November 27, 2004

Bad News, Good News

The dollar keeps declining, and markets seem poised to push it lower. All the while, it strengthens China's hand in ways they could only have dreamed of just a few short years ago:

...Seen in that light, there are a number of factors that have combined to drive down the dollar. Beginning in 2000, the United States underwent an economic slowdown and a decline in the stock market, which analysts say made foreign investing in U.S. companies less attractive than
during the "boom" years of the late 1990's. Another factor is the U.S. government, which in fiscal 2004 incurred a record budget deficit of nearly $413 billion as it waged war in Iraq, a global war against terror and other costly expenditures. There is also the $592 billion trade deficit - more than 5% of the U.S. economy's total value - run up last fiscal year as Americans bought far more outside the country than they sold abroad.

Josh Bivens of the Economic Policy Institute in Washington says that ..."Everyone realizes that we have to worry about the trade deficits now... They've just gone as far as they can go. They're not sustainable. But yet they don't want to give up the "strong dollar" part and they can't have it both ways. If you want to do something about the U.S. trade deficit, you have to accept a lower value for the dollar."

...Much of the concern over the trade imbalance has centered on China, which ties the value of its currency, the yuan, to the dollar. John Williamson at the Institute for International Economics in Washington says this has enabled Beijing to remain a dominant exporter. "When the dollar decreases in value, the Chinese currency rides it down," he says. "And so, that means that Chinese exports become more competitive in the rest of the world."

China has resisted pleas to break its currency's link to the dollar in order to continue its economic expansion. But the dollars it accumulates are spent in part on buying U.S. government securities that finance the budget deficit. What worries some analysts is that foreign investors such as China may become reluctant to support Washington's debt. If that happens, a crisis could develop that would force the U.S. government to raise interest rates on bonds substantially. Those analysts say Wall Street stocks and other private U.S. investments may be driven down as a result, possibly triggering a recession. ...

But on the bright side, Walmart sales are down. I could give a list of places that are better to shop at than Walmart, but this would *almost* be redundant. Shopping anywhere else at all, if that's an option for you, is a positive step for homegrown manufacturing, wages, and working conditions.

Posted by natasha at November 27, 2004 02:24 PM | Economy | Technorati links |