Paul Krugman's Wile E. Coyote Moment
Yesterday, the U.S. dollar reached a new low against the Euro at $1.41 and it reached parity with the Canadian dollar. While we know this makes traveling abroad for Americans very difficult, it causes numerous other problems abroad. If you think of the global economy as a car engine, the United States is the piston & crankshaft assembly. Basically, the U.S. economy dictates the global economy.
Already, reverberations are being felt in Europe. Companies like Airbus are obviously the big losers, due to their sales being in dollars and operating costs being in Euros, they lose big to competitors such as Boeing. The problem could echo across Germany. As the article says, German automakers (as well as Japanese, Korean, British, and pretty much anyone else) depend on U.S. sales heavily. With the slide in value of the dollar, they'll either be forced to raise prices or shift manufacturing facilities to countries outside Europe where the Euro is not in use. Either way, it's going to cost them. Together, the slide of the dollar could very well force Europe into a recession.
So you may ask, why do we care about the Europeans? If Boeing and U.S. automakers benefit, isn't that a good thing? Why can't we let the dollar continue sliding and reap profits? Well, it's more complicated than that.
You probably don't know, but the Chinese own us. The Chinese possess $900 billion in U.S. treasury bonds, thanks to our massive trade deficit. Basically, we're continuously pressuring them to devalue their currency, which desperately needs devaluation, and our own currency is sliding. Since the Chinese renminbi is pegged to the U.S. dollar, their currency slides along with ours and it doesn't make them happy. China has repeatedly threatened to liquidate their entire store of $900 billion in treasury bonds, something referred to as the "nuclear option" in state run media. In addition, we're now hearing rumblings from the Middle East where the Saudis are thinking of decoupling their currency from the U.S. dollar. The above article explains this well.
Basically, even the Chinese "nuclear option" by itself is enough to push the U.S. into a recession. The Bush administration has long been plagued by inaction because of the belief that a weak dollar would stimulate U.S. exports and make the Bush economic record rosier than it actually should be. Well, I think we're close to the breaking point. We need to act before we reach the Wile E. Coyote moment?
Already, reverberations are being felt in Europe. Companies like Airbus are obviously the big losers, due to their sales being in dollars and operating costs being in Euros, they lose big to competitors such as Boeing. The problem could echo across Germany. As the article says, German automakers (as well as Japanese, Korean, British, and pretty much anyone else) depend on U.S. sales heavily. With the slide in value of the dollar, they'll either be forced to raise prices or shift manufacturing facilities to countries outside Europe where the Euro is not in use. Either way, it's going to cost them. Together, the slide of the dollar could very well force Europe into a recession.
So you may ask, why do we care about the Europeans? If Boeing and U.S. automakers benefit, isn't that a good thing? Why can't we let the dollar continue sliding and reap profits? Well, it's more complicated than that.
You probably don't know, but the Chinese own us. The Chinese possess $900 billion in U.S. treasury bonds, thanks to our massive trade deficit. Basically, we're continuously pressuring them to devalue their currency, which desperately needs devaluation, and our own currency is sliding. Since the Chinese renminbi is pegged to the U.S. dollar, their currency slides along with ours and it doesn't make them happy. China has repeatedly threatened to liquidate their entire store of $900 billion in treasury bonds, something referred to as the "nuclear option" in state run media. In addition, we're now hearing rumblings from the Middle East where the Saudis are thinking of decoupling their currency from the U.S. dollar. The above article explains this well.
Basically, even the Chinese "nuclear option" by itself is enough to push the U.S. into a recession. The Bush administration has long been plagued by inaction because of the belief that a weak dollar would stimulate U.S. exports and make the Bush economic record rosier than it actually should be. Well, I think we're close to the breaking point. We need to act before we reach the Wile E. Coyote moment?
posted by Vivek at 5:11 PM
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