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What will happen with the dollar?
Keith asks, as do others:
I had been curious as to how this whole situation will effect the dollar...If you find the time, I would like to know or see the future of the dollar in this situation.
Please note that I am a "buy and hold" guy, not a trader, and I am certainly not a currency trader. But I'll cover the dollar vs. the Euro.
My inclination is to think the dollar will hold its value. I don't trust any of the macro models of currency values and we do know that purchasing power parity, while very approximate, and exerting its force only in the long run, does not imply a bearish stance toward the dollar.
Here is a list of European banks with assets greater than the gdp of their respective home countries. And read this.
As for this country, the Chinese now regard us as "battle tested." We have been through some truly major bumps, yet no major U.S. politician has called for "not paying back the Chinese." We've even guaranteed the $350 billion in agency securities held by the Chinese central bank and without a stir. I think the Chinese are shocked by that and in many ways they now trust their investments more than before, not less.
The Chinese do not have comparable trust in "Europe." If something went wrong in the financial realm, who would they call up on the phone? Which country? What do they think is the power base of the head of the ECB? What political party does that person belong to? What favors can be traded and with whom? Whose answer would count as definitive? Keep in mind that for all of China's modernity, their leaders are still communist party functionaries.
The negative scenario for the dollar is where the Chinese economy collapses, not where the Chinese become too afraid to buy dollar-denominated assets.
Bush, Bernanke, Paulson -- we call them leaders. The Chinese think of them as the customer service department. I suspect the Chinese get straighter answers from them than we ever do.
Posted by Tyler Cowen on October 2, 2008 at 06:24 AM in Economics | Permalink
Comments
Hold on a second- now the Chinese are shocked that we've guaranteed their agency securities? I thought they were so sure of that, that if we had not done it, it would have resulted in the apocalypse? Anyone else remember that post?
Posted by: Cliff at Oct 2, 2008 7:57:06 AM
I think this is spot on. I haven't understood the dollar bears recently. Even if one of the worse case scenarios comes to pass in the US (which is unlikely) it's not clear the eurozone will fare much better for reasons Tyler mentions. And it's not just the Chinese that will be heartened by the behaviour of the US, I think the Russians will too.
I'd dump my sterling though. I have no idea why sterling isn't doing worse than it is.
Posted by: Finnsense at Oct 2, 2008 8:06:37 AM
a new iPod nano 16gb costs over 50% more on amazon.de than it costs on amazon.com (225 EUR vs 189 USD). just saying...
Posted by: Kyle S at Oct 2, 2008 8:11:24 AM
Come on readers, learn the difference between effect and affect.
Posted by: Aaron Fix at Oct 2, 2008 8:17:03 AM
Go back to that list of European banks. Isn't that a little frightening? If one of those banks fails, won't it drag down some governments? (Especially given that European governments do not borrow in their own currency.)
Posted by: y81 at Oct 2, 2008 8:31:06 AM
"And read this."
That's awesome. I guess Europe needs more regulation.
Posted by: Andrew at Oct 2, 2008 8:42:22 AM
Cliff both statements can be true.
The Chinese could have believed say that there was a 90% chance that they would be paid back in a crisis.
Once the crisis happened and they were paid back now they are nearly 100% confident they will be paid back.
So they were very confident before but are more confident now.
Posted by: eccdogg at Oct 2, 2008 8:55:16 AM
Kyle, I have been keeping track of electronics prices a bit, and in general the price gap isn't nearly of that order, especially if you take VAT into account. But Apple products, and especially iPods are bit different: in the US the iPod has a large marketshare, and is marketed as the standard choice for an mp3 player, while in Europe it is more marketed (and priced!) as an expensive luxury player.
Posted by: Zamfir at Oct 2, 2008 9:14:47 AM
Tyler,
You wrote, "Bush, Bernanke, Paulson -- we call them leaders." What do you mean, "we?" They're not leading me.
David
Posted by: David R. Henderson at Oct 2, 2008 9:21:01 AM
There's an element of wishful thinking here.
The US was ground zero of the epidemic; European banks got in severe trouble only to the extent that they gullibly bought tons of US product. Buying US financial investments used to be something like the old saying from the 1960s or 70s that "Nobody ever got fired for buying IBM [products]". No longer.
Are Chinese dairy products now "battle tested"? And how many of you are enthusiastic about buying Chinese pet food or toys? Well, that's exactly how enthusiastic foreigners will now be about financial investments in the US. See: In Asia, bloom is off the U.S. rose
Posted by: at Oct 2, 2008 9:24:25 AM
"We have been through some truly major bumps, yet no major U.S. politician has called for "not paying back the Chinese."
Your wrong, check the fed website. Bernanke gave a big speech on this where he said we have a technology called the printing press and we can use it if we need to in order to escape huge debts.
Posted by: Gabe at Oct 2, 2008 9:28:39 AM
Tyler wrote: "Bush, Bernanke, Paulson -- we call them leaders. The Chinese think of them as the customer service department. I suspect the Chinese get straighter answers from them than we ever do."
Funny he should bring this up, because I was just having the same problem with the Gambinos. Jimmy was keeping my street clean and everything, but then his services dropped off, and some other guys moved in and started to take some of my business away from me. I thought, huh? So when I tried to complain, I couldn't get anyone in Jersey to take my calls, not even Tyrone. But then I heard that when Provenzano and Denaro needed to get to Gambino had to discuss some payment problems, they got through right away and guess what? Problem solved!
Gambino may be considered a leader, just like Bush, Bernanke, and Paulson, but what good are these guys is you can't get straight answers from them? Meanwhile, things go bad down here. I guess that's what happens when you have a monopoly on the use of force.
Posted by: barry at Oct 2, 2008 9:34:49 AM
I'm curious where the opinions in the original quote came from. Are there interviews with Chinese leaders out there? Other people's research? I'd like to believe all this is true, but I'd sure like to see some supporting evidence. Tyler?
Posted by: rubashov at Oct 2, 2008 9:44:15 AM
This thread is already doing a good job of touching on the components of my love/hate relationship with economics blogs, and since it's already been derailed I'll contribute my own hit. One cannot post anything that can be remotely construed as positive (well, really, one cannot post anything thoughtful) without being smacked by the gloomspeakers. Heck, guys, he even threw you a bone with the American-leaders-as-lowly-customer-service-peons analogy. If you want so badly to believe this is America's end, just spend your time memorizing Der Spiegel's 5-part bubblegum economics piece linked on Drudge yesterday which thoroughly details for the wannabe economist crowd how America is no longer a superpower in any measure, or is only steps from such a fate. And on another note, if you're one of the people who can't let an instant go by where you're not telling everyone how Bush and company are not "your" leaders, a little hint: Yeah, we know. We've heard it before. No one thinks any more highly of you. You're not a special flower. You'd be hard pressed to find anyone who thinks of anyone in government as "their" leader. Shocking, I know.
Posted by: Michael at Oct 2, 2008 9:49:32 AM
My inclination is to think the dollar will hold its value. I don't trust any of the macro models of currency values and we do know that purchasing power parity, while very approximate, and exerting its force only in the long run, does not imply a bearish stance toward the dollar.
As usual, my inclination is to think that this post will not hold its value. :)
I agree with Tyler that the Treasury will do whatever it can to placate its bankers, i.e. the Chinese. But I don't see how purchasing power parity (PPP) has much to do with the reader's question.
If housing prices continue to plummet, and the Fed / Treasury continue with their generous assistance programs, at some point they are going to start printing new dollars like crazy. Then US prices skyrocket, and PPP says the dollar falls in the foreign exchanges. Right?
To paraphrase my point, it seems as if Tyler above is saying, "Remember folks that currency traders eliminate arbitrage opportunities. So the dollar shouldn't fall in the long-run against the euro."
P.S. I consider David Henderson my leader.
Posted by: Bob Murphy at Oct 2, 2008 9:50:51 AM
"We"will pay the Chinese back but they are not going to see the hundreds of billions they put in Fannie and Freddie. So, they may keep buying our treasuries but "we" have show equally eager to nationalize companies in trouble as the Europeans.
Posted by: zaoem at Oct 2, 2008 9:57:37 AM
This post sounds pretty vindictive, Tyler. Almost as if you want Europe to tank as well (or even worse) so the US problems won't hurt as bad by comparison. Shared misery is halved misery?
Posted by: Melpomene at Oct 2, 2008 10:00:40 AM
I don't fundamentally understand why hanging the Chinese out to dry would have been an end-of-world scenario.
As I pointed out in the prior thread and per that article cited by anonymous, they don't seem eager to continue pouring money into propping up our wild spending (and with good reason).
Posted by: meter at Oct 2, 2008 10:05:11 AM
"agree with Tyler that the Treasury will do whatever it can to placate its bankers, i.e. the Chinese."
Anything accept withdraw troops from Japan, South Korea etc. This is because while we can safely borrow trillions from China, we must simultaneuosly invest trillions in national defens and hundreds of bases aroudn the world to keep us safe from the communist armies that will surely invade our country should we take our troops out of Korea. This is the reason we must increase taxes in the future, to keep us free.
Posted by: Gabe at Oct 2, 2008 10:38:39 AM
Michael,
Anyone who says something similar to "the paulson/bernanke plan is better than nothing" is the true "gloomspeaker" that you so derisvely accuse us of being. We are the optimist, we think there are problems in our economy that could be fixed by eliminating some of the errors and monopolies our government has made. The "gloomspeakers" of Bush, Bernanke and Paulson, NYT, War Street Journal, MSNBC, Washington Post and Tyler Cowen are the ones saying that free economies are so terribly flawed that we must round up forced donations from all americans periodically or else we will have no colleges, houses or food.
We get that you don't like anyone taking you out of your prozac induced euphoria. But Bernanke is a big "leader" in our country and threatening to massively increase the supply of dollars to escape problems of excess debt is equivalent to talking about not paying back debt holders(Chinese). I'd love to know how you reconcile this with Cowens statement that this has not been talked about by any leaders.
It seems that you just want to show how "thoughtful" you are by believing our "economic fundamentals are strong" while simultaneuosly believing that we are on "the verge of catastrophe if we don't pass a bill similar to Paulson's proposal", which Tyler describes as "better than nothing". I find it laughable that "thoughtful or serious experts" are not allowed to question the Federal Reserve, it's origins, it's goals or the cost benefits of fractional reserve banking over honest banking.
Posted by: gabe at Oct 2, 2008 11:05:39 AM
I do not understand why Tyler keeps showing the graph with European banks that are larger than their home countries GDP, as if that means that a bank is too large to rescue. The number 6 or so on that list, Fortis with assets 2.5 times the GDP of Belgium, has actually been partly nationalized only 2 days ago.
The Belgian, Dutch and Luxembourg each paid a few billion, the Netherlands and Luxembourg now own 49% of their national part of the bank, the Belgian government owns 49% of the rest. This transaction apparently went smooth, without much political plays between the countries. I guess similar transactions would be possible for other banks that operate largely in other countries.
Posted by: Zamfir at Oct 2, 2008 11:10:55 AM
The reason the dollar will fall in value is because the FED needs to print money to pay for the 700 billion dollar plan, plus all of the other bailouts happening. Whatever money the FED prints needs to be multiplied by 10 thanks to fractional reserve banking. More money chasing the same amount of goods requires prices to rise. All this talk about Europe and China is beside the point. It is the printing that will destroy the dollar.
Posted by: JK at Oct 2, 2008 11:21:00 AM
One cannot post anything that can be remotely construed as positive (well, really, one cannot post anything thoughtful) without being smacked by the gloomspeakers.
In the spirit of "just because you're paranoid doesn't mean they aren't out to get you"... well, just because the usual suspects are gleefully hoping to dance on the grave of the Bush administration, America, capitalism, globalism, free trade and the world as we know it, doesn't mean that we aren't, uh... how do I put this? Cockney rhyming slang: "fully plucked".
Posted by: at Oct 2, 2008 11:25:46 AM
All you radical-populist-free-market-fundamentalists need to leave Micahel alone! He doesn't have to answer your arguments or reply to annoying questions, because all he needs to do is read a serious paper like the NYT or WSJ and he can see that only the loons question our great patriotic leders. If he begins to suspect he is expeincing cognitive dissonance then he can jsut watch some CNBC and the greatest financial minds will inform him what he is supposed to think. If you pay PIMCO and a index fund a small fee then Bill Gross, Jack Welch and Ben Bernanke will make sure that in the long run you ignorant masses make amazing returns. If you question this then you don't understand anything about what it means to be a great american.
Posted by: Thomas Friedman at Oct 2, 2008 11:48:10 AM
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Posted by: Steve at Oct 2, 2008 4:40:14 PM
Just have a look at this chart: http://home.arcor.de/charts/devisen/html/usddem.html (US Dollar versus German Mark).
The USA have a certain habit of depreciating their own currency, relative to other hard currencies. And guess what the nickname "Helicopter Ben" implies?
Posted by: IWantCookieNow at Oct 2, 2008 6:42:55 PM
"Bush, Bernanke, Paulson -- we call them leaders. The Chinese think of them as the customer service department. I suspect the Chinese get straighter answers from them than we ever do."
That is hilarious.
Posted by: Shakes The Clown at Oct 2, 2008 7:49:34 PM
I say we switch to a mackerel-based monetary system...
http://online.wsj.com/article/SB122290720439096481.html?mod=yhoofront
Posted by: JH at Oct 2, 2008 9:11:33 PM
Note than on your list of European banks, neither Iceland nor Switzerland (the first four) use the euro or are members of the EU. Iceland is clearly in trouble but Switzerland is so far one of the only countries with a major financial center that did not need any government interventions. How will to drastically deteriorating balance sheet of the US affect the dollar?
Posted by: Thomas at Oct 2, 2008 10:36:54 PM
We all would be worse off, if we got straight answers from Bush, Bernanke & Paulson. Please keep up the lying.
Posted by: Jesus saves America spends at Oct 2, 2008 11:10:35 PM
I might be making this crisis more simple than it is but here is my take.
1. US households/ US government / Wall Street are all broke.
2. The US government is going to "borrow" over a trillion dollars from us through seignorage, which will cause us to operate at an unneficient point.
3. The US government then will lend that money to Wall Street banks at a reduce interest rate with a high risk (since nobody knows the asset value of these banks).
4. The Wall Street banks then will loan us that money back at a higher interest rate then the Fed loans them (r*>theta).
5. Wall street will make a temporary profit from these loans.
6. Households will be unable to repay these loans due to high inflation and declare bankruptcy.
7. Banks will then declare bankruptcy dues to the high foreclosure and default rates.
8. Were back to square 1.
Posted by: Torris187 at Oct 3, 2008 12:12:44 AM
"The Chinese think of them as the customer service department."
That would be consistent with this from Krugman:
"My view, which I think is now shared by many economists, is that Paulson grabbed hold of the wrong end of the stick — he should have been seeking to expand bank capital, taking an ownership share in compensation, rather than trying to push up the value of toxic paper."
Posted by: egl at Oct 3, 2008 12:31:05 PM
Regarding the link to the FT piece on European banks vs their local GDP. If we take ING, for example, we have a company that is one of the largest financial institutions in the world (top 20) and one of the largest by revenues (top 10). The population of the Netherlands is a little over 16 million, the number of customers of ING is 75 million. Of course their assets are going to be a multiple of Dutch GDP! It is a meaningless stat. What is meaningful, however, is that Europe (outside of the UK) still has savings that can be spent. As to the Chinese trusting the US more than Europe. I don't know the real answer. However, there has never been any doubt that US paper being held by the Chinese would be repaid. Because, once that stops, it is game over. But, if I'm from China looking on I'm seeing European governments taking transparent equity stakes in their banks and the US govt intending to buy portfolios of CDO's. I think know which option looks more trustworthy to me...
Posted by: boo at Oct 3, 2008 2:15:52 PM
