Dollars to donuts
September 20, 2007 5:42 AM   Subscribe

Should I be worried about an impending collapse of the US dollar?

There's been a lot in the news lately to suggest that the US dollar is headed for even deeper trouble than it's been, starting with various oil-producing countries moving away from the dollar standard, and China's threatening to off-load its stash of dollar reserves.

Any economists out there care to comment?
This question was asked also about a year ago, but the times, they are a-changin'...
posted by doctorcurly to Work & Money (20 answers total) 6 users marked this as a favorite
I can't speak for the Euro, yuan, or other currencies, but I've had my eye on the yen for quite some time due to various financial reasons, hoping it'll move upward against the dollar.

No dice. This currency's traded about as high as it ever will against the dollar, and I can't see it breaking above, say, the 100-yen to the dollar threshold anytime soon.

My gut instinct says that, over the years, the yen has hit a physical barrier here that could only be surmounted with a massive change on the US or Japanese side.

So the yen seems stable. As for the yuan, euro and other currencies, I kinda feel like the interest rate cut day before yesterday will prop up the US economy, and hold us to current exchange rates.

But don't bank on a big recovery for the dollar anytime soon.

Oh, and dude, I'm not an economist, since you're askin'.
posted by Gordion Knott at 6:22 AM on September 20, 2007

Nothing has changed from the last time this question was asked. There's always someone predicting the imminent collapse of the dollar; usually this person is selling gold.

Given how trade works, a weak dollar is pretty low on my list of economic concerns. It may be bad for the US psyche, but it's not going to have much effect on my diversified portfolio, since I own tiny slices of both the winners and losers, or on the local economy, as increased export business should offset the increased price of imports.
posted by backupjesus at 7:07 AM on September 20, 2007

It's not really the end of the world. We Canadians have dealt with it forever.

When the dollar is strong, you buy foreign stuff. Exporters have a tough time of it. So Canada will be moving into a cycle where there's a lot of capital investment to improve productivity, since imports are cheap and labour is expensive (relatively speaking).

When the dollar drops, like in the US, exporters have a great time. There's a lot of business growth in export industries. You get more tourists (well, except for that fingerprinting everone stupidity) so, in general, you get good economic growth as money flows in from outside.

It may be hard for US businesses and consumers to make the shift. For those of us whose currency is fairly cyclical you see it more as a phase rather than as some huge earth-shattering event.
posted by GuyZero at 7:49 AM on September 20, 2007

The dollar has lost about 40% of its value in the past 5 years and there's no indication that decline is slowing. For the past 20 years the US economy has been fueled by consumer spending on imported goods, and the trade imbalance supported by foreign investment in the US economy. This makes imports more expensive, exports cheaper, and slows foreign investment in the US.

In my opinion, the two negatives far outweigh the positive (increased exports). Further, I believe that the consequences of the 40% fall we've already experienced have not yet been felt by the economy, but will "come due" if China allows the yuan to float and/or foreign investment in the US dries up.

So I'm very pessimistic about the dollar and the negative impact it will have on our economy. However, this isn't something that will happen literally overnight; it's more likely to be a several year decline that will deepen the upcoming recession.
posted by srt19170 at 7:50 AM on September 20, 2007

In 1957, $1 USD was $0.94 CDN. (this continues into the 70's I believe - the CDN started being devalued sometime in my youth)

In 2002, $1 USD was $1.61 CDN. That's a 71% drop in value.

(The all-time highs and lows for 1957 to now. See here.)

Today they are almost at par (a 40% increase in value) and Canada is still here.

Every economy has ups and downs. The only mistake would be to believe that you can somehow escape economic cycles and grow forever. There is no need to panic. There is a lot of money to be made as the US dollar drops.
posted by GuyZero at 8:11 AM on September 20, 2007 [1 favorite]

The Canadian dollar will hit parity with the US dollar, probably today.
1.00 CAD=0.998796 USD at the moment.
posted by weapons-grade pandemonium at 8:19 AM on September 20, 2007

Nothing has changed from the last time this question was asked.

The dollar has lost a further 7% or so of its value since then, according to the US Dollar Index.

Rather than worrying about an impending dollar collapse, I'd suggest hedging against its likely continued decline.

the CDN started being devalued sometime in my youth

I don't know what circumstances lead to its decline, but I think the recent rise of the Canadian dollar coincided nicely with that country's transition from current account and government budget deficits to the surplus it has today. It didn't hurt that the value of Canada's energy exports roughly tripled in the past ten years. I wish the USA the best of luck in finding some similarly profitable way out of its current binge of deficit spending.
posted by sfenders at 8:45 AM on September 20, 2007

The Canadian dollar will hit parity with the US dollar, probably today.

It hit parity about an hour before you posted. It's since retreated.

It will probably close at or above parity before the end of September.
posted by oaf at 9:19 AM on September 20, 2007

Won't worrying about it and/or making financial decisions in anticipation of a value drop exacerbate the problem, if there even is one?
posted by iamkimiam at 9:38 AM on September 20, 2007

GuyZero: I'm not sure if the comparison with the Canadian economy is apt. Part of the reason Canada can rely on exports when its dollar is low is that the world's largest consumer is nextdoor. The US doesn't have such an eager customer to turn to when its dollar is low, and it won't be able to buy as much from the rest of the world. Because the rest of the world counts on the US to be its biggest customer, that can cause all kinds of shifts in global economy.
posted by Emanuel at 9:39 AM on September 20, 2007

The US has plenty of "eager customers" -- after all, it exported $1.4 trillion of goods and services in 2006. While the economy is not as export-driven as Canada's, the idea that the US has nothing of value to export or, equivalently, to source domestically rather than importing is a bit off base.
posted by backupjesus at 10:39 AM on September 20, 2007

backupjesus: You're right; I exagerated. I guess what I meant is that the US has been a net importer for quite a long time, while Canada has been a net exporter. As such it'll be harder to change the direction of the economy than it tends to be for Canada.
posted by Emanuel at 10:47 AM on September 20, 2007

I think the recent rise of the Canadian dollar coincided nicely with that country's transition...

The Canadian dollar hasn't gained nearly as much against the Euro or the Pound. In truth, we have done nothing. The US dollar is dropping against all other currencies.

My point is that the devaluing US dollar is not an emergency. The economy shifts. A few people get their knuckles scraped in the process, but life goes on.

If anything, it will mean a slowdown in the rate of manufacturing job losses, especially as overseas companies stock up on US infrastructure equipment and associated implementation services. Get used to waking up early for sales calls with European customers.
posted by GuyZero at 10:54 AM on September 20, 2007

Emanuel: it also means that it will be cheaper to work in the US than it has been for a while. There will be less pressure to move jobs off-shore with a low US dollar, more incentive to use American labour making products to sell to Americans. This also reduces import dependance.
posted by bonehead at 10:55 AM on September 20, 2007

Even with the 40% drop in the value of the dollar in the past 5 years, the trade imbalance in the US is still nearly 2:1. That means that the dollar will have to drop to about 0.30E before we get back to a balanced trade situation. If you think that can happen with no more effect on your life than "getting up early for sales calls" then I don't think you have even a basic understanding of macro-economics.
posted by srt19170 at 12:43 PM on September 20, 2007

But the OP wasn't asking about the trade imbalance.

I don't disagree with you on that point, but I can't say I agree with you either - the US trade imbalnce has been out of line with every other country in the world for years. I have never been able to figure out why the US can maintain such a huge trade deficit and not collapse, so I figure that I just don't understand it.
posted by GuyZero at 12:46 PM on September 20, 2007

srt19170, the "nearly 2:1" trade imbalance is true for goods, but, looking at the Q2 2007 numbers, it's more like 3:2 if you include services, and the overall current account (which includes income payments to/from other countries, which is to say exports/imports of money), it's roughly 4:3.

The US can maintain its current-account deficit because foreign traders are, on the net, willing to accept US assets in place of income or goods of equivalent value. This can be seen as a ringing endorsement of the US economy, since it means countries would rather leave a dollar invested in the US than to bring it "home". Or it can be seen as lots of other things, obviously.
posted by backupjesus at 1:22 PM on September 20, 2007

The Canadian dollar hasn't gained nearly as much against the Euro or the Pound.

Not as much of course, but it has gained quite a bit vs. the pound in recent years. Less compared to the Euro, which along with the Canadian currency has been among the strongest in the world lately. Canada being so economically dependent on the US, one might expect their two dollars to move in the same direction most of the time, and a quick web search seems to confirm that usually they do.

The US can maintain its current-account deficit...

... for longer than most other nations in a similar position would be able to, but certainly not forever. It looks to me not so much like an "endorsement of the US economy" in its present state, more of a historical remnant of the world economic dominance of the US in the past.
posted by sfenders at 2:44 PM on September 20, 2007

FWIW, Warren Buffet:

Making these purchases that weren’t reciprocated by sales, the U.S. necessarily transferred ownership of its assets or IOUs to the rest of the world. Like a very wealthy but self-indulgent family, we peeled off a bit of what we owned in order to consume more than we produced. The U.S. can do a lot of this because we are an extraordinarily rich country that has behaved responsibly in the past. The world is therefore willing to accept our bonds, real estate, stocks and businesses. And we have a vast store of these to hand over.

These transfers will have consequences, however. Already the prediction I made last year about one fall-out from our spending binge has come true: The “investment income” account of our country – positive in every previous year since 1915 – turned negative in 2006. Foreigners now earn more on their U.S. investments than we do on our investments abroad. In effect, we’ve used up our bank account and turned to our credit card. And, like everyone who gets in hock, the U.S. will now experience “reverse
compounding” as we pay ever-increasing amounts of interest on interest.

I want to emphasize that even though our course is unwise, Americans will live better ten or twenty years from now than they do today. Per-capita wealth will increase. But our citizens will also be forced every year to ship a significant portion of their current production abroad merely to service the cost of our huge debtor position. It won’t be pleasant to work part of each day to pay for the over-consumption of your ancestors. I believe that at some point in the future U.S. workers and voters will find this annual “tribute” so onerous that there will be a severe political backlash. How that will play out in markets is
impossible to predict – but to expect a “soft landing” seems like wishful thinking.
posted by Comrade_robot at 2:52 PM on September 20, 2007 [4 favorites]

doctorcurly, you did see the thread on the blue about this yesterday, right? The Big Picture post it links is on point.

There are also these two other related AskMe questions.
posted by salvia at 7:21 AM on September 21, 2007

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