Good News on the Declining Dollar, Savings & More

Kurt Brouwer November 24th, 2007

The declining dollar has generated lots of anxiety even though this type of decline is nothing new. It has also drawn much speculation as to its origin, when in fact that should be quite obvious (see How Far Has the Dollar Fallen? And Why? and The Unloved Dollar) because our currency falls when short-term interest rates fall. With all the ink that has been spilled and all the pixels deployed in online media, this is one of the few articles that clearly spells out what is going on. The columnist, Gerard Baker of the Times Online, also succinctly ties in our much-decried savings rate and the phenomenal increase in U.S. household net worth. It’s quite a piece [emphasis added]:

The dollar’s in decline. Great news! (Times Online, November 24, 2007, Gerard Baker)

‘…Much has been written about the eschatological symbolism of the dollar’s fall and the financial problems that have accompanied it. The apparent consensus among commentators here in America and especially in Europe is that the US has become a kind of Third World country, awash in debt and sinking fast because of a collapsing housing market and a banking system in meltdown. And all this is supposed to reflect in turn a seismic shift in the balance of global economic power away from the US and towards Mighty Europe and Emerging Asia.

Let me take a moment in this season of cheer to raise a few objections. The first and most obvious point is that there are many reasons why currencies move against each other, often in quite dramatic fashion. Seismic, epochal, geopolitical shifts are not usually the best explanation.

Rather, more prosaic facts such as differentials in countries’ short-term interest rates, the rebalancing of temporary financial and economic imbalances and sudden changes in demand for and prices of commodities such as oil produced by particular countries — all of these help explain the dollar’s recent decline.

US interest rates are on a downward trend, while European rates are steady and might even rise. The US still has a vast trade deficit, which is being reduced by a continuing fall in the value of the dollar…

…For the historically short-sighted, let’s remember we have been here before. Between 1985 and 1995, the dollar declined by 43 per cent against the world’s big currencies — somewhat more than it has in the past six years. That period was also marked by dire proclamations of the end of US economic power. But it turned out that in those years the foundations were laid for the strongest period of US economic growth in the past 35 years…

Many people view the six-year decline of the dollar with fear and anxiety and that’s unfortunate. The dollar has fluctuated in a similar fashion in the recent past with no harm done. In fact, there are some tangible positive aspects of the falling dollar — then and now — most notable of which is the sharp reduction in the U.S. trade deficit.

And, do you remember thinking that the U.S. was in decline back in the late 1980s and early 1990s when the world’s other superpower, the U.S.S.R. was collapsing. Or, perhaps you remember those columns about how Japan was taking over our country, just at the point when the Japanese economy entered a long-term decline. Not exactly prescient were they. Baker continues:

…If you’re still sceptical, ask yourself this: is it probable that the shift in the relative value of the dollar and the euro represents a bet by the world’s investors that Europe — strike-torn, productivity-challenged, demographically doomed Europe — is the world’s economic future, rather than the US, or, let’s say, China? All right, but this is different, say the Cassandras. The US has been living on borrowing for years now. The world has finally woken up to America’s addiction to debt — all that growth has been bought on the never-never and now, at last, the bill has come due.

The first thing to be said is that the level of public sector borrowing in the US is very small. The fiscal deficit, at just over 1 per cent of national income, is smaller than in most major European countries. It’s true that America faces a large long-term fiscal challenge from an ageing population. But it’s a smaller challenge than that faced by most of Europe, Japan or even China…

Not only is our Federal budget deficit a very manageable 1.2% of GDP (which is half of the average rate for the past 40 years), but our national debt is modest as well. For more on this topic, see National Debt at $9 Trillion:

…So if government borrowing isn’t the problem, it must be the private sector that’s neck-deep in debt, right? The general view is that Americans have irresponsibly fattened themselves up on widescreen televisions and gas-guzzling four-wheel drives, all paid for with easy credit.

If you look at a simple measure such as the savings rate — the proportion of income that is saved rather than spent — Americans do look pretty spendthrift. It is close to zero in the US, compared with 10 per cent in Europe and much higher in Asia. But focusing on this one measure distorts the full picture of America’s household balance sheets. The reality is this: why save when the value of the investments you own is increasing at rapid rates? The total value of mortgage and consumer debt is indeed up by a massive $5 trillion since 2001, according to the latest figures published by the Federal Reserve.

But consider the increases in the wealth of Americans during that period. The aggregate value of houses alone is up $8 trillion. The increase in the value of stocks held either directly or through pension funds and other investment instruments is higher by another $8 trillion. That’s an increase in net wealth of American households of $11 trillion in less than six years. That’s about $90,000 for every household in the country. As someone once said, 11 trillion dollars here and 11 trillion dollars there and pretty soon you’re talking serious money…’

Many people who denounce our national savings rate do not realize that the savings rate statistic does not include most investments nor does it include assets in retirement plans or even home equity. For more on this, see $57.9 Trillion — American Net Worth.

I applaud Gerard Baker for a succinct and lucid column that beautifully lays out a historically-accurate point of view on the dollar and other current concerns. And, with him, I agree that we should be thankful for our economy, both for its strength,but also for its resilience.

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20 Responses to “Good News on the Declining Dollar, Savings & More”

  1. Fritzon 25 Nov 2007 at 3:21 pm

    Nice to see someone look at the situation in a reasonable manner instead of the way the politicians are talking. There have been currency fluctuations for many years and only when the politicians get involved in trying to fix them should we be worried. I say leave the politicians out of it and let market forces deal with it.

  2. hrhon 25 Nov 2007 at 4:24 pm

    While a declining dollar is probably good news for the USA (products overseas being sold at more competitive rates, etc.), it is sure causing me some difficulty. I live overseas and get paid in dollars. When you couple that with the fact that in many places in this world, inflation of national currencies is a fact of life, people in my position feel the squeeze. Of course, we did not complain when the dollar was stong and national currencies were weaker.

    I would imagine in places like Ecuador, where the currency is the Us dollar, there will be a lot of pressure to cut loose from the dollar, which in the long term would be a mistake.

  3. Lou Minattion 25 Nov 2007 at 4:33 pm

    Wow. Optimists. You are a rare breed in the blog world.

    I am negative short term due to the collapse of the housing bubble, but like you I am old enough to remember the predictions by “smart” people that America’s time was up. Remember Sony’s Akio Morita? Quote:

    “The American Economy appears to be deteriorating. I assume that the Bush administration will take steps to tackle the present problems, but the country as a whole seems to be extremely nonchalant about the so-called twin deficits: budget and trade.”

    Soon after Morita’s book came out, Japan entered into an economic depression that it has yet to emerge from.

  4. Kurt Brouweron 25 Nov 2007 at 6:18 pm

    Great point Lou. And thanks for the uh compliment. I’m happy to be an optimist. The quote from the Sony chieftain was quite moderate at the time. Our own pundits were predicting our economic demise.

  5. Kurt Brouweron 25 Nov 2007 at 6:27 pm

    hrh–you’re absolutely correct. The declining dollar does hurt U.S. expats and others who get paid in the dollar. And I particularly appreciated your candor about how you did not complain when you were a beneficiary of the strong dollar.

    There are many countries that have a currency ‘pegged’ or linked to the dollar. The biggest one is China. I recently posted on this topic: Can China Dump the Dollar?

  6. Ursuson 25 Nov 2007 at 6:43 pm

    People don’t seem to remember but a weak dollar was part of the administration’s plan for recovery. See for example this BBC article with John Snow from 2003 where he telegraphed the intention to go low.

    In short, people who hold up the weak dollar as proof of declining US hegemony are pretty much arguing the opposite.

  7. Greg Brookson 25 Nov 2007 at 8:07 pm

    I’m neither an economist nor a trader, just a bit of a cynic, I suppose — which is why the drama in current mainstream economic reporting has left me wondering if I was getting the whole story. Thanks so much for an understandable synopsis that seems backed by reason.

  8. John Don 25 Nov 2007 at 8:31 pm

    Yeah, I’m not an economist or anything remotely resembling one. But I am retired military and remember the days of the 2 DM or 100 yen dollar. The world was ending then too. Somehow it always manages to right itself. I really bites when you’re living outside the U.S. and buying things locally. But then, I also remember the days of the 4 DM or 400 yen dollar.

    Good times…bad times. The only thing that you can rely on is that things will change.

  9. [...] Good News on the Declining Dollar, Savings & More Many people who denounce our national savings rate do not realize that the savings rate statistic does not include most investments nor does it include assets in retirement plans or even home equity [...]

  10. icon 26 Nov 2007 at 1:09 am

    China can dump their toxic toys as well as dump the dollar. The only way for China to dump the dollar is to buy things from us. Unfortunately, the Chinese don’t much care about our products, they buy our manufacturing factories. They do not run the factories here, they dismantle them and ship them back to China. They also buy our high techs, not high tech gadgets but the whole companies like 3coms, for our military techs.

  11. carolon 26 Nov 2007 at 2:15 am

    A chum in insurance here in London says the losses from Katrina are less because of the declining dollar.

  12. howard lohmulleron 26 Nov 2007 at 4:46 am

    An over looked factoid is that our rate of inflation of 2.5% per year reduces the debt by half every 25 to 30 years.(rule of 72) Thus in 90 years the current debt would be 1/8 of what it is today.(1/2×1/2×1/2) The trick is to hold all nations to 2.5% inflation.The U.S. does which is why we still run things.

  13. Dr. Kenneth Noisewateron 26 Nov 2007 at 7:12 am

    And even regarding foreign holding of US government debt being a huge problem…

    “When you owe the bank $100,000, it’s your problem. When you owe the bank $100,000,000,000, it’s the BANK’S problem.”

    Short of nationalism, it is in the interest (no pun intended) of government holders of US debt to see the dollar strong, and its current downward trend is killing them. It’s almost like a tax and tariff rolled into one!

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  16. WealthFly » Advisor Blog: Fundmasteryon 28 Dec 2007 at 10:57 am

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  17. Anonymouson 24 Jan 2008 at 12:02 pm

    Yes, things are great for the people with the most money. Never mind about the rest of America, as in, most of us…

  18. JBrownRBDon 30 May 2008 at 5:23 am

    The Economy is only growing for the wealthy, I have a friend who works for Merrill Lynch and he says people are losing their jobs in that company left and right. ML is sending the jobs overseas.

    F.Y.I Barack Obama says he will stop giving tax breaks to companies like this.

  19. KAMAL AHMAD KHANon 21 Jul 2008 at 8:35 pm


    The health of U.S. has been on the rocks ever since the Gramm-Rudmann-Hollings Law was amended/scrapped by President Bush. The Repercussions on the Consumer/Common man on the street will be felt when the Debt Servicing gets to above 3 Percent of GDP. which it already is. That means inflation will follow for the next 5-7 years followed by a Period of Stagflation possibly 3 years i.e. I see Interest rates back above double digits in 7-10 years. with the economy performing poorly. Recession should show its indication from 2009. Outflow of investments should pick up speed 2009 onwards. Bankruptcies to double in the next 5 years. Unemployment to double in next 5 years. The USD to FALL , the Stock market to Fall to 7,000 levels . The banking sector to lead the way as FDIC doesn’t have enough money to bail out a Top 20 US Bank. The Blame (I Feel) goes ALL to US Congress-Senate especially PRESIDENT BUSH for his policies to gain Votes and popularity NOW at the cost of the Future of the US People as the Consumer/Common people in USA will feel the HIT 5-7 years down the road in a Big way. First Recession followed by Stagflation after 3-5 years will and should be hitting the economy in 2009 onwards as the
    Sub-Prime Mortgage crises is ONLY the forewarning of worse gloom and doom to follow.


    Who is going to Bail out the USA ? EU ? World Bank ? IMF ? Japan ? China ? Who ???

    Have your forgotten that the Governement has increased TAX on OIL and is earning Billions every year and even then the situation is worsening.

    Note what I have written down now as Time will tell you IF I am right or wrong. Today 08 July 2008.
    (This is my analysis and my own working)

    Kamal Ahmad Khan

  20. Roberton 29 Aug 2008 at 10:48 am

    Your work is marvelous!!

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