate ones to find that Kondratiev's economic cycle is real after all.

One of the things that I believe is happening to the US dollar, and this is just a theory because I haven't seen anyone else with this opinion, is that it is being devalued by counterfeiters.

There ar huge but unknown numbers of fake American dollars in circulation around the world. In the recent deal between N Korea and the US over nuclear power, the US demanded that N Korea stopped printing fake American Money. The defacto currency in the middle east is the US dollar, and most of them are fake. Apparently the governments of Syria and Iran both print US dollars.

What a great way to destroy the economy of your enemies. There is really nothing the US can do about it. When the counterfeiters have the resources of the state behind them, they are making undetectable fake money. The US has no idea what the "money" supply is and therefore no control over the devaluation of their currency.

Holdfast:

The US is the world's leading exporter - the likes of MacDonalds, Coke, Boeing, MS, etc., etc.. They hire non-americans to provide cheaper labour inputs via international subsidiaries.

The devaluation of the US$ vs the rest of the world has very little to do with the EU, or Canada for that matter, and mostly to do with the reluctance of China to revalue the Yuan upwards - much further upwards - from where it is currently.

It is very similar to what the US did to Japan a couple of decades ago.

The lesson that the EU countries are learning the hard way is that control of the money supply has to be at the same level as the highest order of central Gov't - ie - the gov'ts of France, Greece etc. have too much autonomy, and thus as others above have noted they are abusing the system. Look for France and then others to abandon the Euro very soon.

Why don't the EU just use all the US$ to buy a 100 year supply of carbon credits from gore. This way they can save the world and their economy. Win-Win.

It is the debt that they have run up and continue to run that is the issue.

The money presses run becuase they fear deflation.

The Chinese have undervalued their currency. This is not a sustainable position and at some point there will be a big adjustment. The Chinese may well find themselves suddenly priced out of markets and given that they still rely on labour vs capital....will find themselves with an umployment problem like you wouldnt believe. Which of course brings political instability with it.

For the West, well production can be replaced, for the East, demand is harder to replace.

An adjustment needs to happen and it will be painful for all.....but mostly to the Chinese who will find themsleves in an unemployment situation and then a govenrnment that needs to pay for the welfare state in a slack economy (sound familiar)

If the Chinese never revalue then other currencies will continue to fall, eliminating the benefit, and/or the Chinese will find trade barriers finally pop up on them around the world simultaneously.

I was thinking this could last till 2010, but I wonder if we will get out of 2008 without a major currency crisis.

Look for the Chinese to move on valuation post the Beijing Olympics. The US economy is doing just fine BTW - real estate adjustments are being taken in stride - growth continues as does the upwards trends in the stock markets.

The following is an excerpt from an article on investing by John Ing of Maison Placements Canada Nov.23/07. A 6% current account deficit is huge and certainly nothing to take lightly. The choices out of the current mess are cut spending to the bone while increasing taxes or keep creating new money out of thin air and keep inflating. Not a pretty picture.

US Greenback Death Spiral

When Bush took office in January 2001, the national debt stood at less than $6 trillion. Today after tax cuts, war spending and a credit boom, the debt stands at $9 trillion. One of the biggest causalities is the US dollar, which has finally begun its overdue correction as the credit crisis unfolds. However, we believe the dollar's decline is just a prelude to a much more substantial fall given the need to shrink the $750 billion current account gap, which runs almost 6 percent of GDP. The US manufacturing sector has dwindled to less than 20 percent of GDP, worsening America's trade gap to grow. In 1988, the US trade gap stood at $247 billion (when the euro averaged $0.88). Today, the greenback has fallen 40 percent against the euro, but the trade gap has worsened (the euro is close to $1.50). America's trade deficit must be financed by $2 billion of capital a day from the rest of the world. Since foreign investors are no longer buying significant amounts of US stocks or even their paper in the wake of mortgage crisis, the trade deficit must somehow be financed. Former Fed Chairmen Greenspan said the dollar decline may reflect foreigner's reluctance to buy US securities and that, "there is a limit to the extent the obligations to foreigners can reach". We have reached that limit.

At a time when the US requires more than $2 billion a day to finance its bloated current account deficit, the depreciating dollar acts as a disincentive to foreign investors for additional investments in US securities, particularly when they reduce rates. To no surprise, foreign investors dumped their holdings of US securities by a record amount, according to the latest US Treasury figures. To be sure, the dollar has lost its safe haven status as the credit crisis unfolds. In August, total oversea holdings of US bonds, notes and equities fell a net $69.3 billion after a revised increase of $19.2 billion in July. The August outflow surpassed the previous record of $21.2 billion in March 1990.

The United States continues to spend more than it produces. The chronic twin deficits are bloated by war spending and America's insatiable appetite for oil which has caused the trade deficit to explode to almost 6 percent of GDP. Over the last ten years, the consumer accounted for 70 percent of American spending, driven largely by the housing boom and the doubling in property prices. That has ended and now price inflation not asset inflation will plague consumers in light of rising energy, food and higher financing costs.

Ironically the credit crunch started a new bubble. Newly created money is fuelling the boom in global commodities. Currencies are losing value against commodities and gold due to open market operations that sees everyone absorbing excess dollars with newly created currencies. The printing presses are on full steam. Global monetary policies are excessively stimulate as a result of the demise of the greenback, ensuring our intermediate target of $1,000 an ounce. Reflationary forces to end the credit crunch has caused a dollar crunch and investors are looking to hard assets to keep their value. To be sure, the dollar has lost its status as the world's reserve currency.

prospector:

The lower dollar will go a very long way to addressing the trade deficit.

The debt is less as a % of GNP (not GDP - which does not take into account the patriation of earnings from multi-national corps) today than when Bush entered the White House - quite an acheivement consideringt that WW4 has started in the interim. The dollar still remains the reserve currency - the bedrock of any investment portfolio is US T-Bills - backed by the US Armed Forces.

Let's see: 1.5 * 0.7 = ...

---------
By Roman Kessler, Dow Jones Newswires, +4969 2972 5514, roman.kessler@ dowjones.com

FRANKFURT -(Dow Jones)- The euro is on track to trade in a $1.50-$1.60 range over the coming months, Norbert Walter, chief economist at Deutsche Bank, said Friday.

The euro is fundamentally overvalued by about 30% at this range, Walter said on the fringes of the European Banking Congress...

"When Bush took office in January 2001, the national debt stood at less than $6 trillion. Today after tax cuts, war spending and a credit boom, the debt stands at $9 trillion."

Interesting use of large numbers, but without context. In 2001, US GDP was $10.1 Trillion (debt was 59% of GDP). Today, US GDP is about $14 Trillion (debt is 64% of GDP and now falling). I don't know how this compares to US historical numbers, but this hardly looks like the apocalypse.

Nice site at http://www.optimist123.com/

I don't buy this article's EU doom and gloom any more than I buy the "end of the US dollar".

I do think it is interesting that the EU and Canada are panicked by the strength of their currencies. (another interesting site at http://www.propertysnake.co.uk/ showing falling UK property values - wasn't this real estate collapse supposted to be limited to the US? Hardly.)

Prospector has the right idea. A low greenback is great for the U.S. economy. All those multi-nationals that do business abroad get paid in Euros, CD and Yen. The difference in currency exchange goes right to their bottom line. Just wait till OECD economic production begins to slow down, perhaps as early as next year, all those strong currencies will start flowing back to the U.S. If the U.S. was really concerned about their rising decifit, they have a multitude of ways of raising money,ie. raising taxes. Someone can correct me, but as a % of GDP, the US debt is no worse than Canada, better than Europe and much better than Japan. Based on all the doom and gloom and negative media stories circulating about how the U.S $ is going to zero, a major turnaround is probably just around the corner. Some of you have made some very astute comments here.

Gord Tulk;

With each passing day the US greenback becomes less and less the world's reserve currency and it pains me to state that fact because I support the USA and Bush, however facts are facts. If foreign investors had put funds into US T-bills in the past few years they would be losing serious money because of greenback weakness.

Japanese Shift Cash Out of U.S. Investments By MARTIN FACKLER
November 23, 2007

TOKYO, Nov. 22 — Many in Japan are starting to speak of “quitting America,” but they are not talking about a rise in anti-American political fervor. Rather, they mean a move away from American investments that is altering global capital flows and helping to weaken the dollar.

The move is seen in decisions of individual investors like Daijo Okudaira, a 66-year-old clerk at a Tokyo consulting company. Like many Japanese, Mr. Okudaira had long limited his overseas investments to the relative safety of securities from developed countries, particularly the United States.

Starting late last year, however, Mr. Okudaira made drastic changes to his portfolio, putting $50,000 into mutual funds focusing on stocks in China and other emerging economies. He said he had been drawn to these countries because they seemed to hold much brighter growth prospects than the United States.

“People say the engine of the global economy is shifting from the United States to emerging countries,” Mr. Okudaira said. “Emerging countries have growth and energy that America and Europe lack. They remind me of Japan 40 years ago.”

More…

A look at Canada's Debt to GDP
http://www.optimist123.com/optimist/2006/03/canadas_debt_ne.html

Comparison of US Debt/GDP to other countries
http://www.optimist123.com/optimist/2006/02/feb_2006_gdp_an.html

Now this being economics (where is that one handed economist when you need him), all the above will be challenged. Let the fireworks begin

In short, as of Feb 2006, Debt to GDP (see the link above)
USA 65.4%
Canada 68.2%
Euro Area 79.7%
Italy 107%
Japan 170%
Australia 16%

Dave:

And as I noted above the US's economy should really be looked at in terms of GNP rather than GDP as it has by far and away the most companies with large earnings from international assets.

And prospector, the US dollar IS the reserve currency of choice - the Euro certainly isn't, and no one is betting the farm on a stable and tradable Chinese Yuan as the currency of last resort.

Sure, the developing countries offer the best place to invest for growth and that is how it should be (India would be my choice) and they will do it while flying in Boeings using MS and google on their computers watching an American movie and eating some american brand of fast food, planning their dream vacation with the kids to some disney emporium.

Does anyone remember the old newsreel films of germans taking wheelbarrows of money to buy a loaf of bread. I know, that dates me, but it did happen.

One more article that ties a lot of these comments together -

A Comeback for the Greenback
By JONATHAN R. LAING

THE NEWS HAS BEEN NOTHING BUT grim for the U.S. dollar as of late. For the year, the buck is down against all 16 major trading currencies save the Mexican peso. But perhaps most disconcerting, last Friday the greenback fell to an all-time low against the 13-nation euro, which has been in existence only since 1999. The European currency now fetches nearly $1.50, compared with less than 83 cents as recently as 2000...

...Thus, it comes as something of a surprise that GaveKal, an international investment-research boutique with offices in the U.S., Hong Kong, Paris and Abu Dhabi, recently penned a report lauding the dollar's prospects against the euro. In fact, in a telephone interview from Paris, firm founder Charles Gave terms the euro "grotesquely overvalued" at its current level. In the next couple of years, he maintains, the euro should fall to its "parity" value of $1.05 to $1.10.

Gave, whose firm's good track record has won it a large institutional following in the U.S. and Europe, points to several secular factors that bode well for the greenback versus the euro. For example, rapidly aging populations in euroland figure to decimate working populations there and increase the governmental financial burden at a pace far faster than in the U.S. European countries such as France have far higher debt-to-GDP burdens than the U.S., especially when estimates of their unfunded pension liabilities for government employees are figured in...

http://online.barrons.com/article/SB119586931310202772.html?mod=googlenews_barrons

Hey Gord.

Maybe you can clarify this for me, but I was taking a look at the BEA site (http://www.bea.gov/national/index.htm#gdp) for their comparisons of GDP and GNP.

The definition they use is:
GDP + Income receipts from the rest of world - Income payments to the rest of the world = GNP

If I look at table 1.7.5, after they do the calculation above, there is almost no difference between GDP and GNP. Just a fraction of 1% difference

http://www.bea.gov/national/nipaweb/SelectTable.asp?Popular=Y

What am I missing here?

Otherwise, I do agree with your other comments.

There was also a report last week (http://ca.news.yahoo.com/s/afp/071115/business/us_china_economy_growth_worldbank) about an analyst estimating China's economy as 40% smaller than previously believed, with three times more Chinese living in poverty. Doesn't look like much immediate danger of China overtaking the US.

Apologies for all the link posts (I tend to be a "show me the data" kind of guy).

I'd watch for any sign of a US$ rally at this point. A forecast that made United Press implies that, if the C$ tracks the trade-weighted US$ index, you "could" get a full Hamilton for a loonie; the article suggests that it'll take place by the end of 2008. The link was posted on another SDA thread.

Predictions like that one, which violate common sense, become credible at the blow-off stage of a trend. This particular prediction reminded me of the "gold will be $5000/oz by Tuesday" ones that were made around 1980.

Note the assessment posted above by "overvalued euro." Is it being generally ignored? If so, then so are the fundamentals if the analysis is correct.

interesting comments. canada let it's dollar fall to remain competetive with the u.s. now the u.s. is letting something similar happen and the world is finding this is a problem. too freakin bad.

The EU is starting to look more and more comparable to the UN. It jusr appears to be no more than a corruption and money sinkhole that gives the square root of zilch in return for the resources that it consumes.