September 20th, 2007

Ratatouille: Glum

Dollar in Decline

The US dollar continues to weaken. It passed $1.4/Euro and reached parity with the Canadian dollar for the first time in over thirty years. Saudi Arabia and a number of mideast countries that value their currency relative to the dollar may unpeg their currencies rather than be drawn into an inflationary cycle.

China's fixed currency valuation has long been a sore point for the US. It's made small adjustments but the yuan is still tightly controlled rather than floating in response to the market.

This creates an artificially favorable market for Chinese goods, resulting in ever-increasing imports to the US. Domestic manufacturers cannot compete and the production sector of our economy has effectively moved overseas. This results in increasing national debt, even when measured as a percentage of GDP.

This debt will eventually become unsustainable, not because the US cannot repay it but because other countries will not want to extend new loans to us, thereby ending our economic cruise. Our national debt just passed nine trillion dollars, a number so large that it's difficult to intuitively grasp.

If we can get to the point where we can export with a good exchange rate, it'll help. It would also help if Americans were able to break their lowest-price-is-the-only-thing-that-matters obsession. (WalMart purchasing accounts for something like 10% of the trade deficit.) But it'll be rough, however it happens.

Thanks to qatar for some links and inspiration to read up on this again.