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Deficits Don't Matter

Unless, that is, you purchase stuff made at least in part abroad (also known as "most stuff"), travel, or care about interest rates. Then you might be interested to learn that "The dollar hit a fresh record low against the euro and a nine-year low on a trade-weighted index on Monday as investors continued to shun the greenback on worries over the United States' bloated deficits." Awesome. DeLong and Drezner have more.

November 8, 2004 | Permalink


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This is something that hits home daily living in England while studying for a masters degree. Once doubling a price was too much, but kept one in their budget. Now doubling a price is almost not enough.

Posted by: ben | Nov 8, 2004 6:33:47 PM

Just like the good old days. That would be the second Reagan term. I was living in Japan at the time. Boy the yen bought a lot of dollars to send home.

I guess Shrub is the reincarnation of the Great Communicator.

Posted by: Jeff I | Nov 8, 2004 6:36:31 PM

I pointed this out on Drezner's blog, but I'll point it out here too: the value of the dollar is still significantly above what is was in 1997, at least as measured against a broad index of our major trading partners.


Indeed, as even the article Matthew posts notes, we're right back where we were 9 years ago. And somehow I fail to recall 9 years ago being a disastrous economic time.

What I see happening is the creation of another mini-myth, just like with outsourcing. If you look at one small segment of information, things don't look so great. But if are able to step back and look at the big picture, you realize that we're really not doin all that bad.

Posted by: Al | Nov 8, 2004 6:38:31 PM

Yup, that second Reagan term was an economic nightmare wasn't it? Well no not really actually. Granted this won't stop me from investing wisely to reap the benefits of the worsening exchange rate.

Posted by: Jeff the Baptist | Nov 8, 2004 6:41:54 PM

I made this point in a comment down the page, but I'd like to reiterate. The $ has already declined anywhere from 35-50% over the last couple of years. This is vs the Euro, Yen and baskets of currencies. Although the fundamentals for the greenback look very weak, the mkt has discounted much (if not more) already. This is NOT the time to sell dollars. Speculators are short more contracts here than ever, with the (smart money) commercials long the buck. With whom do you want to bet?

Posted by: GAB | Nov 8, 2004 6:48:15 PM

What I see happening is the creation of another mini-myth, just like with outsourcing. If you look at one small segment of information, things don't look so great. But if are able to step back and look at the big picture, you realize that we're really not doin all that bad.

Al, you ignorant slut.

We are at all time highs for trade and budget deficits, and personal debt. If the Fed isn't a bit more aggressive in raising interest rates, we're in big trouble. However, because we are so over-extended, once the rates do come up a couple more points, it will choke off domestic investment, and our nascent recovery will shrivel like the thumb of a real leather golf glove forgotten at the bottom of your bag after a sweaty round in August.

Housing is the only thing keeping the economy from collapsing. Once interest rates rise, and they will very soon (unless the Fed really screws up and floods the market with liquidity, really driving down the dollar), the one consistently bright spot in the economy over the last three years will be gone.

Posted by: Jeff I | Nov 8, 2004 6:49:17 PM

really, al, the idea that you can look at currency values in isolation, then claim to criticize others for not looking at the big picture...well, read what jeff has to say.

as for outsourcing, just for the record, it's not a myth in select industries. what made it politically salient is that the economy isn't creating enough jobs; i personally have no problem with outsourcing. i have a problem with so-called stimulus packages that don't lead to job creation....

Posted by: howard | Nov 8, 2004 6:58:13 PM

What universe does Al live in? I want to move there.

We bought our gold stock today. I'm betting this gets worse before it gets better.

Posted by: donna | Nov 8, 2004 7:23:06 PM

Not sure the time is right to hit the panic button, or that a continued slide in the dollar is all that bad. If the fall is gradual, as it has been, we can adjust accordingly. The fed will raise rates to fight inflation, which will slow everything down (but they were going to raise rates anyway).

The danger seems to lie in either happening too fast. Raising rates and massive devaluation of the dollar will likely create a recession. The fed will then be in a tight spot. Not raising rates leads to the possibility of high inflation, and, with continual devaluation, potential stagflation. Both are bad.

Still, if the changes are slow enough, we could just ratchet growth down to nothing and be relatively OK, if not getting richer (well, getting poorer at the rate of inflation).

One other concern to throw into the fire is that as the fed raises rates regardless, the growth will slow. Those rosy job figures from last week will prove ephemeral (if they weren't already - the repubs were explaining away job losses in Aug-Oct as part of the hurricanes' effects - is it possible that the job creation figures and upward revisions last week were the hurricane job losses working themselves out? Not sure exactly how the data is collected...)

Posted by: Scott | Nov 8, 2004 7:38:32 PM

I've lived in Japan for the last 20+ years, and we built our (imported) house 10 years ago on the back of the tremendously high yen vis a vis dollar rate. Before the recent election, I told my wife that if Kerry lost, it'd soon be time to import another container's worth of goods for the house. Yup, I'll give it a few more months to get down to below 100 to the dollar . . .

Posted by: Hokuto | Nov 8, 2004 7:55:30 PM

scott, you are definitely on the right track.

the best-case scenario is a gradual drop in the dollar, a gradual rise in rates, and a mild stagflation.

the worst-case scenario is a rapid drop in the dollar, a rapid rise in rates, followed by a bounceback of the dollar negating the export advantage of the lower dollar, and we have medium stagflation.

and yes, part of the jobs report was hurricane-reconstruction related, and part was our old friend temporary jobs (perhaps one and the same); the underlying trend was decent but nothing special, and that's the problem going forward with either of the scenarios we are looking at....

PS. look, it's not impossible that japan and china will still want to leave the dollar where it is, and that we will skate by, but i wouldn't bet cash money on it....

Posted by: howard | Nov 8, 2004 8:32:17 PM

The problem with the theory that a slow devaluation of the dollar, plus interest rate hikes is ok, is that we pay interest on the national debt. If interest rates go up, the fixed interest payments become a larger and larger proportion of the federal budget. That either means a larger and larger budget deficit or greatly reduced spending on other programs. Neither is good.

Posted by: Vaughn Hopkins | Nov 8, 2004 8:47:10 PM

Uh, no, howard. Best case scenario is that US manufacturing and other export businesses really take off, increasing jobs at home, while the only downside is that elitists like Matthew have to pay a bit more for expensive meals and hotel rooms when they vacation in Cannes.

Posted by: Al | Nov 8, 2004 8:54:07 PM

Maybe this is a question for brad's blog, but I'll ask it here since it occurred to me after reading Hokuto's comment.

Is this drop really tied to Bush's having won? Isn't it possible that it would have happened if Kerry had won? My sense is that most investors were kinda holding their breath until the election to make any moves, and this specific move might simply have represented a sudden jump in a long trend.

I'm willing to be convinced otherwise, as I like to have specific arguments for tying disaster around Bush's neck.

Posted by: Jackmormon | Nov 8, 2004 8:58:03 PM

If the Democrats had simply had more cowbell, none of this would matter.

Posted by: Chris K | Nov 8, 2004 8:58:23 PM

Vaughn: true, we pay interest on the debt and rising rates will force us to pay an increasing portion of future budgets to service the debt. This situation will continue to hamper growth in the long term, but it would not necessarily mean a sharp recession in the short term.

Al: elitists such as Matthew would not be the only ones affected. Our exports would likely rise some (at least in dollar terms - same amount of units might be shipped but currency exchange rates for a weaker dollar would bring in more dollars per unit sold). But we import an enormous number of goods; almost everything you buy at Wal-Mart would become more expensive.

Posted by: Scott | Nov 8, 2004 9:01:54 PM

Jackmormon: likely the disaster belongs to Bush simply b/c the markets ARE responding to his re-election and the likelihood that the budget will not be brought into line. A Kerry victory might have signaled to the market that at least with divided government, outlays would shrink or grow less fast. However, since the repubs have every branch of government by a decent majority and they showed no fiscal discipline in the past 4 years, the market figures they can't be trusted to get it right for the next four.

Similarly, the jump last week in the stock market likely did have something to do with Bush's reelection. His administration is thought to be pro (big) business, which helps nearly every public company (at least in the short run - unless of course the dire predictions involving stagflation/recession come true; if these things happen, the stock market will definitely take a beating, influx from private SS accounts or no).

Posted by: Scott | Nov 8, 2004 9:15:57 PM

Let me see if I have learned anything. Blue America (high taxes & productivity=cheap labor) pays the hidden costs of cheap oil (military spending, overvalued dollar, trade deficit). Cheap oil is a necessity for a viable Red America(cheap land=rural,exurbs,suburbs). Red America is paranoid about the relationship=ressentiment, much like Spartans, helots, and whatever the damn merchant/craftsman class was called.

Rising interest rates, rising oil prices, rising labor prices, a falling dollar, or Blue America independence would be disastrous for Red America. There must be war, probably against Iran in six months.

Posted by: bob mcmanus | Nov 8, 2004 9:33:52 PM

yes, Al, as Scott tells you, that isn't a realistic best-case scenario: that's more like a bush-ian cakewalk scenario. if the dollar drops enough for exports really to take off as you are suggesting, then it has dropped enough to import inflation all around, and not just on european vacations. there is no free lunch; we don't get exports just to boom without paying some other kind of price at a time we can't really handle it.

my ps is the most optimistic scenario available: that we muddle through.

of course, as the wall street saw goes, i can tell you what's going to happen, but not when, or when something's going to happen, but not what. in this case, i'm afraid i know what's going to happen, just not when.

PS. If the dollar dropped in response to a trade deficit while we were otherwise in a fiscally sound position, then we could have an export-led boom, but we aren't....

Posted by: howard | Nov 8, 2004 9:59:19 PM

So, uh, how do I get into the exciting world of gold and euro trading? I'm not seeing it listed as an option on E-Trade.

Posted by: Maureen | Nov 8, 2004 10:45:57 PM

Scott, thanks at the start of an answer. I agree that this is the common-sense interpretation of the currency market's trend. But as a frothing anti-Bush person, I'd like to check my impulses against some more impartial readings. I guess I should read Brad DeLong's blockquotes more carefully....

Posted by: Jackmormon | Nov 8, 2004 11:28:49 PM

Dude, forget about what DeLong has to say - everyone take your cues from that notable nonpartisan macroeconomics expert Al! Seriously, how can a tenured professor at a top-ten economics department who's published over 200 papers in peer-reviewed econ journals hold a candle to a genius of that caliber?!


If I remember correctly, Al is the lawyer who once tried to argue that Justice Jackson's opinion in the Youngstown Steel case granted the president unlimited executive authority once he utters the words "commander in chief" - which is exactly the opposite of what Justice Jackson's opinion actually says, as any first-year law student would be able to tell you in about five seconds flat. That was just such a ridiculously absurd display of ignorance that you didn't know whether to laugh or cry in response. Hey Al, before you post again, answer one question: if you're that pathetically incompetent at law, which is supposed to be your actual job, how can you possibly expect any intelligent person to respect your opinion on economics?

Posted by: JP | Nov 9, 2004 12:19:34 AM

All of our annexed Iraqi oil, no-bid Halliburton contracts, and military industrial complex will offset the deficits. Hahaha...foolish leftists.

I'm sure George Soros and the Godless Asiatic Bolsheviks of Red China have nothing to do with the ephemeral weakening of the dollar.

Posted by: Modern Crusader | Nov 9, 2004 1:27:24 AM

You're on the right track MC, but I'm pretty sure Emmanuel Goldstein is behind this one.

Posted by: tennin | Nov 9, 2004 3:20:09 AM

Oldman on Petrodollars

"In light of this Bush's attempt to divert Socal Security receipts to prop up the stock market make more sense at least in the short term. Active selling would probably accompany a shrinking dollar sphere." ...oldman

Posted by: bob mcmanus | Nov 9, 2004 7:59:35 AM

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