I'll be honest. Huh? The two statements I bolded confused me. First about European goods being more expensive, and secondly about American jobs vs. what I thought was a discussion about American sales. I'm abstaining from commenting personally yet, and just trying to understand the arguement. If American dollar was weaker, wouldn't it mean comapnies would want to stay here? Or is it just against the Euro, so companies still go elsewhere (which is what I think) but then we still don't have moeny to purchase? Or is it not about our purchasing power but about foreign markets buying American products or...I didn't seem to get this particular article for some reason. Anyone?

The jobs tidbit is unrelated; John Kerry seems to think (or, more likely, wants to create that impression) that free market is a zero-sum game. It is not; if the markets are free, the companies can outsource American jobs to cheap-labor countries, but they can also import cheaper goods. The net result benefits both the U.S. AND the country where we outsourced our labor to.

The point is moot. Dubya is only a free trader when it suits HIM. For example, he slaps all sorts of tariffs on Canadin lumber.

And let me take this opportunity to remind you, K, of my pre-election prediction that the US economy would be in critical condition by 2006, and it WILL be an issue. These are the 1920s all over again, and that decade proved to be the undoing of the GOP for quite some time.

You're going to have to define what you mean by critical condition, though. Something objective ought to do the trick.

How far can the decline in home bias and the increase in the variance of current account balances be expected to proceed, and where will it lead?

Current account imbalances, per se, need not be a problem, but cumulative deficits, which result in a marked decline of a country's net international investment position--as is occurring in the United States--raise more complex issues. The U.S. current account deficit has risen to more than 5 percent of GDP. Because the deficit is essentially the change in net claims against U.S. residents, the U.S. net international investment position excluding valuation adjustments must also be declining in dollar terms at an annual pace equivalent to roughly 5 percent of U.S. GDP.

OK, so what will be the objective measure of the U.S. economy doing badly?

Pressure grows for US budget fix amid dollar drop
Fri Nov 19, 2004 04:56 PM ET
By Tim Ahmann

WASHINGTON, Nov 19 (Reuters) - A drop in the value of the U.S. dollar cannot by itself bring better balance to global trade without raising both U.S. interest rates and recession risks, economists and a growing chorus of policy-makers say.

U.S. Federal Reserve Chairman Alan Greenspan was the latest top official to press Washington publicly to add deficit cuts to the rebalancing process -- which markets seem to have set in motion already by sending the dollar lower.

The Fed chief hit U.S. stock and bond markets and deepened the greenback's tailspin when he said on Friday that a dollar drop was inevitable given the United States' record reliance on foreign investors to fuel spending.

He chastised U.S. fiscal policy-makers, saying cutting the bloated budget deficit was the best way to fix global distortions without painful solutions.

A sharp dollar fall could push up import prices and force the Fed to raise interest rates to ward off inflation.

Greenspan's words amplified recent warnings from others at the U.S. central bank and the International Monetary Fund, as well as pleas from policy-makers in Europe, which is now creaking under the burden of a record-high euro currency.

Is anyone wondering why Alan Greenspan waited until after the election to announce what most economists have known for years: that foreign central banks are not going to keep up their current lending to us indefinitely? The statement last week, expressed in typically round-about "Greenspan-speak," was just clear enough to send the stock market, the bond market, and the dollar all reeling. In horse-racing parlance, he hit the trifecta.

Here is the problem: the United States has been importing a lot more than we are exporting, to the point where we are now borrowing nearly 6 percent of our national income from the rest of the world. This is not sustainable: if you project this rate of borrowing out a few years, you end up with levels of foreign debt that almost no developed country has ever had.

The only feasible way to reduce this foreign borrowing to a sustainable level -- we don't have to have balanced trade -- is for the U.S. dollar to fall against other currencies. This would increase the price of our imports, and reduce the price of our exports to other countries. This is not a bad thing -- in fact it is not only inevitable but necessary in order to save what is left of our manufacturing sector and yes, even recover some of the jobs in that sector that have been lost.

Since 2000 we have lost almost 3 million manufacturing jobs, and the number one cause of this hemorrhaging is actually the overvaluation of the U.S. dollar. If the dollar is overvalued by 30 percent, this is equivalent to giving a 30 percent subsidy to imports entering our markets. At the same time, it is also the same as having U.S. companies face a 30 percent tariff on everything that they export abroad.

It is an understatement to call this a huge disadvantage for U.S. manufacturers. And since wages in the manufacturing sector have historically been higher and have often driven wages in other sectors, the loss of these jobs is one of the causes of increasing income inequality in the United States.

Unfortunately most of our policy makers do not care much about any of these things. Wall Street prefers an overvalued dollar because it keeps inflation low by making imports cheap, and it also makes it cheaper to acquire assets (and hire labor) overseas.

So both the Clinton and Bush administrations have officially embraced a policy of maintaining a "strong dollar." This sounds very nice but is comparable to a doctor pursuing a "strong influenza virus" policy for his patients.

In any case we have now reached the point where private foreign investors are no longer financing our foreign borrowing -- it is foreign governments, primarily China and Japan, that are doing this for political reasons of their own. But as Mr. Greenspan noted, this cannot go on indefinitely. By choosing to hold their reserves in dollars instead of Euros, for example, they have already lost hundreds of billions of dollars over the past two years. Many developing countries who can afford it even less are also facing significant losses by continuing to hold dollars.

The overvalued dollar is a bubble, like our stock market bubble prior to 2000. In fact the stock market bubble contributed to the dollar's overvaluation by attracting large amounts of foreign capital to the U.S. stock market. Greenspan is right to call attention to the dollar bubble. He was also right when he briefly pointed to the possibility of "irrational exuberance" of the stock market at the end of 1996. Unfortunately he subsequently backed off from those remarks and allowed the stock market bubble to grow to dangerous proportions.

Our stock market bubble burst in 2000-2002, but it could conceivably have gone on much longer. If so, the consequences when it burst would have been even worse. This is even more true of the dollar bubble, since every year that the dollar remains overvalued costs us hundreds of thousands of manufacturing jobs.

The adjustment to a lower dollar will not be painless, since higher import prices will add to inflation, and long-term interest rates will almost certainly rise from their extraordinarily low levels of today. But there is no sense in remaining in denial.

The holiday buying season is upon us. You might as well spend your cash now because the dollar is dropping like a stone in international currency markets. It’s dropped nearly 30 percent since 2001, and is now at a record low. Even without the recent dour pronouncements of Alan Greenspan and Treasury Secretary John Snow, the greenback is likely to fall further. And the reason is simple: We’re living beyond our means. American consumers are deep in debt. The nation is importing more than we’re exporting. Most importantly, the federal budget deficit is out of control.

Nearly all of the increase in public debt over the last four years -- some 1 trillion dollars -- has been financed by foreigners, lending us the money. But who wants to lend more and more to a drunken sailor? Foreigners are bailing out of dollars. Even the Chinese and Japanese, who have kept lending so we’ll keep buying their exports, are starting to wise up.

American exporters are cheering because a lower dollar makes everything they sell abroad cheaper. But it’s bad for the rest of us because as the dollar drops everything we buy from abroad -- including oil -- becomes that much more expensive. And these higher prices will ripple through the economy, threatening inflation and higher interest rates -- and, ultimately, reducing our living standards.

It’s one of the oldest of economic laws: When you’re living too high on the hog, eventually you’re gonna fall off and find yourself in pig slop.

Riding highest on the hog right now is the federal government, with a budget deficit of over $400 billion this year. Surprise, surprise! It turns out that cutting taxes while waging an expensive war and doling out corporate welfare leads to red ink. If I were cynical, I’d suspect the White House had an ideological agenda to starve the government so it can’t do much of anything in the future except wage war. But whatever the motivation, the deficits are driving the dollar down and subjecting America to huge economic risks. The sensible move would be to roll back the Bush tax cuts, but don’t hold your breath.

In the meantime, enjoy the holiday buying season, folks. And here’s a buying tip: With the dollar dropping, the nicest and safest gift you can give a friend or loved one is ... gold. But you better move fast. As the dollar drops, the price of gold is soaring