In this article on one of the popular portals , the author is predicting that the world is going to witness a global meltdown of the value of the US $. At the best, U.S. can slow it down to an orderly devaluation.
What do you guys think ? [ June 11, 2007: Message edited by: Vivek Pandey ]
Currencies not backed by (say) gold are abstract entities with no _objective_ level of value. But one can say that a currency is highly valued if it buys more labor in other countries than it buys within its own country.
At the beginning of this century the U.S. took the lead in automation and mechanization. A dollar could buy more manufactured goods in America than in other countries (because of the location of production), but it could buy far more labor in less-developed countries. Therefore, the dollar was said to have a high value. This was reinforced after WWII -- so many European factories had been smashed during the war, and many of their most brilliant citizens were driven away as refugees or murdered by jealous people of lesser talent.
The dollar started to fall in the 1970s as Europe rebuilt and Asia industrialized, but then the rise of socialist movements threatened the security of investments around the globe -- even in Europe where people feared they might be taxed away. When foreigners bought up dollars they were in a sense trading purchasing power for security. For example, a resident of Argentina might make more profit from an investment at home, but an investment in the U.S. would be less likely be confiscated by a government. So people were willing to pay a premium to get the dollars needed to invest in America where property rights were more secure.
Right now we have truly bizarre imbalances in the exchange rates -- when you compare the labor that a dollar can buy in China or India versus America. Trade and free-enterprise tends to reduce these imbalances, so I would not be at all surprised were the dollar to fall hard against these currencies. That is, unless politics once again threatens the security of investments in these countries.
But as foreign countries develop longer and longer traditions of respect for private property, people are going to be decreasingly willing to pay a premium to keep significant portions of their wealth in the U.S. (All the moreso if America itself abandons its economic traditions.)
The current level of US public debt (partially due to the Iraq etc) is huge at the moment, but a low dollar reduces the burden of this debt for the government. A low dollar will also help the trade deficit - as the dollar becomes weaker, US exports become cheaper for other countries to buy. The government is therefore probably not too upset to see the dollar slide a bit downwards.
Obviously it would be problematic (not just for the US, but for the world economy) if it was to fall too much or too fast, but I wouldn't be surprised to see it drift downwards.
I can't really see it falling in value at a rapid rate while it remains the reserve currency of choice for much of the world. Perhaps one day the Euro will reduce this role a bit, but at the moment there is still a high level of demand for dollars.
Another factor involved is the Chinese government which isn't allowing its currency to reach its "true" value against the dollar, by pegging it to a basket of foreign currencies. While it is no longer strictly pegged to the dollar, it does not have full flexibility and this effects trade between the two countries. Should China allow it to change value some more, then the effects on trade between the US and China could be significant to the value of the dollar.
There will be glitches in my transition from being a saloon bar sage to a world statesman. - Tony Banks
This is a very interesting topic. My question would be is this too meaningful for Meaningless Drivel?
So my comments on the topic anyway. So we still in the US have a big contigency of people that well, never leave the US, and only by US products. Is that enough to keep the dollor going even after a collapse? Are you also saying that when it collapse we will not have smart people that will create innovative ideas that will make money. Am I completely off topic here? I just think there are always people that are doomsday, "The Sky is falling" people, and while the dollar is lower and can go lower, the world isn't going to end.
Also, if the dollar is falling, getting your money into Gold, and Diamond type ETFs (Electronic Traded Funds) are the things to do. GOod thing I have a Diamond Trust fund that has gained 35% in the past two years for me.
Originally posted by Mark Spritzler: I just think there are always people that are doomsday, "The Sky is falling" people, and while the dollar is lower and can go lower, the world isn't going to end.
True, but the herd mentality can be powerful: recall 1929. The world ended for a lot of people for years. The stockcrash was domestic but the potential is also there on the world stage, if certain conditions are met. I have no idea if those conditions have occured yet. Perhaps that's the real debate?
I think USD price in next 3 months July-August-September would be crucial. That price would be the average USD price for next couple of years or so. I expect it to recover a bit in next couple of months.