Higher prices?

[esquire.]

As for China, they will need to allow the yuan to float soon, as keeping it artificially low is going to cause inflation soon.  The reason it hasn't caused inflation yet is because the Chinese national bank is buying dollars (US Govt bonds) like it is out of style, but if their GDP growth slows at all, they are f*cked.  Allowing the standard of living to deteriorate in China is the quickest way to cause a revolution, people have ignored the communist rulers for now because they are quasi-capitalist but start having double digit unemployment and a lower standard of living and hyper inflation, and you will see civil war.  

BTW, as for your comment in the other board about Chinese military spending, a huge percentage of their GDP goes towards buying US govt bonds, in order to prevent inflation at home.  The reasons for this are fairly complex economically, but I can walk you through it if you are interested.

Yeah, if you're willing, I'd like to learn more about it.

I assumed that the reason the Chinese govt. bought so many bonds was to keep their current rate of growth. I heard that China has so many white elephant, state owned industries that employs millions of workers but will have to start letting these workers go. And, that they needed this hyper growth to act as a safety valve for all these workers, and not necessairly to prevent inflation.

 

[drizzt3117]

It's a bit late to write the full story, so here is the short version.

Keeping the yuan artificially low is good for exports, but is causing a lower standard of living in China, which will eventually cause inflation because it costs more for China to purchase raw materials and inputs from other countries, primarily oil. One of the reasons that China has been buying so many US government bonds is to combat this by boosting the value of the dollar artificially. This is theoretically a great situation for us, as we can keep trying to devalue the dollar and China will keep buying our bonds to keep it up, allowing the US to screw the Europeans and be bailed out by the Chinese. However, this is NOT a good economic strategy for either the US or China. It isn't good for the US because in theory we could be allowing the dollar to recover, increasing our standard of living and making staple goods such as gasoline cheaper for the average American. As it heads towards winter, and we need natural gas and oil for heating, we will probably let the dollar rise against the Euro a bit. It isn't good for China because there are much better alternative uses for that money, such as building more infrastructure to help increase their growth. At some point though, this cycle will break and China will have to float the yuan. As more and more people come into the workforce and more and more inputs are needed, the prices will rise beyond the point where China's infusion of capital will keep the dollar from falling and it is in the US hands. Personally I think it's stupid that we are trying to get China to float the yuan, as we really don't compete with Chinese goods in any market, and we can compete better against Europe with it fixed.

 

[stache]

Quote:

(T4phage @ 27 Oct. 2004, 09:12) In the U.S, you fly more. Are you sure the distance travelled is greater?
There is no train from San Francisco to Los Angeles. You have to take a bus accross the bay,
May I nitpick? Take BART (train) to Richmond station and catch Amtrak to anywhere in North America. This eliminates the bus problem. I agree that the time on Amtrak can be deadly.

 

[esquire.]

As for China, they will need to allow the yuan to float soon, as keeping it artificially low is going to cause inflation soon.  The reason it hasn't caused inflation yet is because the Chinese national bank is buying dollars (US Govt bonds) like it is out of style,

Dz,

You lost me when you stated that buying dollars helps control inflation in China. I don't quite understand this point, although I think I did when you first posted this. Is it due to the fact that weak dollar is responsible for higher oil prices?

 

[armscye]

A couple of corrections to be sure the errors don't go unremarked:

1. The US does not "subsidize" low fuel prices, and in fact US fuel prices include a healthy highway tax. The reason our gasoline is comparatively cheap is that European nations use huge $1/liter taxes on fuel as an indirect income tax. A secondary factor, minor by comparison in scale, is the general inefficiency of European retailing, which is why ALL goods in Europe are at least marginally more expensive than their North American counterparts.

2. The idea that mass transit could be used to reach anyplace in the US quickly is absurd on the face of it. Europeans live in dense towns in small countries easily served by government subsidized rail and bus systems-- Germany is the size of Wisconsin. Start adding up the infrastructure necessary to provide walk-to-the-station rail service to every town in, say, Texas, and let us know how many miles of track and millions of jitneys we're gonna need to "improve" just that one state.

3. All of the utopian social engineers out there craving more light rail and the blooming of utopian inner city centers, please note one small inconvenient fact: the American people have voted on these issues and our current approach won by a mile. The voting takes place continuously, with each cash register a polling place and each dollar bill an accurately tabulated vote. Americans want mobility and personal freedom, and are willing to trade it for suburban sprawl, freeway entanglement, and the joys of malldom. Don't like it? Maybe you want to check the help wanteds in Finland.

 

[nightowl6261a]

GM's Billion-Dollar Bet Better, more efficient, cleaner, and Middle East non-dependent We should be making the politicians of America demand faster research in this technology to get it to the road. Let us all demand more, and take the world's economy out of the hands of the Arabs.. Cleaner and better living, and a better economy that does not depend on the price of oil.

 

[rsp1]

A few thougthts:

1) China (and other foreign countries) have no choice but to keep buying US$ bonds. Because of the massive trade imbalance, they are stuck with hundreds of billions of US$. They need to earn a return on this money, and typically need to do it in a risk-free way, so they buy, and will continue to buy, US Treasuries

2) there is not a deliberate attempt to weaken the dollar, so much as the dollar weakening is simply an automatic adjustment that must occur given our trade and budget deficits. It is a self-correcting equilibrium that will continue to drive the dollar down, not a specific government policy.

 

[Fabienne]

Quote:

(T4phage @ 27 Oct. 2004, 09:12) In the U.S, you fly more. Â Are you sure the distance travelled is greater?
In the Northeast (roughly from Washington to Boston) the train is popular, because the distances are shorter. Â Washington to New York is less than 3 hours on the fastest train. Â To get from New York to Chicago by train (for example) think takes almost two days. Â Flying takes less than three hours. California could and should have better train service. Â But it doesn't. Â There is no train from San Francisco to Los Angeles. Â You have to take a bus accross the bay, and then take a torturously long (14+ hours) train ride to LA. Â Plus, Amtrak runs on the tracks of the all-powerful Southern Pacific Railroad, and the frieight trains get priority. Â Once I stopped for nearly two hours near Santa Barbara waiting for the rails to clear. Â Flying, on the other hand takes a little more than one hour. Other distances in the US tend to be too long for the train.
A little perspective: to get from one location in Paris to another in Lyon by plane or by train (TGV) takes the same amount of time. It seems to me there were more than a few lobbyists in the 50s making sure the railroads would not become a way of life in the US. In the end, comparing distances driven by Europeans and Americans is meaningless, as everyone reasons in terms of their own pocketbook. As someone mentioned, gas in Europe is heavily taxed. Government needs money? Tax cigarettes and gas, of course. What is all so interesting to me is that the euro is actually overall successful. I remember Americans laughing at the idea, some calling it "the eurodollar". I haven't heard that expression in a while.

 

[dah328]

What is all so interesting to me is that the euro is actually overall successful.  I remember Americans laughing at the idea, some calling it "the eurodollar".  I haven't heard that expression in a while.

It's unclear what you mean by the "overall success of the Euro" because exchange rates don't measure success.  Also, a "Eurodollar" is a financial term for US currency on deposit outside of the US.  That term predates the existence of and has nothing to do with the Euro currency.  In fact, the term applies to all currencies.  For example, a Euro-yen is Japanese currency on deposit outside of Japan.  And interestingly enough, a "Euro-Euro" is EU currency on deposit outside of the EU.

dan

 

[armscye]

Let me ask by what standard the euro is "successful." 23 of the 25 EEC nations don't meet the central bank standards required for its adoption, yet have been allowed to adopt it anyway. Germany, Austria, and Switzerland have taken an across-the-board 20% cost of living hit that has damaged their economies, while other member nations have gotten a free ride. Most of Europe is in a middle-grade recession as we speak, Brussels bureaucrats excepted-- German unemployment at 13%, Italian GDP DOWN for the year. Is the Euro a "success" simply because Europe hasn't melted down this year? Or is it widely called a success in Europe because mass hypnosis is the only way Europe can keep believing in this fiscal folly?

 

[seok]

My personal opinion:

I think short-term, the US$ has depreciated enough that further significant downward pressure is eased off a bit. Mid- to long-term, however, the triple debt--consumer debt, budget deficit, trade deficit--will cause lenders (buyers of US Treasuries) to analyse the credit risk of the US. Surely, the government can print more US$ to pay off the debt, but that will add to inflationary pressure, making the bonds less valuable.

Certainly, prices of European imports--i.e. Grenson shoes, Kiton suits, and the likes--will continue to rise for the US consumers.

 

[linux_pro]

First, the US Gov't does actively pursue a weaker dollar when it serves American interest (like devaluing the federal deficit during a war, etc). The current astronomical decline in value on the dollar has a lot to do with the outrageous trade deficit, budget deficit, the war in Iraq, etc. Administrative policy can have a dramatic affect on future dollar value, as evidenced by the strength of the dollar in all major pairs (CHF, EUR, JPY, CAD, GBP) after Snow and Bush both stated that reducing the federal budget deficit would be a primary objective in Bush's 2005 Federal Budget plan. Of course, as predicted by almost every central bank in the world, Bush lied and took no measures at all in his budget to reduce the deficit. Bush and Snow are both complete idiots, and you can think Bush the day it costs you $5000 for a pair of Italian shoes (but thanks to the pegged Chinese yuan, you'll be able to pick up a pair of Chinese loafers at Walmart at the same price as always). Instead of introducing a flat-tax as he had proposed (and which could have eliminated the federal budget deficit within a year or two), he completely pulled an about-face and further cut taxes for a very select portion of the population, which has now sent the dollar right back south in a serious fashion. Does the decline in the dollar value affect average people? You better believe it. And it's vastly more far-reaching than simply making American exports cheaper to world markets, or devaluing our federal deficit. In order to offset the decline, at some point the Federal Reserve will be forced to increase the interest rate dramatically (in order to continue to attract foreign investment), which will seriously affect the interest you pay on credit cards, loans, etc. The most dangerous effect of a basement-dwelling dollar is decreased foreign investment which seriously weakens securities for example, and can cause lost jobs, decreased GDP, etc (this is very bad for working Americans). Inflation is not caused simply by a sinking greenback, contrary to common belief. The largest factor influencing inflation is dramatic decreases in the unemployment rate mixed with spikes in consumer spending (at least with Greenspan running the Fed). A bit of a different dynamic here. And generally when this occurs, the value of the dollar is actually rising versus other major currency pairs. The outlook for the dollar right now is very poor. Many currency experts are putting the EUR/USD pair at 1.42 by early summer. The outlook changed dramatically after the Bush Administration's 2005 Federal Budget was released. Expect to see GBP/USD (british pound) around, if not over, 2.00 in the same period. Yeeeehaw... Personally, I love the ride. I'm going short on the USD in almost every pair and making a killing (on long-term positions).

 

[Fabienne]

Quote:

(Fabienne @ Mar. 05 2005,13:57) What is all so interesting to me is that the euro is actually overall successful. Â I remember Americans laughing at the idea, some calling it "the eurodollar". Â I haven't heard that expression in a while.
It's unclear what you mean by the "overall success of the Euro" because exchange rates don't measure success. Â Also, a "Eurodollar" is a financial term for US currency on deposit outside of the US. Â That term predates the existence of and has nothing to do with the Euro currency. Â In fact, the term applies to all currencies. Â For example, a Euro-yen is Japanese currency on deposit outside of Japan. Â And interestingly enough, a "Euro-Euro" is EU currency on deposit outside of the EU. dan
The term "Eurodollar" was being used by the entire Finance department and by some managers at the US headquarters of the company where I work when they meant "the euro". Thanks for the explanation of the term, though. I didn't know.

 

[Fabienne]

Let me ask by what standard the euro is "successful." 23 of the 25 EEC nations don't meet the central bank standards required for its adoption, yet have been allowed to adopt it anyway. Germany, Austria, and Switzerland have taken an across-the-board 20% cost of living hit that has damaged their economies, while other member nations have gotten a free ride. Most of Europe is in a middle-grade recession as we speak, Brussels bureaucrats excepted-- German unemployment at 13%, Italian GDP DOWN for the year. Is the Euro a "success" simply because Europe hasn't melted down this year? Or is it widely called a success in Europe because mass hypnosis is the only way Europe can keep believing in this fiscal folly?

I'm not an economist by any stretch of the imagination. I simply remember Americans around me attempting to ridicule the whole endeavor, predicting a return to the various currencies after a short while. They never imagined it could pull its own against the dollar.

I choose to look at the long-term, at monetary stability. It's but one building block on the way to the future of Europe.

As for the recession, it seems to me the epicenter is elsewhere.

The idea of a "free ride", worded differently, is the essence of the European Union as I understand it, the stronger economies helping the weaker ones pull through. Look at Spain. In the 50's, France was flooded with Spanish immigrants. Now, its economy has largely benefited, and you find French doctors looking for work in Spain, for example. Or French film or advertising crews filming in Spain.

PS: Switzerland is not part of the Euro zone.

 

[drizzt3117]

I think the Euro will help in terms of functional commerce and in terms of European stability, but Europe is going to have some issues until they get all of the integration issues sorted out, especially with all of the new members. Their slower GDP growth is going to be a serious issue, with the hot new economies out there. I think in the next century, the EU will be a major player if they can operate as one, which I'm not sure they can, but on a lesser scale than the US and China.