Several people within the administration (particularly Stephen Miran) are highly in favor of dropping the value of the USD, as they believe it's about 25% higher than it should be due to being used as the international reserve currency:
https://www.hudsonbaycapital.com/documents/FG/hudsonbay/rese...
Can someone explain why it isn't disingenuous to look at Euros?
Firstly, euros cost now as much as they did three years ago. So that is clearly a price that can be reached with any number of causes. Then, UK pounds cost only what they did last September. And other world currencies? Values vs the dollar are all over the map, up, down, and nearly unchanged. No clear trend at all.
I had heard a good way to check the absolute value of dollars is to google USDX. Guess what? It's not particularly low, well within the normal range of ups and downs.
No it isn't 'capital flight' Noah - that's a fixed exchange rate concept. There are no fewer dollars in the US dollar currency area after the sale than before.
Specifically "Normally, when Treasuries get sold off, people park their money in cash, instead of moving it overseas. This time, a bunch of investors actually pulled their money out of America entirely."
They didn't, because to get out you require a bunch of other investors putting their money into America, otherwise there would be no exchange in the first place.
It's a fallacy of composition. Individual investors can sell their dollars and buy euros, but investors overall cannot. Somebody has to be selling euros and buying dollars, and the question has to be asked "what did they do with those dollars when they got them, and why were they coming in that direction in the first place?".
Liquidating static savings and pushing them back into the flow tends to cause more physical transactions to occur. It's taking money out of a drawer and spending it. That's likely stimulative.
There are no fewer dollars in the US dollar currency area after the sale than before… but those dollars are worth less than before. If capital has not left the area, it has been destroyed. That’s not to say that the US economy is inevitably doomed… but you sound very bullish.
They are not worth less in dollar terms. The same number of dollars will still settle next months mortgage bill, or tax bill regardless of what it may or may not exchange into Euros.
And the exchange rate of barrels to tomatoes hasn’t changed as that is a productivity issue.
There is no universal chart against which value is determined. Instead there are ever moving currency zone orbits, possibly shifting financial savings around.
> They are not worth less in dollar terms. The same number of dollars will still settle next months mortgage bill, or tax bill regardless of what it may or may not exchange into Euros
By that logic you are saying if the US dollar to Euro went 10 to 1 or even 100 to 1 there would be no impact because the same number of dollars will still settle the mortgage or tax bill.
> The same number of dollars will still settle next months mortgage bill, or tax bill regardless of what it may or may not exchange into Euros.
If nobody wants dollars, then to import things it's necessary to send more unwanted dollars, so the exchange rate does up, so everything imported is more expensive, so you have inflation, so the interest in the mortaje goes up, so you have to pay more.
[Hi from Argentina! Been there, done that, got a pile of worthless bills as souvenirs.]
>They are not worth less in dollar terms. The same number of dollars will still settle next months mortgage bill, or tax bill regardless of what it may or may not exchange into Euros.
If only our living expenses were just taxes and mortgages, amiright?
This take reminds me of the old joke:
“I don’t get why people complain about gas prices going up. I used to put in 40 bucks, and I still put in 40 bucks.”
I don't mean to suggest that the current American devaluation is as large as the UK's 1967 devaluation, at least so far. Just that your reasoning here is wrong: when your currency falls, that has a domestic inflationary effect precisely because your currency is worth less than before.
On the mortgage and tax bill specifically, sure there is no impact.
But I (an American) pay for some European services in Euros, meaning those got 10% more expensive. I understand this might be the intended effect, but it's not good for me.
>But I (an American) pay for some European services in Euros, meaning those got 10% more expensive.
European services would be the least of issues. The main issue would be the tons of foreign imported food, cars, products, clothes, gadgets, and so on - including tons of component parts for "american" products (not to mention materials and tooling to make even the increasingly rarer "100% made in US" products).
But that’s because you decided to take on currency risk without hedging or having a matched foreign income stream.
That’s not what anybody with scale will have done.
And now you have to reevaluate the cost of that service relative to the alternatives - including letting them know they need to take fewer Euros to retain your custom vs the competitive alternatives.
Customers are hard to come by. Are they prepared to let you go?
"They didn't, because to get out you require a bunch of other investors putting their money into America, otherwise there would be no exchange in the first place."
And when those other investors bought those dollars they did so for a lower price in another currency than they previously would have, which results in the overall value of the total dollars to fall. This alone does not signify capital flight, but the combination with rising yields does. There's simply less demand both for US dollars and all dollar-denominated assets.
It doesn’t cause the value of dollars to fall in dollar terms.
Again you’re implying a fixed exchange and there isn’t one. The exchange rate of barrels to tomatoes hasn’t altered since that is a matter of productivity
This is why “devaluations” in the fixed exchange rate period didn’t work
> exchange rate of barrels to tomatoes hasn’t altered since that is a matter of productivity
Of course it has. We are one of the world’s largest importers of tomatoes [1]. The dollar devaluing makes them more expensive. That, in turn, means the internal price of tomatoes goes up. We’re a net oil exporter, on the other hand. So yeah—the “exchange rate of barrels [of oil] to tomatoes” has been altered. In part because the productive benefits of comparative advantage are being slashed. In part because trade frictions are being introduced that reduce our economy’s productivity.
> How does it make them more expensive. Where else are they going to sell the already produced tomatoes?
It’s currently cheaper for me to take a vacation to Canada to buy next year’s skis than it is to buy them domestically. That’s demand transfer.
On the other hand, car factories that used to export to America are being idled in Canada and Mexico. That’s supply contraction.
More pointedly, if you have an unreliable trading partner, it makes sense to offer discounts to other buyers who will make up for the price cut in the long term. (Either with increased quantities demanded or a less-volatile trading relationship.)
> We already know from history that devaluations don’t work. What has changed that suggests they have suddenly started working?
We’re not in a controlled devaluation. This is America facing its first semblance of a currency crisis. Far from fully blown. But if a large foreign holder of Treasuries started dumping them, for example, and were to co-ordinate it with our erstwhile allies, that could create problems.
reply