Living in Canada has been a stark reminder of how quickly a thing called Bush (Harvard should be embarrassed) can reverse what Clinton had done for the US economy. I've been here for a little over two years, and the I receive about 40 cents less Canadian for every US dollar and I really doubt that this is about to change. Granted, the Canadian dollar has been rising, but the US dollar has still been falling in comparison to other currencies.

Question is: do you think we are heading for an economic crisis, or are the other countries going to continue to bail the US dollar out by buying it up? Also, is it even possible for the other countries to let the US dollar fall, since their economies are so tied to the US? Moreover, these countries can't continue to prop the US dollar up indefinitely. And, what is the general perception in the different countries- how do they view the state of the US economy and how it affects theirs? One author referred to this as sticky power, or the power the US has from in virtue of its economic presence in the world, that other countries interests become increasingly tied to that of the US so that they are forced to support it. Thoughts?

You seem to equate the economic success of a country solely on the strength of its currency. Or more specifically, solely on the strength of the Canada/US exchange rate. This is an incorrect assumption. Just because it's hurting your wallet doesn't mean it's an all-around bad thing. You need to look at the entire basket of indicators.

For starters, look at all of the US indicators. It's the healthiest major Western economy, with the some of the lowest unemployment, highest growth rates, and greatest per capita income growth in the West. (The US' growth in per capita income is actually twice the level of anything in Europe right now.)

Now, about exchange rates. The nations that it's really hurting right now are countries like Canada and our major European trading partners who need to build on their economic recoveries. For as the dollar drops, US-manufactured goods become cheaper. Money flows back to the US rather than to their domestic manufacturers.

And while the US imports a huge amount from abroad, we're actually starting to benefit from the currency peg that the Chinese have with us. Yes, Chinese goods are getting much cheaper for the rest of the world too. But Chinese-US trade should remain fairly unaffected, preserving the power of companies like Wal-Mart that rely on heavy importation.

The bottom line is that, yes, the dollar is weakening. But the US economy can support the depressed dollar right now. And when the Fed decides they've had enough, they can start to implement corrective measures. While the Fed reiterates a "strong dollar" policy, I have heard nothing to indicate that they're taking any action to preserve the dollar's strength. If they decide to intervene the market, after a few days of craziness, things will settle down.

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FLUSHED THE JOHNS!

No, I am not saying that the state of an economy is determined by the strength of its currency. However, this is one of the indicators. We also have inflation, rising interest rates, TRILLIONS OF DOLLARS OF DEBT THAT CONTINUE TO BE INCREASED, a trade deficit, and a war with no end in sight.

unemployment- unemployment indicators should be questioned, since they only measure the amount of people who are hired out of those who are actively seeking employment. In other words, those job seekers who are discouraged and leave the market are not counted in the final numbers.

We may have per capita income growth, but this tells us nothing about the state of the average citizen. Income inequality has worsened over the years, not improved. And the European countries are having trouble growing because of the strong Euro (from our weak dollar). Plus, a high growth rate does not tell always tell us that an economy is stronger than another, China's been having high growth rates, but it is not the strongest economy.

The Chinese currency peg- it is actually a problem for the East Asian economies, who want the yuan to go up.

Economist: South Korea’s ambivalence about its won policy may be shared by the other post-crisis countries in the region. But their freedom for manoeuvre is limited by China’s dedication to its peg against the dollar. During the financial storms of 1997 and 1998, the peg provided an important anchor for the region. Even as currencies collapsed all around it, China refused to beggar its neighbours by devaluing the yuan. But China’s peg, a bulwark against the financial crisis, is now blocking the “reversal” of the crisis that Mr Jen foresees and the dollar needs. To its neighbours, China is such an important trade partner and competitor that they dare not let their currencies strengthen too far against the yuan. Even Japan is wary. Much of the G20, then, is now waiting for just one of its members, China, to unpeg its currency.

Also, the Fed is not always responsible. Alan Greenspan allowed the income tax cuts that have only increased the deficit. Most importantly, the Fed is not a miracle worker... if the US economy falters, it's going to take much more than the Fed to save it.

Last edited by cristalclair on Nov-20-2004 at 17:33

A weak US dollar results from nothing more than normal business cycle fluctuations. If anything, the current lull in the US dollar is doing wonders for US exporters (I dont have any figures, but intuatively I should be right) and keeping checks on the number of imports (Although China is starting to make a shitload of cheap goods which might actually increase your imports, despite the weak dollar).

Currencies are essentially determined through interest rate differentials, or just differences between interest rates between countries.

Currently, Australia has interest rates at 5.25% and our dollar is booming against the US. We've seen an appreciation of 40%, or so, over the last few years. This is only because US interest are so low. (it's all about capital flows, for those who are interested)

With exchange rates, theres always someone who wins, and someone who loses. Strong dollar = good for importers. Weak dollar = good for exporters. Take your pick.