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Runaway globalisation and the dollar

by Jerome a Paris Mon Dec 11th, 2006 at 01:16:16 PM EST

Nothing shows how globalisation has accelerated at the turn of the century than this graph showing the exports of the 4 biggest exporters: Germany, the USA, China and Japan:

The staggering increase in Chiense exports is all too visible, but the performance of German exporters over the past few years is also quite notable, and the USA and Japan have also enjoyed record export growth.

Trade, free or not, is certainly doing well.


But of course, exports have a flip side - imports. And the picture here is a bit different:

Germany, Japan and China show significant increases in imports that roughly match their exports. All 3 have healthy surpluses, but the evolution of imports and exports seem correlated. German companies increasingly outsource to Eastern Europe components or sub-assembly, and export the final product, including the "Made in Germany" stamp and implicit or explicit quality check. Same thing with Japanese companies with China or the rest of Asia playing the subcontracting role. There is a debate as to what portion of the value added stays in the country, but it seems that ultimate control is still firmly with the German of Japanese companies. In the case of China, there is a lot of imports of raw materials, and also important of components for assembly and re-export. The graph below, which shows that China actually exports a lot more to Japan and Asia (with which it has trade deficits) than to the US or Europe suggests that China is also increasingly integrated in the regional economy, probably focusing on commoditised goods, either sold on directly to final markets or to other Asian countries for further value addition.

The really odd case is that of the USA. While the above 3 export about 20% more than they import, the USA import a staggering 90% more than they export, which means that their trade deficit is almost equal to their total exports.

And the problem is not so much imports from Asia (although they do add up, and are growing), but the combination of these with an increasing oil bill.

Meanwhile, strip out exports to the US, and China, Germany and Japan are not so far from balancing their trade. Notably, Europe (led by Germany) is able to balance its trade with OPEC, something the USA is conspicuously failing to do.

Which brings us to the dollar.

We have a combination of two economic trends, globalisation and higher commodity prices, the second one being lead by the first one:

  • globalisation driven by the lure of lower labor costs and the ease of movement of capital has increased offshoring and outsourcing to places like China. That movement is led by large Western companies which move their factories to lower cost (and lower regulation) environments but keep their headquarters, strategic product control - and a large portion of their clients - in the rich world. The locals also benefit to some extent, and are busy building their infrastructure and enjoying the first fruits of prosperity, at least for significnat minorities in each country.
  • most other countries, to adapt to that relentless trend, have to cut costs to stay competitive, which has translated, in rich countries, in income stagnation, lowish growth driven by weak consumption, but higher corporate profits;
  • the USA is in a different position. Thanks to the dominant role of the dollar, and its own status as the largest economy, there has been no need for a domestic contraction to remain competitive: consumption, and growth, is fed by debt, which is being granted freely by the rest of the world, and allows US consumers to keep on buying despite suffering from the same downward pressures on wages and income. US corporates get the best of both worlds: buoyant demand and lower costs - and thus a boost to profits, all thanks to Uncle Sam's global credit card.
  • this mechanism depends, of course, on others being willing to lend the USA money. The mercantilist Asian economies did, for a while, (as it protects their own competitivity) but they have slowed down their net purchases. Thankfully, a new player has come to the fore: oil exporters, who have benefitted from the price spikes created by the strong world growth generated by the above cycle, and are accumulating record trade surpluses - mostly, when imports are taken into account, with the USA. Flush with dollars, they have lent these amounts again, and allowed the merry dance to go on further than anyone believed.

But this may come to an end soon. Oil producers are beginning to move away form the dollar. And as, currently, the USA need to borrow $2.5 billion per day just to stay afloat, any slowing down in the rythm of purchases of US debt, let alone net sales, will have a direct impact on the rate of the dollar and the overall cycle described above.

It appears inevitable to me that this will have to stop at some point, and it is likely that it is going to take the form of a collapse of the dollar, a collapse of US demand, and a brutal contraction of the export-driven economies of various bits of the world.

How this will play out is, to say the least, uncertain, but the ride is unlikely to not be rough for most parts of the world.

Display:
Jerome. How far do you see the dollar falling against the euro? $1.50? $2.00?

Hey, Grandma Moses started late!
by LEP on Mon Dec 11th, 2006 at 01:29:54 PM EST
Euro was introduced around 1.17 dollar per euro which was at the time the historical average of basket of european currencies against USD (read: DEM). The lowest point of EUR against USD was at 0.8252, this is 1.42 times less the average (1.17 / 0.8252). If you assume symetry around the historical average, estimated maximum is 1.42 * 1.17 = 1.63 dollar per euro. This is of course back of the enveloppe, but at 1.33 there's still room for appreciation if the past is to predict the future :).
by Laurent GUERBY on Mon Dec 11th, 2006 at 02:23:39 PM EST
[ Parent ]
I think 1.5-1.7 is a quite safe bet...everybody wnats it.. and everybody thinks its great..so it will probably happen..

Going deeper into the 1.8-2.. well I think some people could get scare...

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Mon Dec 11th, 2006 at 02:34:21 PM EST
[ Parent ]
I've been in France since 1990 and the lowest I've seen the dollar is where it is now, which would be 4.93 french francs. That was in 1992.

Hey, Grandma Moses started late!
by LEP on Mon Dec 11th, 2006 at 03:33:19 PM EST
[ Parent ]
It was lower when I was a little kid, around 4 francs to a dollar if I'm not mistaken?

Assuming quite a lot of things, this would be like 1.6 euros to the dollar.


The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Mon Dec 11th, 2006 at 06:12:34 PM EST
[ Parent ]
Around 1990 the dollar went from almost 200 pesetas to the dollar to about 100 (or the other way around). That would be €0.60 and €1.20.

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Mon Dec 11th, 2006 at 06:36:18 PM EST
[ Parent ]
Hi all,

Thanks Jérôme for your analyse and you're not the only one to believe the dollar is colapsing...
See this analyse made last february by Franck Biancheri, who is by the way the president of Newropeans:
http://www.europe2020.org/en/section_global/271106.htm
See you
David

by David (dcarayol at yahoo.fr) on Mon Dec 11th, 2006 at 01:45:56 PM EST
I think this post clarifies the image more or less we all have. Thanks a lot.

The question is how many different future possibilities one has.

What happens if oil is no longer symbolically traded in dollars? What happens if suddenly governments want to diversify more and more to euros?

And on the other hand.. what happens if the dollar keeps on falling against other currencies. There can be a cascade effect? Would oil producing countries switch to the euro (int heir reserves) in that case?

I think a graph showing a network with of exports-imports among the different blocks, and the debt hold by the different groups would be really awesome to have a nice view on how the different money-debt-oil/gas/no manufacture-manufacture products move around.

This is, a network without third sector products or housing... only exports , imports, debt and currency holdings. Is the US in a very soft spot? How would  the european economy turn out if the dollar  and the exports to the US collapses but an influx of demand of euros appear?...and this taking into account that Japan and CHina are also affected.. and they can also affect Europe.

I do not have the image on my mind....and I am not sure the great economists of our time have it either.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Mon Dec 11th, 2006 at 02:05:04 PM EST
In what currency oil is traded matters not that much, as Jerome explains it is what oil sellers decide to do with the money they receive for oil: they can keep it in USD as they do know, that is loaning to USA, or they can convert it in something else (euros, gold, ...). There are some small cost to convertion, but they're nothing against risk of keeping USD around (risks cost money too).
by Laurent GUERBY on Mon Dec 11th, 2006 at 02:14:52 PM EST
[ Parent ]
The symbolic aspect of dollars is also relevant.

I normally think that alwways (or mainly) the symbolism is the thing that actually amtters most although it may seem irrelevant.
Or in other terms... a symbolic change in the denomination goes a long way to force countires to adapt to the new paradigm..

I actually think that more movements to the euro would ahppen if some countires would adopt the symbolic measure...and announce it aloud...I personally ahv eno doubt about it....althought in principle ther eis no reason...

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Mon Dec 11th, 2006 at 02:32:51 PM EST
[ Parent ]
As I said a year and a half ago

http://atimes01.atimes.com/atimes/Global_Economy/GE27Dj01.html

Oil is not priced in Dollars: Dollars are priced in Oil.

No deficit-based currency is mathematically sustainable in a world with finite liquid fuel resources, and the Euro is deficit-based. ie it would only put off the evil day.

Keynes had it right at Bretton Woods when he advocated an International Clearing Union - and others, such as Stiglitz and Monbiot advocate variations on that theme.

We need to start over, and I give the system between one and four years before it collapses totally.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Dec 11th, 2006 at 02:38:48 PM EST
[ Parent ]
Hey. I just turned 70. How about giving it another ten to fifteen years.

Hey, Grandma Moses started late!
by LEP on Mon Dec 11th, 2006 at 03:35:48 PM EST
[ Parent ]
Many happy returns, LEP!

(I'll pass your request on to The Boss ;))

by afew (afew(a in a circle)eurotrib_dot_com) on Mon Dec 11th, 2006 at 04:13:50 PM EST
[ Parent ]
Thanks afew. And if you have some good contacts up there, see if HE can get the dollar back to about 1,20 euros. That would help me a lot.

Hey, Grandma Moses started late!
by LEP on Mon Dec 11th, 2006 at 04:23:54 PM EST
[ Parent ]
Oil is not priced in Dollars: Dollars are priced in Oil.

Damn that's quotable!

-----
sapere aude

by Number 6 on Tue Dec 12th, 2006 at 06:29:41 AM EST
[ Parent ]
Leaving aside the fact that the phrase "a new Bretton Woods" immediately recalls Lyndon LaRouche...

What do you suggests is likely to happen that would prompt the celebration of "a new Bretton Woods" conference, and what makes you think that, if Keynes of all people couldn't get the International Clearing Union, anything sensible if going to be put in place next time around?

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Tue Dec 12th, 2006 at 06:37:31 AM EST
[ Parent ]
Because "sensible" is all we have left....

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Tue Dec 12th, 2006 at 08:12:15 AM EST
[ Parent ]
There's always "dystopia".

You need political will to make "sensible" happen, and you might get a horror designed by committee (see Kyoto Protocol).

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Tue Dec 12th, 2006 at 09:52:42 AM EST
[ Parent ]
   
"Amazon.com...Recommended for You. Amazon.com has new recommendations for you based on items you purchased or told us you own.

The Coming Collapse of the Dollar and How to Profit from It: Make a Fortune by Investing in Gold and Other Hard Assets."

Hey, Grandma Moses started late!

by LEP on Mon Dec 11th, 2006 at 02:11:09 PM EST
Most of my long term investments are in energy now as a hedge against the dollar.

you are the media you consume.

by MillMan (millguy at gmail) on Mon Dec 11th, 2006 at 02:28:02 PM EST
[ Parent ]
Thanks for the data. I like to kill the myth that "we (the US) don't make anything anymore." The problem is the enormous amount of shit we buy on credit. The fun is clearly over when I hear "negatively amortizing mortgages" being advertised on the radio.

In related news I look forward to a couple of years of "contracting oil demand is masking the peak" arguments.

you are the media you consume.

by MillMan (millguy at gmail) on Mon Dec 11th, 2006 at 02:32:56 PM EST
is indeed the big unknown.

If the scenario I described happens, then it is likely that oil demand will drop - or that it will grow less than expected. But if we are near the production peak, that small growth may still be enough to create tensions.

Or indeed, as you say, the contraction may hide peak oil effects for a while.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Dec 11th, 2006 at 03:06:49 PM EST
[ Parent ]
"negative amortizing"?

As if negative-equity, interest-only were not bad enough.

<head explodes>

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Mon Dec 11th, 2006 at 03:44:57 PM EST
[ Parent ]
I remember thinking things couldn't get any weirder all the way back in '99. Obviously I had no idea.

you are the media you consume.

by MillMan (millguy at gmail) on Mon Dec 11th, 2006 at 04:21:30 PM EST
[ Parent ]
I'm starting to think there is something wrong with the trade figures. I think there are activities that are not being counted.

For example how does the presence of the US military in 750 overseas bases affect trade? How about all the intangible services like banking and investment trading? What about all the revenues from various types of intellectual property sales? What about sales of military equipment and/or support to third world countries?

It is to the benefit of US corporations to make earnings appear higher overseas so they don't have to pay higher US taxes, does this get factored in?

Even the prototypical Chinese imports don't present a clear picture. If the item is made in a factory with foreign part owners how is the revenue treated?

It is not even clear that we know how to define money any more. Money can now be created with no collateral on the loan just by using your credit card. Hedge funds seem to be creating money by using margin and as non-banks they don't have the reserve requirements.

I also believe in the The Coming Crash, but I have a feeling that the way it will unfold has not been anticipated. Afterwards the pundits will all say "it should have been obvious that having XXX would lead to a crash", but what is the XXX?

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Mon Dec 11th, 2006 at 02:44:23 PM EST
Perhaps all the countries in which the U.S. has military bases should pay the U.S. for putting its military there. It could be considered it as payment for protection. That would soon become America's biggest export and would do wonders for the U.S. balance of payments and would save the dollar and by extension, the world economy.

Hey, Grandma Moses started late!
by LEP on Mon Dec 11th, 2006 at 03:30:35 PM EST
[ Parent ]
I don't know about other countries but I know that NATO finances its budget with own contributions to 80% and the US 20%. There are only 4 major US bases left in Western Europe and the two new ones are in Romania/Bulgaria (which barely could afford them). Besides the bases don't play a protection role in Europe any longer, they are merely a projection system towards the Middle-East.
by oldfrog on Mon Dec 11th, 2006 at 03:56:43 PM EST
[ Parent ]
It seems to me what is "runaway" is not so much globalisation as US consumption and debt.

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Mon Dec 11th, 2006 at 03:32:48 PM EST
One way for it to play out, of course, is for Europe and Chi-Jorea to compete in extending finance into the analog side of the digital divide to restore the export demand that the collapse of the US dollar brings on.

Going by the experience of some middle income Latin American nations that have seen their currencies collapse, one of the possible retorts from the US is a system of barter trading, given that the US still retains the capability to produce a substantial portion of the kind of capital equipment that many African nations need the most. I've blogged on that idea once or twice before.

It goes without saying, and therefore probably should be said, that the more quickly and (except for the bits I don't like ;) more completely Energize America is adopted, the better the long term prospect for the US economy post-dollar collapse.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Dec 11th, 2006 at 04:06:57 PM EST
that the big graphs came alongside this article (China faces fresh tasks on trade) in the paper version of today's FT.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Dec 11th, 2006 at 04:27:59 PM EST
Of course, if one takes the contrarian view of markets, when everyone (including your plumber) starts calling for a dollar crash, and the dollar falling to 1.85 euros, that's the time to buy the dollar.

Hey, Grandma Moses started late!
by LEP on Mon Dec 11th, 2006 at 04:52:45 PM EST
Also on a contrarian note, if the dollar falls, U.S. exports will be less expensive in terms of other currencies, making it tougher for other exporters to compete. It is to some extent self-correcting (perhaps there is an Invisible Hand taking care of things!), but there is also the risk of sudden collapse.
by asdf on Mon Dec 11th, 2006 at 08:00:47 PM EST
[ Parent ]
Firstly, the dollar potentially has a long way to fall, exacerbated by the fact that once such a trend starts it inevitably goes too far.

Secondly, it's not that clear to me exactly what the US currently makes that the rest of the world will be queuing up to buy in preference to getting it elsewhere.

Changing that will take time, if its possible at all. So any correction of the deficit would come IMHO from a fall-off of US demand (aka a recession) as opposed to a rise in foreign demand for US exports.

Thirdly, I doubt whether this will be an orderly process, bearing in mind the mob psychology of markets.

Better keep whistling in the dark, I think....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Dec 12th, 2006 at 04:25:54 AM EST
[ Parent ]
You did notice that the chart shows that U.S. is a HUGE exporter, though. The American problem (well, one of many) is excessive importing of oil.
by asdf on Tue Dec 12th, 2006 at 11:53:18 PM EST
[ Parent ]


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