Comments on: The dollar carries on falling http://www.johnredwoodsdiary.com/2007/10/04/the-dollar-carries-on-falling/ Conservative Party Member of Parliament for Wokingham Wed, 19 Nov 2008 13:43:26 +0000 http://wordpress.org/?v=2.6.2 By: Stagflation http://www.johnredwoodsdiary.com/2007/10/04/the-dollar-carries-on-falling/#comment-8023 Stagflation Fri, 12 Oct 2007 13:41:35 +0000 http://www.johnredwoodsdiary.com/2007/10/04/the-dollar-carries-on-falling/#comment-8023 Hey!, Very nice place you have here. Youve done a good job & awesome blog on The dollar carries on falling! Hey!, Very nice place you have here. Youve done a good job & awesome blog on The dollar carries on falling!

]]> By: Michael Taylor http://www.johnredwoodsdiary.com/2007/10/04/the-dollar-carries-on-falling/#comment-7384 Michael Taylor Fri, 05 Oct 2007 14:59:00 +0000 http://www.johnredwoodsdiary.com/2007/10/04/the-dollar-carries-on-falling/#comment-7384 Not sure you're right, John. On the face of it, credit crunch plus loosening would mean tendency towards slowdown & inflation in the US - ie, a flirtation with stagflation. If so, this would be the worst possible outlook for the dollar. And yet, although the dollar 'carries on falling' it just hasn't collapsed as one would expect if that were all that's going on. Three possibilities: 1. The dollar has been falling for two years in anticipation of what's now emerging. 2. We're wrong about US slowdown and/or inflation in the medium term. 3. The interbank seizures challenged the justified expectation of permanent available liquidity in dollar asset markets, which forms one major necessary plank in the dollar's reserve currency status. In these circs, the Fed's loosening reaffirms the dollar as a reserve currency and so, perversely, strengthens it. I suspect there's a bit of all three going on. The big surprise would be a US domestic economy which didn't roll over next year, combined with a currency which subsequently rallied strongly. And I think we just might get it. In which case, Steven-L's worries about a sterling problem exposing our lost supply-side flexibility might be absolutely right. PS. As I'm sure you know, a falling dollar won't deal with the US current account deficit, and a rising Rmb won't deal with China's current account surplus. Reply: Stagflation would be a bad outcome, but I do not think inflation is currently a worry in the main Western economies. There are no signs of a wage/price spiral. Manufactured product is still being forced down in price by world competitive forces, and service activities are in the main under reasonable control thanks to web technology and reasonably flexible markets in the US. I agree the dollar could draw strength from a decent growth performance next year. I do think a lower dollar will help cut the deficit. Not sure you’re right, John. On the face of it, credit crunch plus loosening would mean tendency towards slowdown & inflation in the US - ie, a flirtation with stagflation. If so, this would be the worst possible outlook for the dollar. And yet, although the dollar ‘carries on falling’ it just hasn’t collapsed as one would expect if that were all that’s going on.
Three possibilities:
1. The dollar has been falling for two years in anticipation of what’s now emerging.
2. We’re wrong about US slowdown and/or inflation in the medium term.
3. The interbank seizures challenged the justified expectation of permanent available liquidity in dollar asset markets, which forms one major necessary plank in the dollar’s reserve currency status. In these circs, the Fed’s loosening reaffirms the dollar as a reserve currency and so, perversely, strengthens it.

I suspect there’s a bit of all three going on. The big surprise would be a US domestic economy which didn’t roll over next year, combined with a currency which subsequently rallied strongly. And I think we just might get it. In which case, Steven-L’s worries about a sterling problem exposing our lost supply-side flexibility might be absolutely right.

PS. As I’m sure you know, a falling dollar won’t deal with the US current account deficit, and a rising Rmb won’t deal with China’s current account surplus.

Reply: Stagflation would be a bad outcome, but I do not think inflation is currently a worry in the main Western economies. There are no signs of a wage/price spiral. Manufactured product is still being forced down in price by world competitive forces, and service activities are in the main under reasonable control thanks to web technology and reasonably flexible markets in the US. I agree the dollar could draw strength from a decent growth performance next year. I do think a lower dollar will help cut the deficit.

]]> By: Tony Makara http://www.johnredwoodsdiary.com/2007/10/04/the-dollar-carries-on-falling/#comment-7357 Tony Makara Fri, 05 Oct 2007 11:05:58 +0000 http://www.johnredwoodsdiary.com/2007/10/04/the-dollar-carries-on-falling/#comment-7357 This is a very complicated issue and of course no-one can predict exactly how things will turn out. The passive devaluaton of the dollar combined with a reduction in interest rates are in textbook terms measures that will lead to inflation. The Americans no doubt have their rationale for allowing this. John, your logic on the need to promote exports is sound. The question is how low can the dollar go? I've read a number of commentators say that the Fed are only looking for one more rate cut, but what if that proves to be still not enough? No-one can rule out inflation and I believe the same applies in Britain because no-one really knows the true rate of inflation with Gordon Brown keeping two sets of books and an overvalued sterling keeping the lid on things. John, just want to ask you if you agree that most of Britains economic problems have come about since the end of Bretton Woods? reply: No I don't think that. I favour floating exchange rates to help economies make adjustments to different rates of inflaiton, growth and investment opportunity. No-one can rule out inflation, but I do think the issue in the US at the moment is staving off too sharp a decline in growth. This is a very complicated issue and of course no-one can predict exactly how things will turn out. The passive devaluaton of the dollar combined with a reduction in interest rates are in textbook terms measures that will lead to inflation. The Americans no doubt have their rationale for allowing this. John, your logic on the need to promote exports is sound. The question is how low can the dollar go? I’ve read a number of commentators say that the Fed are only looking for one more rate cut, but what if that proves to be still not enough? No-one can rule out inflation and I believe the same applies in Britain because no-one really knows the true rate of inflation with Gordon Brown keeping two sets of books and an overvalued sterling keeping the lid on things.

John, just want to ask you if you agree that most of Britains economic problems have come about since the end of Bretton Woods?

reply: No I don’t think that. I favour floating exchange rates to help economies make adjustments to different rates of inflaiton, growth and investment opportunity. No-one can rule out inflation, but I do think the issue in the US at the moment is staving off too sharp a decline in growth.

]]> By: Steven_L http://www.johnredwoodsdiary.com/2007/10/04/the-dollar-carries-on-falling/#comment-7279 Steven_L Thu, 04 Oct 2007 18:19:44 +0000 http://www.johnredwoodsdiary.com/2007/10/04/the-dollar-carries-on-falling/#comment-7279 This is all very interesting but the little guy like me worries about a sterling bubble building up and bursting. Then we get inflation and trapped between a rock and a hard place with interest rates. People seem to want our money at the moment but we aren't exactly a reserve currency are we? Any more shinanigans like Northern Rock, any sign of a slide in the housing market and foreign investors might start to think of sterling as a 'sell', or even worse a 'short'. Reply: The pound is going up against the dollar becuase the dollar is very weak, but it is not going up against the stronger currencies. The pound is also gaining some support from relatively high interest rates here. The problem is more credit crunch than incipient inflaiton at the moment. This is all very interesting but the little guy like me worries about a sterling bubble building up and bursting.

Then we get inflation and trapped between a rock and a hard place with interest rates.

People seem to want our money at the moment but we aren’t exactly a reserve currency are we? Any more shinanigans like Northern Rock, any sign of a slide in the housing market and foreign investors might start to think of sterling as a ’sell’, or even worse a ’short’.

Reply: The pound is going up against the dollar becuase the dollar is very weak, but it is not going up against the stronger currencies. The pound is also gaining some support from relatively high interest rates here. The problem is more credit crunch than incipient inflaiton at the moment.

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