'Isn't the value of the dollar (and the index you mention) just a relative measure, so it's entirely possible that all non-Chinese economies are collapsing together, with just a bit of jostling to see who can collapse fastest?'In light of these posts, it might be worth just discussing the recent recovery of the $US. In particular, how is it that it is recovering? A dollar recovery does not fit the script that I have been writing over the last few months.
As it is, the second comment is on the right track. All of the currencies of the rich world economies will almost certainly decline against the currencies of the emerging economies, and the reason for this long term trend is given here. However, with regards to the RMB it is a managed floating exchange rate, such that it can not automatically respond to market conditions. This is a big spanner in the workings of the currency system, and continues to be a partial block to the rebalancing of the world economy.
This is obviously just a very broad context and does not explain the recent rise of the dollar. My own suspicion is that the rise in the dollar is nothing to do with fundamentals but just the result of habit. In times of uncertainty, which I think would be a good summary of the current economic climate, people automatically look to the dollar as a safe haven. The trouble is that the dollar is now no such thing, and is still highly vulnerable. It's a bit like the business saying of 'nobody has ever been sacked for buying IBM', but in this case of the dollar it is flying in the face of reason. The simple question to ask is 'what has changed in the state of the US economy in the last few weeks to justify this appreciation?' As soon as you ask the question the only answer is that there has been no major change. As such, sentiment rather than reason is driving the dollar higher.
The real problem here is that the revaluation of the dollar upwards is just storing up even more trouble for the US economy. The US economy needs to be rebalancing towards export led growth, and this will delay progress towards this end. It is only through the relative impoverishment of the US that is represented by a weaker dollar that the US can regain a competitive position.
As such, the dollar may rally for a while, but in the end it can only last for so long before economic reality trounces market sentiment. At some point there needs to be an economic justification for a stronger dollar, and force of habit is a poor justification.
Comments from MattinShanghai:
I have had a couple of interesting comments from a person who presumably lives in China. I am particularly pleased to have a comment coming out of China, as it is only through seeing China 'on the ground' that the reality of that country's economic development is apparent (with Shanghai as a quite startling example).
One point of note was a link to an article/essay that Matt posted. The article can be found here. It offers a very challenging perspective on Japan, and is worth reading. I keep on meaning to address the subject of Japan, but it is on an ever expanding 'to do' list, so will have to wait a while longer.
For his other comment, I will not try to paraphrase it, but it gives an outline of a historical perspective on my post on Synthetic Economics. As such I would recommend a quick read of the comment. Matt refers to one author and his writing can be found here (I am downloading it now, so can not comment on it yet). However, it sounds like the author has an interesting perspective.
I have just been looking through the Sunday papers, and it is interesting to note that the British Chamber of Commerce is now saying that the UK is heading for a recession (article in the Times):
'THE British Chambers of Commerce (BCC) will this week become the first leading business group to predict a recession in Britain.
Its quarterly economic forecast, to be published tomorrow, is expected to say that Britain is heading into a “technical” recession of two or more quarters of declining gross domestic product over the next six to nine months.
It will say that a deep recession, of the kind last experienced by Britain in the early 1990s, remains unlikely, but that the risks to the economy have grown significantly over the past quarter and unemployment is set to climb by up to 300,000.'
On the positive side, at least they are recognising that the situation is bad, but their optimism over the length and severity is completely unjustified. I have looked at their website, and assume the source is the quarterly survey, which is only available with a subscription, so am unable to see how they reasoned their prediction. However, whatever their reasoning, at least the conclusion is positive in that they are pressing the Bank of England to ease interest rates. This is desperately needed in a sinking economy and will help the UK to adjust to the economic imbalances through weakening the £GB.
A good example of the non-argument for raising interest rates is given by Simon Heffer in the Telegraph. He calls for higher interest rates to fight inflation, but as is typical of such commentary, fails to explain (and presumably understand) by what process raising interest rates will prevent inflation. He says:
'A rise in rates, which I believe is necessary to drive the last ravages of inflation out of the system, would be the final humiliation not just for Mr Brown, but for the system of economic management that he has made his own.'And:
'I know a rise in interest rates will cause more houses to be repossessed, more businesses to fold and more bankruptcies.
Sadly, that is what the economy needs in order to turn itself round. You can't have sustainable "growth" on the back of an economy where people and enterprises are living beyond their means. You can have it only where they are living within their means.'
He may not have noticed, but this is already happening. Regardless of the interest rate, this process is already in train, so how is accelerating it going to help? He suggests that it is better to have the pain now than later. However, an interest rate rise will have the effect of being a prop for the £GB (though will just slow the fall), and this is will only have a negative effect. I give the example of Heffer, because his line of thinking is not isolated. Underlying such thinking is a lack of acceptance of both the severity of the current situation, and the changed reality of the world economy. Britain, along with the rest of the rich world, are going through a crisis, and and this lack of recognition of the crisis is one of the great dangers in the current situation.