The dollar is no worse then other currencies?

[OracleofMN]

Hello everyone,

I am curious to hear what other people think of the value of the dollar relative to other currencies? And I don’t want to here “All fiat currencies eventually fall to their intrinsic value - zero.” The dollar is priced in terms of other currencies, so with all the stories and news out there about the fall of the dollar I am wondering, why the dollar? Other countries have much worse debt and deficit levels relative to GDP. I know that GDP is not the best definition of economic output but if we hold the same definitions across all countries it can be a useful measure.

Below is IMF world outlook for 2011 debt to GDP. Note: this is gross debt which includes intra-govt obligations ie. treasuries held by the SS Trust fund and the Fed.

Gross Debt as % of GDP

France 99%

Germany 85%

Japan 240%

UK 94%

US 100%

Spain 74%

http://en.wikipedia.org/wiki/United_States_public_debt#cite_note-20

So, what I am seeing is that the US dollar is in a bad postion but no worse then some of the other major economies.

Let me know your thoughts.

Thank you,

Phil

[liberty_student]

There is no such thing as intrinsic value.

[OracleofMN]

Thank you doctor Simon Pritchett. Then what about the relative value of the currencies?

[liberty_student]

My dear Peter Keating,

What what about these relative values? Are you not familiar with subjective value theory?

[OracleofMN]

Fair enough. I apologize for the above remark. I am only looking for different perspectives on the value of the US Dollar. I have heard so much of the dollar’s imminent collapse but in looking at numbers I am not seeing the support for this idea. When I mention value I am referring to the market value or price, which, in the currency markets is priced in terms of other currencies or a basket of currencies e.g. the dollar index. I am no expert of value theories but I would tend to agree with the subjective theory insofar as I understand it. Therefore, what do you think the market price of the dollar will do relative to the market price of the other major world currencies?

[vaduka]

as liberty student wrote you there is no such thing as intrinsic value or objective value. and if you ask me about the subjective value of the dollar i can not tell you because i can not express it cardinally, since it simply means the relation between the marginal utility of a certain quantity of dollars and the marginal utility of the certain quantity of all the goods i can purchase with these dollars.

the other thing is that the dollar does not have one uniform market price. it has price compared to every good out in the world that is or can be dominated in dollars(including other currencies). so there exist billions of dollar prices.i can not give you a definite answer what will be the price of the dollar relative to the euro, because that would mean that i can at the current moment have knowledge of what the preferences of millions of individuals will be in the future(i can not tell you also what their preferences are now, i can only know what their demonstrated preference is, which is revealed with their purchase - that is the current price of the dollar denominated in euros).

what someone can make is a prediction what the price of the dollar in euros will be. the projected fall of the dollar can happen in one day and can also happen steadily. in one day it can happen if enough people believe that they will be able to buy comparatively less goods with it in their future purchases; and steadily compared to the first scenario will be the case if there is hyperinflation.

[Smiling_Dave]

There are two kinds of nations, debtor nations and creditor nations.

The creditor nations export more than they import, meaning, obviously, that they produce alot of stuff. Which is what Adam Smith correctly thought is the measure of the Wealth of a nation. And if you own some of their money, you are in good shape, because you can buy a lot of goodies with it. So their currency will be in demand, and go up in price.

A debtor nation may or may not be in good shape. If they are importing and going into debt in order to increase their productive capacity in the future, then they have a [possibly] bright future. But if they are importing and going into debt in order to consume, then that country is destroying its economy.

The USA is now the world’s largest debtor nation. We owe more than anyone else, by far. And that debt has been used to consume. So that we have shot ourselves in the foot very badly, worse than anyone else.

Now one way to pay back your debts is by producing things and giving them to other countries in payment. We obviously are not doing this and don’t plan to do it , as evidenced by a balance of trade deficit of 50 billion dollars a month.

The other way is to print money and use it to pay your debts. This is what we are doing now, more or less, calling it QE2. And it’s what every country in debt has done.

Now somebody who lent money to the USA does not want to be paid back in printed money, because it is worth less than the money he gave. So that if a country is suspected of going to print money, it will not attract people who will lend them money. And we are broke. We need loans [which we are not going to get], or else we have to print lots and lots of money [which will produce hyperinflation] for the govt to be able to spend like the greedy madman it is.

So that we are in the worst shape possible, meaning our dollar will soon not be worth anything. What will people be able to buy with it? Other countries have problems too, but ours are the worst. As soon as enough people figure this out, they will drop the dollar like a hot potato.

GDP measures how much money a country spends. Even if the spending is wasteful [like govt spending], or was borrowed money that was spent ]like govt spending], it all counts for GDP. In other words it’s not an accurate measure of a country’s wealth.

[liberty_student]

@OracleofMN

Therefore, what do you think the market price of the dollar will do relative to the market price of the other major world currencies?

It is impossible to know.

[liberty_student]

@Smiling Dave

There are two kinds of nations, debtor nations and creditor nations.

There is no such thing as a nation.

Schiffism is entertaining, but it’s not economics.

[cobracarg]

ah, this is why i love Austrian Economics, its so brutally honest…

[Bill_Smith]

I think what you’re trying to figure out is, what is the USD worth in comparison to other currencies? Whether or not there is such a thing as intrinsic value or nations doesn’t have anything to do with that question. The price of the USD or any other currency that is traded on the open market is set by FX trading. Is the system flawed? Of course. But regardless of what value system you subscribe to. On any given day you will get X amount of Euros for X amount of dollars and Forex markets determine the price of X. For what it’s worth…that’s exactly what it’s worth.

Japan’s debt to GDP ratio is 2 and a half times higher than the US and has been for quite a while. In spite of this, the biggest problem they have been having is deflation. They have repeatedly tried to manipulate and devalue the Yen, (and they will again at any time) so that their exports can compete. The currency game is harder to rig than Bernanke thinks. Japan has been trying for 15 years with little success.

The US wasn’t a debtor nation at the time of the great depression. Export driven economies are at the mercy of their customers just like any other business. If your customers go broke, you go with them. Someone should explain this to the Chinese when they smugly throw around their state manufactured growth figures. A great depression in China will generate a lot more social unrest there than it did here

On to the future of the USD. With all these economies in worst shape than the US, and the stronger economies at the mercy of their bankrupt customers. How much will the USD be worth in comparison with other currencies? I’m no Ben Bernanke, I can’t say with 100% certainty that inflation can be halted in it’s tracks in 15 minutes. Although I am fairly certain that Bernanke is an educated idiot. But I can tell you the future price of the US dollar…in the future.

[Smiling_Dave]

Bill,

That was a very informative post. I have a comment or two on some of the things you said. As always, my comments in boldface.

@Bill Smith

Japan’s debt to GDP ratio is 2 and a half times higher than the US and has been for quite a while. In spite of this, the biggest problem they have been having is deflation.

Why do you think deflation is a problem? From the AE I’ve absorbed, deflation is a good thing, an increase in purchasing power.

They have repeatedly tried to manipulate and devalue the Yen, (and they will again at any time) so that their exports can compete.

Which is of course a silly thing to do.

The US wasn’t a debtor nation at the time of the great depression.

I did not say that being a debtor nation caused the great depression. Let us not conflate [first time I used that word ever. Mwahahahaha!] a depression with the loss of purchasing power of the currency, or with the drop of the “X” you mentioned in FX trading. They are not the same. The great depression was caused by govt interference in the economy, mainly by money printing. And the dollar was on a gold standard then, and thus did not lose value [until FDR started messing with the amount of gold you get for a dollar]. But nowadays, when we are talking about whether the world will disdain the fiat dollar and not want any dollars in its wallets [which will lead to X=0 or close to it in FX trading] being a debtor nation is a very important factor, as I explained in my earlier post.

Export driven economies are at the mercy of their customers just like any other business. If your customers go broke, you go with them.

No. You sell to someone else. Your broke customers, on the other hand, will find no one to buy from.

Someone should explain this to the Chinese when they smugly throw around their state manufactured growth figures.

On the contrary, someone should explain to the Chinese that they are fools to keep devaluing their currency, thus shooting themselves in the foot.

A great depression in China will generate a lot more social unrest there than it did here

But they won’t neccesarily have one. It depends on how much meddling its govt does [not on wether the US will keep on buying from them]. They are a rich people, bursting at the seams with goods and gold, and every day getting richer.

On to the future of the USD. With all these economies in worst shape than the US,

Which economies are in worse shape than the US?

and the stronger economies at the mercy of their bankrupt customers.

This is a fallacy. There are plenty of other customers. It’s called Say’s Law.

[cobracarg]

Deflation is a bad thing… BUT we prefer deflation over inflation. The best option is to have neither inflation or deflation… i suggest you read this article by Mises, http://mises.org/daily/4143 …

“Economics recommends neither inflationary nor deflationary policy. It does not urge the governments to tamper with the market’s choice of a medium of exchange…Deflationary policy is costly for the treasury and unpopular with the masses. But inflationary policy is a boon for the treasury and very popular with the ignorant. Practically, the danger of deflation is but slight and the danger of inflation tremendous.” - Mises

[liberty_student]

Bill, this debtor nation, creditor nation stuff is all bullcrap. It’s a ruse used to sell people on foreign stocks, on markets which are not regulated as closely domestically.

First, there is no such thing as a nation.

Second, no where in praxeology is there some objective value statement about debt.

Third, GDP is completely arbitrary and meaningless.

[Smiling_Dave]

Izzy,

Mises is talking about a deflationary policy. Meaning the govt meddling in the economy to try and create deflation. That, he says, is bad.

But if deflation happens by itself, not by govt meddling, it is good for creditors, bad for debtors, and great for the average person, meaning everybody with money in their wallet. What bad could result from the money you own suddenly having increased purchasing power?

Now you may ask, if deflation is so great, why does Mises say not to pursue it as a policy? Reread the article you linked to for the answer.

[cobracarg]

in a free market, we would have competing sound currencies… Sound money does not lose it purchasing power… thus we believe that the best way of handling with things is neither by inflation or deflation…

[Bill_Smith]

But if deflation happens by itself, not by govt meddling, it is good for creditors, bad for debtors, and great for the average person, meaning everybody with money in their wallet. What bad could result from the money you own suddenly having increased purchasing power?

The average person produces or sells a good or service. Deflation can be self reinforcing. People will wait to make purchases of non essential items hoping for a better price. Businesses will be forced to hold their inventories to a bare minimum. Every day it stays on the shelf it becomes worth less. This could trigger shortages of some items. Ultimately the average person will face wage reductions or unemployment. I’m not a proponent of government intervention. Deflation and inflation are natural occurrences in a free market. Just pointing out a couple of deflation hazards.

[Smiling_Dave]

@Bill Smith

The average person produces or sells a good or service.

true

Deflation can be self reinforcing.

not sure what this even means. BTW it occured to me that we should be making clear that deflation is sometimes meant to mean a reduction in the money supply, and sometimes “price deflation”. A reduction in the money supply obviously cannot happen “by itself”. So I guess we are talking about price defaltion. Not that this is really something for or against either side in the discussion, just a clarification.

People will wait to make purchases of non essential items hoping for a better price.

This is a popular myth, not backed by evidence. Have you any? A search on this site will show you many an article addressing precisely this myth.

Businesses will be forced to hold their inventories to a bare minimum.

No. Remember, they may get say $99 for their widget, instead of $100 like they planned, but that $99 will have the purchasing power that $100 used to.

Every day it stays on the shelf it becomes worth less.

How can a useful thing suddenly become worthless? People still want it.

This could trigger shortages of some items.

As an aside, where did you learn to use words like “trigger”? Do you use it in everyday speech? In any case, you are trying ot have your cake and eat it. people are not buying the widget, you claim, which causes businesses to produce less of them, you claim, which causes a shortage, you claim. How can there be a shortage of something people don’t want anymore?

Ultimately the average person will face wage reductions or unemployment.

No. His nominal wages may decline, but his real wages [=purchasing power] will stay the same or rise. This has happened historically, I belive, all through the 1800’s in the USA. There was price deflation all the time, but nobody got poorer, quite the contrary.

I’m not a proponent of government intervention. Deflation and inflation are natural occurrences in a free market. Just pointing out a couple of deflation hazards.

I understand your position, and consider it laudable. I just think that the hazards you mention are not real, based on my readings here.

[Vitor]

The dange of the dollar is its privilege of being the “world curreny”, since it means that people will tolerate the abuse of Bernanke and friends more than if it were another currency.

But when the day of recon arrives, the acumulated mess will be too big.

[Prateek_Sanjay]

@Smiling Dave

There are two kinds of nations, debtor nations and creditor nations.

The creditor nations export more than they import, meaning, obviously, that they produce alot of stuff. Which is what Adam Smith correctly thought is the measure of the Wealth of a nation. And if you own some of their money, you are in good shape, because you can buy a lot of goodies with it. So their currency will be in demand, and go up in price.

Adam Smith was the one who said that a nation’s wealth is measured in the goods and services available to its consumers, and not in its gold reserves or foreign exchange reserves. He is the exact person to refute the mercantilist ideas you just suggested.

A debtor nation may or may not be in good shape. If they are importing and going into debt in order to increase their productive capacity in the future, then they have a [possibly] bright future. But if they are importing and going into debt in order to consume, then that country is destroying its economy.

It’s not a nation that produces or consumes; it’s people and households and businesses that do so. The Apple Corporation earns $200,000 of net profits per employee, Ford Corporation earns $30,000 per employee, while the largest businesses in the Third World, like Chinese company Geely, earns $10,000 per employee. You are absolutely mistaken to think that it’s United States does not produce.

The USA is now the world’s largest debtor nation. We owe more than anyone else, by far. And that debt has been used to consume. So that we have shot ourselves in the foot very badly, worse than anyone else.

Now one way to pay back your debts is by producing things and giving them to other countries in payment. We obviously are not doing this and don’t plan to do it , as evidenced by a balance of trade deficit of 50 billion dollars a month.

The trade deficit is a metaphysical figure that serves to do nothing but excite the imagination. And I am quoting a Keynesian on saying this! It’s a difference between exports and imports when both equally benefit people in a country. Britain was an importer nation back in the 17th century, and produced only wool and timber domestically, and still created a giant empire. Are you going to say they shot themselves in the foot, when Britain was among the poorest European countries in the 16th century and imported its way to power?

The other way is to print money and use it to pay your debts. This is what we are doing now, more or less, calling it QE2. And it’s what every country in debt has done.

Now somebody who lent money to the USA does not want to be paid back in printed money, because it is worth less than the money he gave. So that if a country is suspected of going to print money, it will not attract people who will lend them money. And we are broke. We need loans [which we are not going to get], or else we have to print lots and lots of money [which will produce hyperinflation] for the govt to be able to spend like the greedy madman it is.

Of course United States government will get loans. Have treasury bond interest rates risen? Printing lots and lots of money may or may not produce hyperinflation, and may just result in people saving money and businesses holding back reserves out of uncertainty, leading to no rise in price level. Japan kept multiplying its monetary base, even as Japanese people kept saving more and did not spend more.

So that we are in the worst shape possible, meaning our dollar will soon not be worth anything. What will people be able to buy with it? Other countries have problems too, but ours are the worst. As soon as enough people figure this out, they will drop the dollar like a hot potato.

GDP measures how much money a country spends. Even if the spending is wasteful [like govt spending], or was borrowed money that was spent ]like govt spending], it all counts for GDP. In other words it’s not an accurate measure of a country’s wealth.

The dollar will only be worth what value people will attach to it. It will not happen that the dollar will become worthless by itself and then people will ditch it; it’s people who decide that in the first place. As long as legal tenders are there, people will prefer to use the dollar. Yes, an inflationary expansion will have effects on its usage, but once that round of expansion is over, its effects are over. It takes another inflationary expansion to cause those effects to continue. Weimar hyperinflation was from a permanently running printing press, while America’s central bank inflates in rounds and rounds.

LibertyStudent, is this what you just called Schiffonomics? I long stopped following the man, but Peter Schiff’s hyperinflation predictions have been the biggest embarassment the Austrian School has suffered or will ever suffer. I quote Jonathan M. Finegold Catalan when I say, “Those Austrians never learn”.