Post by docfung on Oct 30, 2007 7:59:38 GMT -6
Economic View: They dreamt that the money would just keep coming but one day Americans could wake up screaming
Wheter or not there is a recession, the US is no longer first choice for investors and the dollar could fall to a point where it is nothing special
Hamish McRae
Published: 28 October 2007
news.independent.co.uk/business/comment/article3104570.ece
The dollar hit a new low against the euro yesterday, and at around $2.05 to sterling it is pretty weak here too. So how far will it go? And does it matter if the dollar decline really gets going?
At an individual level, the fall has resulted in a strange reversal of the relationship between Britons and Americans. We go to the US and feel rich; they come here and feel poor. I was talking to some young American bankers last week who said their London colleagues were really hurting: though their salaries were paid in sterling, their bonuses were calculated in dollars. I nearly said "poor dears", but thought better of it.
But the impact on US bankers in London, or UK holidaymakers in Florida, is less important than that on the world economy. The dollar is already at a level low enough to start to correct the chronic US current account deficit, with exports rising faster than imports – but that may not stop it falling further.
Currencies usually overshoot their long-term sustainable levels, and if the dollar does fall a bit further, it may be no bad thing. It would force a faster adjustment in the US, with consumption being held down and exports driven up. But the deeper the decline, the greater the danger of global disruption and damage to the world economy.
So what, on the balance of probability, is going to happen? The best starting point is the familiar one: US indebtedness. This is already on such a scale, the surprise is not that the dollar is weak but rather that it hadn't weakened sooner. You can see what has been happening to the dollar and the current account in the two charts. From 2000 to 2003, the current account was in pretty poor shape (though not quite as bad as last year) but the dollar was still strong. The attractions of the US as a place to invest brought in enough funds to offset the deficit. That has now changed for, I think, four main reasons.
The first is that prospects for the US economy have deteriorated. There is a great debate about the risks of recession next year, the action the Federal Reserve will take to reduce this risk, and the consequences of that. Given what has been happening to the US housing market, it is surprising demand has held up as well as it has, but it does take a lot to stop Americans shopping. Whether or not there is an actual recession, there is no doubt there will be somewhat slower growth. That would not be a disaster and the Fed is expected to cut interest rates soon to check the downturn. But obviously an actual recession would hit company profits and undermine the support they have given to shares.
Wheter or not there is a recession, the US is no longer first choice for investors and the dollar could fall to a point where it is nothing special
Hamish McRae
Published: 28 October 2007
news.independent.co.uk/business/comment/article3104570.ece
The dollar hit a new low against the euro yesterday, and at around $2.05 to sterling it is pretty weak here too. So how far will it go? And does it matter if the dollar decline really gets going?
At an individual level, the fall has resulted in a strange reversal of the relationship between Britons and Americans. We go to the US and feel rich; they come here and feel poor. I was talking to some young American bankers last week who said their London colleagues were really hurting: though their salaries were paid in sterling, their bonuses were calculated in dollars. I nearly said "poor dears", but thought better of it.
But the impact on US bankers in London, or UK holidaymakers in Florida, is less important than that on the world economy. The dollar is already at a level low enough to start to correct the chronic US current account deficit, with exports rising faster than imports – but that may not stop it falling further.
Currencies usually overshoot their long-term sustainable levels, and if the dollar does fall a bit further, it may be no bad thing. It would force a faster adjustment in the US, with consumption being held down and exports driven up. But the deeper the decline, the greater the danger of global disruption and damage to the world economy.
So what, on the balance of probability, is going to happen? The best starting point is the familiar one: US indebtedness. This is already on such a scale, the surprise is not that the dollar is weak but rather that it hadn't weakened sooner. You can see what has been happening to the dollar and the current account in the two charts. From 2000 to 2003, the current account was in pretty poor shape (though not quite as bad as last year) but the dollar was still strong. The attractions of the US as a place to invest brought in enough funds to offset the deficit. That has now changed for, I think, four main reasons.
The first is that prospects for the US economy have deteriorated. There is a great debate about the risks of recession next year, the action the Federal Reserve will take to reduce this risk, and the consequences of that. Given what has been happening to the US housing market, it is surprising demand has held up as well as it has, but it does take a lot to stop Americans shopping. Whether or not there is an actual recession, there is no doubt there will be somewhat slower growth. That would not be a disaster and the Fed is expected to cut interest rates soon to check the downturn. But obviously an actual recession would hit company profits and undermine the support they have given to shares.