Brad DeLong's Semi-Daily Journal: A Weblog

Can I go ahead and invest in GOld which will increase as Dollar Slides. "?

Economic Q: Why is Gold's price increasing as dollar slides ?

Because dollars are no gold?

Whatever the reason people want gold, it is not directly guided by the wanting of dollars, so if world demand of gold does not change, then when dollar goes down, gold goes up, like most world traded goods.

DSW

" Asian nations may no longer be willing to fund the large deficits in the U.S. unless interest rates rise."

Chickens will be coming home to roost, soon. Thanks, George.

Recession coming. Sharp one. Long duration.

How far and how fast until we get to call it a run?

Where would a Member of the Reality-Based Community recommend that a fellow member turn to purchase gold bullion? I have heard that some of the larger gold dealers are wing-nuts and I dont see any reason to give them my business if it can be avoided.

Also, are there any pitfalls unique to buying gold? I mean other than the usual eggs-in-one-basket/diversification stuff.

China and Japan were propping up the dollar earlier this year so that they could continue with their export-driven growth or recovery.

East Asia is still pegging its future on export-driven growth.

India is growing, but its weak and fractured domestic market means that it relies on exports of goods and out-sourced services.

Middle East and African economies mostly depend on energy exports. Those that don't, depend on increasing textile, extractive, and agricultural exports.

Latin America is still searching for the secret to sustained export-led growth.

Europe is worried that a rising dollar will choke off an export-led recovery.

Meanwhile in that great black hole for cheap imports, American economic policymakers see a falling dollar and consider that maybe it's not so bad because it will make imports more expensive, reducing the trade deficit and helping American exporters.

Unless someone found a large, sedentary, rich, consumer-crazed civilization on the moon that I didn't hear about, who is going to buy all these friggin' exports? And what happens when the global markets realize that we can't all export our way to prosperity without some growth in domestic demand? Something's gotta give. Any guesses?

@anne

Roach is honest, but sometimes a little off.

Why should Europe consume more? If people are fine with saving for later years one should be happy if they do so. It´s the US who is overconsuming. Europe consumes what the people feel they need, not more, not less.

In essence he is asking for a new Plaza Accord, but there is one point missing. Reagan increased taxes to lower the US budget deficit. That was the US part of the deal. This time around the US is not willing to do its homework. So why should anybody engineer a gradual Dollar decline now? That would be quite a onesided deal no. Let the Dollar dump. The Japanes and Chinese central banks will run some book losses on treasuries but so what?

The dollar will have to fall a long way for the book losses on holding tbills to be as high as the book losses on holding gold, over any length of time, from any start date before 1980.
I expect it will fall that far.

Chuck,

"Recession coming. Sharp one. Long duration."

Yup. In Germany and Japan. Suck it up, Chuck. :^)

B

Why should Europe consume more? If people are fine with saving for later years one should be happy if they do so. It´s the US who is overconsuming. Europe consumes what the people feel they need, not more, not less.

Agreed.

A falling dollar also stimulates the growth in US exports. They become cheaper abroad, while increasing the cost of foreign goods in the US. This helps in US job creation and job maintenance.

Indeed part of the September 1985 Plaza Accord to allow a decline in the value of the dollar, was the agreement to raise taxes to limit the expansion of the government deficit. With no such change in fiscal policy a decline in dollar value can take some pressure off our balance of payments deficit, but only for a time. As the deficit continues to build there will be balance of payments pressure.

We are imagining that economic growth will cut the government deficit, as tax revenue increases automatically, but we have a structural deficit that will be little limited by faster growth.

Shorting ALA, ABB, SAP. Y'all are interpreting the ultimate effects of this _entirely_ incorrectly.

Let it fall, let it fall, let it fall!
(Sung to the tune of "Let It Snow")

Bernard Guerrero

Responding: Rather than buying gold, an investor who believes gold a proper hedge against a weakening dollar or rising inflation seems better off buying a precious metals stock fund.

"""A falling dollar also stimulates the growth in US exports."""

The question is; has the US something to sell to the world and can the US even produce enough of it?

Sure, US-made products such as dvdplayers become easier to export, but if no American company produces dvdplayers then it will take a long while to start production. In the meantime the trade deficit on dvdplayers (seen in isolation) will stay the same or increase.

""A falling dollar also stimulates the growth in US exports.

The question is; has the US something to sell to the world and can the US even produce enough of it? ""

The question is NOT has US something to produce / enough can it produce ?

BUT will the world ready to BUY anything from US ?? :-) (except for Baywatch and Friends)

"BUT will the world ready to BUY anything from US ?? :-) (except for Baywatch and Friends)"

Of course, if the price in the local currency is low enough. Duh.

I believe the Asian central banks will continue supporting the dollar in the near term (a year or two?), to support their export-driven economic growth. The euro will bear the brunt of the pressure from the dollar-asia currency bloc. The ECB may begin to intervene (e.g. to keep the euro below 140).

Whether we can avoid a messy nonliear decline is unclear, given all the hedge funds (and even ordinary people) placing bets against the dollar...

WSJ: The selling also signals a startling shift that may have damaging implications for the dollar down the line: Many Chinese view the yuan, also called the renminbi, as the safer currency to hold.

"The U.S. dollar is weakening! The renminbi is the hard currency now!" shouts a 40-year old man after pulling $10,000 out of U.S.-dollar-denominated stocks and plunking the sum into yuan deposits. "It's the best choice," he says.

http://infoproc.blogspot.com/2004/11/dollar-loses-luster-in-china.html

http://infoproc.blogspot.com/2004/11/ubs-fx-report.html

http://infoproc.blogspot.com/2004/11/how-can-average-investor-hedge-against.html

I'm with b. Insufficient consumption?!? Only when compared to the U.S., who overconsumes.

Sheesh.

D

Since the Yuan is pegged to the dollar, the broad fall in value of the dollar gives Chinese exporters a growing cost advantage. China finds its large dollar reserves losing value, but export gains are ample compensation.

What does saving mean?

Dano,

"I'm with b. Insufficient consumption?!? Only when compared to the U.S., who overconsumes."

What, precisely, do the terms "Overconsumption" and "Underconsumption" mean to you, exactly. Because, AFAICT, there are no such animals. The level of consumption is whatever the consumers in question would like it to be, limited and scaled only by their tastes and budget constraints. And given the slack and huge amount of room for import substitution in the U.S. economy, I don't see that the budget constraint is all that tight in this case (unlike, say, Argentina.)

anne, b: Europe, as well as the US, is suffering from overly large "rentier" and "bureacrat" classes (for lack of my imagining a better name). By that I mean those who live (to a large extent) off of rent extraction, heritage, financial speculation ("investment"), and operating an increasingly financialized, legalized, regulated, compliance-based etc. society -- lawmakers, law enforcers, regulatory commissions, accountants, financial advisors, standards bodies, all kinds of lawyers and paralegals that businesses and individuals have to employ, patent & IP lawyers, compliance officers & auditors, and so on.

Please note that I don't mean to degrade the work that especially people in the "bureaucrat" categories do. Many of them, especially in the private sector, work quite hard, and often with more stress and uncertainty than others. For any regulation or procedure in isolation, it seems often better it is there than not, and the work of its administrators should not be judged useless, and neither is it their fault.

Anyway, after this lengthy disclaimer, in the aggregate administering procedures does not produce goods and "consumable" services, but at best "intangibles" like a less polluted environment in the case of environmental regulation. Both "desirable" and "useless" procedures are a drag on the efficiency of labor and value creation, either directly (cutting into business revenue) or indirectly (taxation of labor and value creation). In addition to that (and perhaps worse), rent extraction has a similar effect of cutting into labor & value creation incomes.

In the end this is packaged and resold under the label of "high labor costs". The labor cost is not because workers "make too much", but because each X workers have to support a number of rentiers, lawyers, accountants, compliance officers, military personnel, etc.

And this is also the driver of offshoring. The "cheap labor" locales are also "low regulation" locales, and buying off a number of local officials looks cheaper on the balance sheet than implementing OSHA, workers comp, environmental protection, and employing all the administrators around them. (What is more, foreign bribes used to be tax-deductible in Germany until a decade or so ago.) If you can't dump your waste into US rivers and soil, dump in Chinese rivers and soil. And perhaps at this time the offshore rentier classes are content with less rent than their domestic counterparts.

Coming back to the subject, it is hard to see how the US and Europe can develop incentives to repatriate offshored businesses, or protect newly created businesses from offshoring. Otherwise they will have to offer ever less for export. Because DVD players manufactured in the Far East on behalf of a US client are not US exports.

I found Roach's opt ed to be all about stoping a panic. He is covering for his past pessimism.

"Where would a Member of the Reality-Based Community recommend that a fellow member turn to purchase gold bullion?" You are right, avoid the wingnuts.

http://finance.yahoo.com/q?s=gld

Gold ETF

""""A falling dollar also stimulates the growth in US exports.""""

We import as much food as we export. We no longer have textiles. We no longer have low cost manufacturing. I am not sure we have much capability in tools. We manufacture no computers or chips. I would argue that they are aalready tired of American exports like Coke, and McDonalds, and Marlboros. There isn't much market for weapons that can't be matched by overseas.

The rest of the world wants fuel efficient vehicles, not SUVs.

There will be much less gained by cheap US exports than you think, and even that will be countered by heavy anti-Americanism.

Forget the jobs and plan for the recession.

I'm curious: is there a point at which the exchange rate of the dollar becomes so low (other than zero) that there are no advantages to have a "low" dollar?

Comparing, the dollar is about the value against the French Franc or German Mark that it held in November 1994. The dollar gained in value against what would be the Euro through 2000, then reversed to the value near the end of 1994. Robert Rubin and Lawrence Summers maintained a strong dollar policy, but from 1985 till Rubin became Treasury Secretary there was little Administration concern about a weakening dollar. The current lack of concern may largely reflect the legacy from 1985.

What bothers me is that this pleased Stephen Roach is the same analyst who was last heard telling Boston money managers in a private meeting that there was a crisis coming. Which Stephen Roach are we to believe? Can the dollar adjustment be thoroughly benign?

A strengthening currency should be reflective of a strengthening economy, and the combination should attract low cost foreign investment. Obviously, low household savings levels and high government deficits are weakening of the economy and currency. But, a resolution is not in the least clear.

It has NEVER been "benign" in the long run. It ALWAYS takes one year for all those birds to come home to roost.

The resulting inflation/stagnation takes years to wring out again.

Take a look at the new ETF with call letters GLD. It is a stock that trades like gold. There are issues with how much fees the company that runs the ETF takes out, but if you think gold is going to double soon, and you don't want to buy bullion directly, this may be a way to play.

"Gold is rising because lots of rich americans percive gold to to be a "safe haven" for wealth during economic turmoil."

Gold is only rising vs. the U.S. dollar. Against the euro it is remarkably stable, although it is trending towards its upper range.

I think this may show that the dollar has lost its place as a store of value, which the euro has taken over.

The benefits of a reserve currency is that people take worthless pieces of paper and stick them in their bank vaults and give you back suitcases or digital cameras. As long as there is momentum - more and more reserve currency is put aside -, this is great for the people lucky enough to be issuing the paper. If the momentum goes in reserve, however, said people will be finding that they are working hard only to recuperate the bits of paper that others accumulated.

Well, it's helping my software exports. I have a higher percentage of orders coming form the UK, Germany and Japan especially, compared to the past.

I hope it keeps falling. I know a "weak dollar" sounds bad. I mean, "weak" is always bad, right? No... I don't think so. The only negative thing I foresee is higher prices at WalMart. Good.

The Frontline special reported that people make $0.50 a day in China working at Walmart factories. Well, if the dollar goes in half, they will be making a whole $1 a day. Obviously, the dollar has a lot more to fall.

Anne,

I happened to find a discussion of Roach's NYT article here:

http://wanniski.com/showarticle.asp?articleid=4002

Wanniski's theme is the point that Boucher brings up. I agree with Thomas that the love of gold as a hedge (or need by goldbugs to see "the dollar weighted in terms of gold") seems at least off, but I wanted to post a contrarian view.

As I've said before, I'm not an economist or in the FIRE industry, so can someone out there critique his critique? Thank you.

I just happened to be on Wanniski's mailing list, mostly to see what his side was saying, so that I'm not reading only neo-Keynesianism. Is there a 3rd view?

Why all the gloom and doom? One of the reasons for the 2001 recession was the bursting of a so called tech bubble. This bubble resulted from an overinvestment during the 1990s in the tech infrastructure (one of you mentioned that we were importing capital to finance productive investment during that time, well it seems to me we "over-invested"). I for one believe that we were simply not able to adopt enough practical application of these new technologies in the 1990s to sustain all of the new investment - this will soon change as our ability to make use of the technological advancements in all products (tractors, medicines, kitchen appliances, etc.) is increasing rapidly.

In any case, I can't understand why you are addressing these FX issues in a bubble. Americans are "over-consuming" because there are fewer profitable investments to be made at this time in the domestic tech and manufacturing sectors. Further, before you extend your vitriol to those of us saving a small amount right now, please tell us exactly what Americans are overconsuming anyway?

1. Since interest rates are so low, rather than saving some more of my money, I decided to buy a life insurance policy.

2. Since my public schools are absolute garbage, I spend lots of money to send my children to private schools. This counts as "consumption" and it seems like I am "overspending" my disposable income because my disposable income is $8,000 lower than it should be because the public schools still get to steal my money to fund their mess. This seems to me a pretty good investment anyway - since when was putting savings into human capital worse than putting in vehicles to finance someone else's physcal capital accumulation?

3. I spend extra money on camping materials and other supplies for my Boy Scout Troop. Is this overconsumption?

4. I am spending extra money these days donating to my favorite organizations, including The Nature Conservancy, The Sierra Club, The Cornell Lab of Ornithology among others. Is this overconsumption?

I can go on ... it seems to me that everyone needs to get a grip and stop trying to blame the current administration for all of the US's and world's ills. I look forward to enjoying America's and the world's prosperity in the years to come. I hope all of you get to enjoy it as well.

Why all the gloom and doom? One of the reasons for the 2001 recession was the bursting of a so called tech bubble. This bubble resulted from an overinvestment during the 1990s in the tech infrastructure (one of you mentioned that we were importing capital to finance productive investment during that time, well it seems to me we "over-invested"). I for one believe that we were simply not able to adopt enough practical application of these new technologies in the 1990s to sustain all of the new investment - this will soon change as our ability to make use of the technological advancements in all products (tractors, medicines, kitchen appliances, etc.) is increasing rapidly.

In any case, I can't understand why you are addressing these FX issues in a bubble. Americans are "over-consuming" because there are fewer profitable investments to be made at this time in the domestic tech and manufacturing sectors. Further, before you extend your vitriol to those of us saving a small amount right now, please tell us exactly what Americans are overconsuming anyway?

1. Since interest rates are so low, rather than saving some more of my money, I decided to buy a life insurance policy.

2. Since my public schools are absolute garbage, I spend lots of money to send my children to private schools. This counts as "consumption" and it seems like I am "overspending" my disposable income because my disposable income is $8,000 lower than it should be because the public schools still get to steal my money to fund their mess. This seems to me a pretty good investment anyway - since when was putting savings into human capital worse than putting in vehicles to finance someone else's physcal capital accumulation?

3. I spend extra money on camping materials and other supplies for my Boy Scout Troop. Is this overconsumption?

4. I am spending extra money these days donating to my favorite organizations, including The Nature Conservancy, The Sierra Club, The Cornell Lab of Ornithology among others. Is this overconsumption?

I can go on ... it seems to me that everyone needs to get a grip and stop trying to blame the current administration for all of the US's and world's ills. I look forward to enjoying America's and the world's prosperity in the years to come. I hope all of you get to enjoy it as well.

Why all the gloom and doom? One of the reasons for the 2001 recession was the bursting of a so called tech bubble. This bubble resulted from an overinvestment during the 1990s in the tech infrastructure (one of you mentioned that we were importing capital to finance productive investment during that time, well it seems to me we "over-invested"). I for one believe that we were simply not able to adopt enough practical application of these new technologies in the 1990s to sustain all of the new investment - this will soon change as our ability to make use of the technological advancements in all products (tractors, medicines, kitchen appliances, etc.) is increasing rapidly.

In any case, I can't understand why you are addressing these FX issues in a bubble. Americans are "over-consuming" because there are fewer profitable investments to be made at this time in the domestic tech and manufacturing sectors. Further, before you extend your vitriol to those of us saving a small amount right now, please tell us exactly what Americans are overconsuming anyway?

1. Since interest rates are so low, rather than saving some more of my money, I decided to buy a life insurance policy.

2. Since my public schools are absolute garbage, I spend lots of money to send my children to private schools. This counts as "consumption" and it seems like I am "overspending" my disposable income because my disposable income is $8,000 lower than it should be because the public schools still get to steal my money to fund their mess. This seems to me a pretty good investment anyway - since when was putting savings into human capital worse than putting in vehicles to finance someone else's physcal capital accumulation?

3. I spend extra money on camping materials and other supplies for my Boy Scout Troop. Is this overconsumption?

4. I am spending extra money these days donating to my favorite organizations, including The Nature Conservancy, The Sierra Club, The Cornell Lab of Ornithology among others. Is this overconsumption?

I can go on ... it seems to me that everyone needs to get a grip and stop trying to blame the current administration for all of the US's and world's ills. I look forward to enjoying America's and the world's prosperity in the years to come. I hope all of you get to enjoy it as well.

"The Cornell Lab of Ornithology among others. Is this overconsumption?"

Spending on our birds is always preferred :)
Simon, my Pacific parrotlet, smiles too :)
The rest of the post is far too sanguine.

Why all the gloom and doom? One of the reasons for the 2001 recession was the bursting of a so called tech bubble. This bubble resulted from an overinvestment during the 1990s in the tech infrastructure (one of you mentioned that we were importing capital to finance productive investment during that time, well it seems to me we "over-invested"). I for one believe that we were simply not able to adopt enough practical application of these new technologies in the 1990s to sustain all of the new investment - this will soon change as our ability to make use of the technological advancements in all products (tractors, medicines, kitchen appliances, etc.) is increasing rapidly.

In any case, I can't understand why you are addressing these FX issues in a bubble. Americans are "over-consuming" because there are fewer profitable investments to be made at this time in the domestic tech and manufacturing sectors. Further, before you extend your vitriol to those of us saving a small amount right now, please tell us exactly what Americans are overconsuming anyway?

1. Since interest rates are so low, rather than saving some more of my money, I decided to buy a life insurance policy.

2. Since my public schools are absolute garbage, I spend lots of money to send my children to private schools. This counts as "consumption" and it seems like I am "overspending" my disposable income because my disposable income is $8,000 lower than it should be because the public schools still get to steal my money to fund their mess. This seems to me a pretty good investment anyway - since when was putting savings into human capital worse than putting in vehicles to finance someone else's physcal capital accumulation?

3. I spend extra money on camping materials and other supplies for my Boy Scout Troop. Is this overconsumption?

4. I am spending extra money these days donating to my favorite organizations, including The Nature Conservancy, The Sierra Club, The Cornell Lab of Ornithology among others. Is this overconsumption?

I can go on ... it seems to me that everyone needs to get a grip and stop trying to blame the current administration for all of the US's and world's ills. I look forward to enjoying America's and the world's prosperity in the years to come. I hope all of you get to enjoy it as well.

Me,

That's clear, but I was addressing the lamentation that personal savings are too low in America.

Ann,

Is it a crime to be optimistic? For every reason folks have to get gloomy about our economy, I think there is one to be optimistic. Global productivity will easily outpace the rate of monetary expansion worldwide and alleviate many, if not all, of the concerns posted by others above.

You say this sounds looney? Is it any more looney than folks predicting doom for the world as a result of our twin deficits?

Mirty Blird: Good luck to your software exports, but you may find with a falling dollar that you depend more on imports than you might think, both for your personal consumption and your business.

Do you think that when Walmart's prices rise, other stores' prices won't? (Not as a consequence, but for the same reason.) Including office supply stores and the wholesalers from whom you buy. And I suppose you also have a not too small energy bill. And wait for the healthcare bills to come in. Energy & raw materials is a significant component of every cost structure in the Western world. While it becomes more expensive for you, it becomes cheaper for your foreign competitors (in dollar terms that is).

John Ozrir: Think about the energy needed to power all the automation. If that continues to come from oil & other fossil fuels (as it does today for the largest part), rising energy prices may well cancel out or at least diminish the benefits of automation.

Let's say you produce some export good that you can sell at current dollar price X, and which requires foreign energy (oil) cost Y. Your net export will then be at best (X-Y). You see where this is going. More automation will increase the cost base by Y' (more (?) energy consumption plus depreciation of automation equipment), so the sale value of your good has to increase at least by Y' as well (and if it increases by *just* Y', your price margin will shrink). And the oil price component of Y and Y' is not independent of the increased oil use.

Of course another part of the equation is that you will reduce the human labor input, and humans have to be powered as well. But they don't drink oil, but eat grain, vegetable, meat & milk products which are made mostly locally. That is, if the US can uphold its food production which is also quite energy intensive.

So in summary the trick is how to successfully transition to alternative, non-import energy sources, at least to a substantial degree, and do with less energy to begin with.

John Ozzir

Fret not. You were immediately appreciated for a thought about birds. The Cornell Lab of Ornithology is a wonderful institution, and I urge you to look to magical Pacific Parrotlets.

Economics? As for economics, I try to be a realist and I am troubled just now by our direction and what I take to be policy in the offing. Your post however was appreciated.

http://www.wingsparrotlets.com/Lucy%20on%20apple.-1.jpg

For all a treat.

Also, while economists may be grumbly just now, there is a world bull market in stocks these 24 months and America long term interest rates are surprisingly and happily low.

"Global productivity will easily outpace the rate of monetary expansion worldwide and alleviate many, if not all, of the concerns posted by others above."

Productivity increases allow for but do not insure economic growth. There was such growth through the Great Depression. There is more needed. Most expecially sound monetary and fiscal policy are needed.

snsterling: "Nope! It becomes cheaper for his foreign competitors in their local currency."

That is what I meant to say. Lax wording on my part, sorry.

Anne,

Your birds are spectacular, thanks for the link!

Cheers