Dollar thrill

For virtually my last excursion on this trip, I get into the dollar printing facility in downtown Washington DC.

evandollar.jpgAlthough we only get up close to one of the printing machines inside, it's still quite a thrill. Here I am with a pile of unfinished $100 banknotes.

There are only two of these facilities in the US, though they are capable of producing millions of notes a day. And it seems very different to the equivalent operation in the UK. We Brits print banknotes out in Debden in Essex, and have contracted it out to the private sector.

Here in the US it is a government operation right in the heart of Washington next door to the Holocaust Museum.

Now, the staff at the Treasury Department's Bureau of Engraving and Printing were very efficient and cooperative in allowing us in. They get nothing out of it (after all, they don't need TV publicity to sell their product).

But I detect a small amount of disappointment that we are using the facility as a backdrop to talk about the falling value of the dollar in the international currency markets.

I can understand why they might think the story is negative – people generally prefer strong currencies to weak ones. And the weak dollar reflects some of the current problems in the US economy (international investors have less enthusiasm for investing in the US).

And it is clear the BEP staff are like other Americans in becoming more aware their currency has fallen. In a country as big as this, people would be entitled to forget the value of their currency to foreigners, and yet people keep mentioning it.

They even make reference to the strong euro - a marked shift from previous trips, which sometimes left me with the impression the euro had barely dented the public consciousness.

But people here should not feel so negative about it. A weak dollar is not just a symptom of the problem; it is also possibly a solution. It provides a positive story in that it is helping the US adjust to a new phase in the economic cycle that places emphasis on exporting rather than importing, saving rather than borrowing.

In fact, the people who might need to worry most about how things are going are the Europeans.

Their currency is rising sharply against the dollar, and as a large proportion of the world ties its currency to the dollar, the euro is rising against other currencies too.

This is a bit of a pain.

There are a number of trade imbalances in the world, none more important than the trade deficit of the US. When that deficit is reduced, there has to be a reduction in some other countries' surpluses.

One option, which seems much the most desirable, is that the unsustainable US deficit is resolved by a reduction in the unsustainable surpluses of China and other Asian countries.

But the rising euro might mean that the US deficit is just transferred to Europe. The problem passed on, not solved.

It won't matter much to the Americans whether it is solved or transferred – either would be nice. But to create long-term stability, the rest of us should probably hope that the Chinese currency is allowed to rise further against the dollar, to ease pressure on the euro, stemming from the dollar's fall.

Of course, we are not going to get a complete end to the US deficit; and we are not going to get a US-sized deficit in the euro-zone, any more than we'll get US-sized portions of food.

But that is still quite worrying for Europe's economies, which for all their strengths, lack labour market flexibility. If there's weaker growth, it can quickly escalate into real economic woes.

I've spent a week here now, have spent the budget and am apparently expected to return home tomorrow. Maybe it is a good time: if we want to examine America's economic problems, Europe might be a good place to get a view of them.

Comments   Post your comment

  • 1.
  • At 02:05 PM on 29 Nov 2007,
  • Mark wrote:

The physical printing of dollars is just the tip of the iceberg. No machines could keep up with the rate at which they are being created except computers which create virtual dollars every bit as real as those stacks of $100 bills. The mind boggles at the size of the numbers but it's important to put them into perspective by comparing them to the size of the economy and historical norms. Whatever you think of America's economic "predicament" if you can call it that, it has faced far far worse more than once in the past and not only survived but prospered as well. BTW, there's an old saying that has it if you owe the bank a million dollars, you have a problem but if you owe the bank a billion dollars, the bank has a problem. What do you suppose you could say if you owe China a trillion dollars?

The weak dollar is giving the US enormous advantages over Europe in both international and its own domestic markets. Basically it's pricing Europe out of business. It doesn't really matter if commodities are priced in dollars or Euros because they are interconvertable, a distinction those in Britain who do not want to give up the pound because they would lose control over it at the insignificant minor benefit of not having to change currencies at borders see clearly. The one big exception however is what Airbus is experiencing, being forced to price its product in dollars at a fixed number for a very long term contract not knowing what the exchange rate will be when it actually delivers product and is forced to accept payment at the then prevailing rate. If the current trend continues, it could force Airbus to give its products away for next to nothing. "We lose a little on each sale but we make up for it in volume." :-) Well not so funny for them as it will put them out of business unless they continue to get huge government subsidies at taxpayer expense driving up the cost of all of Euroland's other products still further. It's a no win situation for Europe, the first time it has faced anything like this in living memory. In the past the Federal Reserve Bank took into account the impact its policies would have on foreign countries. I remember when they were worried about Argentina's economy because it was tied to the US dollar. But no more, the Fed is strictly out for the US. Still, neither it nor the Congress has used American fiscal, monetary, or trade policy as an active weapon against most of its adversaries including Europe...yet. Europe wanted to be America's adversary, Chirac and Schroeder said so and countless millions of Europeans took to the streets in agreement. Welcome to modern 21st century warfare where the weapons have nothing to do with physical destruction through munitions used to physically destroy the enemy. How did you like the sub prime lending rate shot, actually a minor salvo just across the world's bow to let everyone know the US is still around? My hunch is that there are many far worse events to come, events which will rock the financial world and shake up global economics to its foundations. A war in the Middle East with Iran could be just one. Inadequate supplies of Russian oil and gas to Europe could be another. Even worse are the ones we don't know about which will come as a complete surprise and we will be entirely unprepared for.

Why are European goods so expensive? How about because when you buy something made in Europe, you have to pay for five weeks of vacation for Frenchmen and a cradle to grave social safety net for all of its citizens not to mention a monumental bureaucracy which makes every business transaction impossibly inefficient and work rules which simply destroy competition. When you buy American goods you have to pay for the war in Iraq and Afghanistan and the military defense of the USA which in real terms is far less than that European social safety net. The trillion dollars these wars cost spread over 5 years is well under 2% GDP, a bargain considering what they are achieving in starting to change the geopolitical conditions of the region.

Demanding that China upvalue its Yuan makes good press headlines but a marginal increase is of no benefit to the US economy, if anything it just reduces America's purchasing power for Chinese made goods and frankly, China's banking and financial system are so fragile, they could come crashing down like a house of cards if it were. As it is, the Chinese stock market is a train wreck on the way to happening but Chinese are as obsessed with casino gambling as anyone and can't resist a good game of chance. This is not investing, it's pure speculation. A lot of people will be left without a seat though when the music stops. What will they do, how will they react when it actually happens? Nobody knows. However, this may not be the seminal event it first appears it will be, a lot of China's industry is owned and financed from the outside. The steady stream of profits and products will probably continue hardly slowed, if anything it could be an investing opportunity to buy Chinese companies at fire sale prices.

I was in my local supermarket yesterday and checked out some of my favorite currency exchange indicators. Societe Roquefort cheese is up to $32 a pound, Stilton about half that. Domestic roast beef is as low as $2 a pound. Certified Angus porterhouse steak is now around $8 a pound but will go on its usual sale at around $6 in a few weeks while non Angus choice grade (actually the same USDA grade) will be at $5 and pork spare ribs are on sale now at $2 a pound. Now what do you suppose I will be buying and eating?

  • 2.
  • At 02:27 PM on 29 Nov 2007,
  • Al wrote:

I disagree, the falling dollar is exactly what Europe needs right now because:
a) Chinese goods stay cheap and reduce the effect of the increased local costs of production (not reversing the China effect),
b) the full impact of potential peak oil can be delayed until the US economy is back on it’s feet (giving people a longer horizon to adjust… because it’s not long before the price stays on the wrong side of $100) and
c) I would imagine most of the trade towards the US from Europe are luxury goods such as German cars or designer cloths/accessories which I don’t believe would be as sensitive to price changes. The consumers of these items are upper middle/upper end of the scale which I wouldn’t imagine they are affected much by the credit crunch or near flat growth.

  • 3.
  • At 02:47 PM on 29 Nov 2007,
  • Chris M. Dickson wrote:

Evan wrote "people generally prefer strong currencies to weak ones"; reflecting on a general principle rather than responding to Evan specifically, I think it is unfortunate that the English languages use the terms "strong" and "weak" for the more literally accurate "expensive" and "inexpensive". "Strong" and "weak" are so value-laden with the other meanings of the words that it becomes perfectly natural to assume strength of a currency is inherently good and weakness is inherently bad, which is very far from being the case for a large section of the economy.

I wonder if any countries (other than possibly trivially small ones) outsource the production of their banknotes to printing facilities in other countries as a cost-saving measure?

  • 4.
  • At 02:50 PM on 29 Nov 2007,
  • Chris wrote:

This is really bad economic analysis Evan. Currency devaluations do not lead to economic growth. Devaluation/loose monetary policies will lead to an export boost in the short term, however in the longer term inflation will filter through the system and erode the exporters profits. The price of domestically produced goods will rise at home as produce becomes more valuable on export markets. And inflation has insidious effects that distort the capital structure of the economy and result in mal-investments that ultimately will have to be liquidated in a future recession. There’s nothing positive about currency devaluation. Any currency can de-valued at the stroke of a pen. However this is not the route to prosperity, for if it were, we should have eradicated poverty (and economics!) long ago.

  • 5.
  • At 05:00 PM on 29 Nov 2007,
  • Chris M. Dickson wrote:

Evan wrote "people generally prefer strong currencies to weak ones"; reflecting on a general principle rather than responding to Evan specifically, I think it is unfortunate that the English languages use the terms "strong" and "weak" for the more literally accurate "expensive" and "inexpensive". "Strong" and "weak" are so value-laden with the other meanings of the words that it becomes perfectly natural to assume strength of a currency is inherently good and weakness is inherently bad, which is very far from being the case for a large section of the economy.

I wonder if any countries (other than possibly trivially small ones) outsource the production of their banknotes to printing facilities in other countries as a cost-saving measure?

  • 6.
  • At 05:11 PM on 29 Nov 2007,
  • Mark S wrote:

Chris, you're confusing devaluation: bad, with depreciation: good :-)

So, Evan gets a thumbs-up from this eco undergrad. The only practical solution for America's up-coming woes is depreciation, domestic consumer demand isn't going to underpin growth, and investment is already high relative to global levels. Undoubtedly the current (sustained) demand shock on commodity prices is complicating matters; due to the inherent inflationary pressure, but provided this tightrope is successfully navigated, benign conditions lay ahead by 2009.

The dollar isn't about to be supplanted by the Euro as the reserve currency, but I think this episode has simultaneously removed the dollar's golden boy status, and shown a new confidence the world community has in the Euro. A more balanced global reserve framework is perhaps an upside of this turbulence affair.

On the money as usual Evan!

  • 7.
  • At 05:25 PM on 29 Nov 2007,
  • DaveH wrote:

"Their currency is rising sharply against the dollar, and as a large proportion of the world ties its currency to the dollar, the euro is rising against other currencies too.
This is a bit of a pain."

Not really - after all, oil has not gone to USD100 in Euroterms, but about USD70 in terms of two years ago. That keeps many costs down and consequently some sale prices down. After all, West Germany did rather better with a strong DM than UK did with the regular devaluations of the UKP.

  • 8.
  • At 06:54 PM on 29 Nov 2007,
  • Colin Smith wrote:

A weak currency is all very well, but it's weak for a reason. It's weak because there are trillions of dollars around. It's weak because they are printing and borrowing it into existence at an increasing rate, disproportionate with the growth in real assets.

  • 9.
  • At 08:46 PM on 29 Nov 2007,
  • Andy wrote:

There is slack in some markets such as the labor market and companies working with well within their capacity. An export-led expansion will lead to productivity advancement through economies of scale, sparking a virtuous circle of lower inflation, lower nominal wage rise demands, stronger real economic growth, greater private-sector investment, lower unemployment, stronger public finances.


  • 10.
  • At 10:34 PM on 29 Nov 2007,
  • Raj Anand wrote:

I agree with the earlier comment, weaker dollar is going to fuel inflation in the US and leak into rest of the world. It is true that the dollar is weakened by the current US economic woes, but the overall US economic growth seems to be still pretty decent, in fact europe with not so pretty GDP to debt ratio, needs to be more concerned, if the dollar tanks the US still stands (history has shown the adaptability of the US to changing conditions political or economical) but if the Euro tanks, I am not sure if there would still be any European "Union" (remember EU is a recent phenomenon and also currently UK is sliding into it's own housing recession, France struggling with economic policies, Germany's slowing growth and eastern europes struggle with declining exports and commodity squeeze from Russia). Commodity and exports fueled emerging countries have more to lose by the declining dollar (commodity prices and export profit margins going in the opposite directions) not to mention populist social policies.The next few years will be time for change in the US (it's leadership and subsequently other policies). I would still think the Dollar might be the safest currency for the long run(with all social political and economical risks considered).

  • 11.
  • At 03:26 AM on 30 Nov 2007,
  • Matt wrote:

Saying that "there is nothing positive about currency devaluation" is a rather one-sided view of the issue. The Federal Reserve uses interest rates to 'manage' several dimensions of the economy at once. The present expansion is an attempt to maintain economic growth in the face of the sub-prime mortgage fiasco that showed up back in August. Maintaining foreign trade balance has little to do with their actions. The Fed doesn't just 'print' money willy-nilly; they have a specific objective. At some point they really will have no choice but to raise interest rates, but that point is still pretty far off.
Actually, I'd say this analysis is pretty good. Until about two years ago the Yuan was pegged directly to the dollar. We asked China to switch to a floating currency value and they did. Maybe that would work for the EU as well.

  • 12.
  • At 04:13 AM on 30 Nov 2007,
  • David Yap wrote:

I dont have a problem with this report. It should also highlight what a mess the world now finds itself with no alternative for an international currency as dollar flight continues unabated. Not surprising gold has leapt to $800/oz. What should and could international transactions be priced and denominated in, and what store of value China & other major exporters are willing to keep most of their foreign reserves other than USD is the 64 zillion question.

  • 13.
  • At 07:20 AM on 30 Nov 2007,
  • Venkat wrote:

I have been hearing doomsday predictions for the last seven years about a collapsing US economy and have believed them all. Still hasn't come true yet. And I am getting tired of the Cassandras and have started disbelieving doomsday scenarios.

The subprime crisis is the latest of a long list of crises that have preceded it. As a person living in India, I am sure about about one thing -the skill levels of the average American are so far above those of even the best Indians (living in India), that there can be no developing nation threat for the US in the foreseeable future.

As for China, the Americans have tied them up effectively as cheap labour to power the US lifestyle. If US is over leveraged, imagine the overleveraged plight of China - its longterm infrastructure loans are enough to kill it with even a small hiccup in the Chinese economy.

The USA is the most powerful economic block in the world and is likely to remain so. The chaotic business channels may make a lot of noise, but life will go on, the people of USA will weather the storm, make a few adjustments and get back on top.

Post a comment

Please note Name and E-mail are required.

Comments are moderated, and will not appear on this weblog until the author has approved them.

Required (not displayed)

The BBC is not responsible for the content of external internet sites