I need an economist to explain this to me! This COULD beat Bush

[Bucky]

Or it may not help us beat Bush. I real this letter from yesterday's Alter-Cation column. My questions are:

(1) What's the relationship between the growth in the Dow Jones Industrial Average and the devaluation of the dollar?

(2) Is the dollar really devalued 30% or is it just down 30% relative to the strength of the euro?

(3) Does the dollar devaluation hurt us at home or does it just affect us relative to import/export transactions?

Anyway, this is the letter to Alter-Cation.

Name: Jason Kirkpatrick
Hometown: Houston, TX
Dear Eric,
I just got back from Europe and boy is my dollar tired. My wife and I spent about $3,500 total which, had we gone last year when the dollar had not yet been devalued by 30% against the Euro as part of Bush's Brazilianesque monetray policy, was about $800 more than we should have spent. At $300 per tax cut we just lost ours. Any chance George might send me another rebate?

One of the long lost stories not hitting the airwaves these days is the fact that while in 2003 the DJIA (Dow Jones average) went up by 35%, the value of the dollar was devalued by 30%, which if you were a European investor means that you only gained 5%, hardly a high return for the risk incurred (historically US equities returns average 20-25% in non-devaluing years). Essentially, much of the "growth" touted by Bush as the result of his tax cuts are actually attributable for his policy of devaluing the dollar and thus devaluing the value of US employee output and US goods and services (funny because I don't feel like I am doing 30% less work).

While this trick is marginally good in kick-starting short term growth, the after-effects, higher inflation and interest rates, will start eating into people's pockets far more significantly than any tax increase. Just ask Brazil.

[rogerashton]

1. It was necessary -- sooner or later.

The dollar was overvalued in purchasing power terms. It probably still is, since European central banks are printing money to buy dollars to keep the dollar up. So is China.

[aneerkoinos]

7. Nope

Not ECB AFAIK. BoJ is printing ridiculous amounts of Yens to buy dollars and just bought about half of the latest auction of US bonds.

What will China do, that is a trillion dollar question...

[freestatevet]

2. Must be

nice, going to Europe on vacation, spending $3,500, and then COMPLAINING about losing your tax cut. Sounds like someone is a whiner.

[JNelson6563]

3. You're right Bucky

I get such a kick out of folks who proclaim with delight that their portfolios are worth however muchmore than before. They seem oblivious that the dollars they've acquired are worth much less.

Julie

[freestatevet]

4. The dollars

are only worth less in relationship to the Euro, the Yen, the Pound and other foreign currencies. As long as you spend your dollars in the US, they are NOT worth less. You are confusing relationships here. Inflation has not risen, if it had you'd be correct, but, as it stands now, you are wrong.

[BlueEyedSon]

5. And since most manufactured (and other) goods

come from overseas....

Get a clue freestate.

[freestatevet]

6. That would be true

if the cost of goods had coming from overseas had increased 30%. Tell me, what's the current rate of inflation?

Seems to me you are the one who needs a clue.

[papau]

9. a GOP point that is true - congrats! but published inflation appears

to be incorrect and reporting a too small a number.

And other indicators suggest a "pop" in inflation that will be large in about 6 months to a year.

But you are correct - the devalue of 10% to 20% in the dollar has not shown up in the US and indeed has only overvalued overseas assets so that the increase shows up as "earnings" for those "financial engineers" that now do FASB earnings for companies

[freestatevet]

11. WHOA

I am NOT making a GOP point. It is a FACT. Inflation remains low despite your assertion that it "appears" to be incorrect. And the fact remains, that, as of NOW, the devaluation in the dollar relative to foreign currencies, has NOT caused a domestic devaluation (i.e., inflation) in the US.

[ProfessorGAC]

21. Sorry, But You're Wrong

The price inflation rate of the CPI was 2.62% in 2003. However, the CPI does NOT include energy and housing. When adjusted for those two factors (which applies to anyone who rents or doesn't outright own the home) the inflation rate was 3.27%.

This is NOT low. As a matter of fact, it's the highest it's been since 1994.

You're also wrong vis a vis the value of the dollar. Imported goods are bought at the currency rate of the country of origin. So, as the dollar falls, the relative cost of goods imported rises. So, the dollar does have poorer purchasing power.

This is simple MICROeconomics at a level at which i wouldn't even bother teaching a class. By the time someone takes one of my classes, they darn well better understand this stuff.
The Professor

[ctex]

23. I thought inflation was covered in MACRO not MICRO-economics

At least it was when I did my graduate work, but that was over 20 years ago.

[ProfessorGAC]

26. It Is! I Was Unclear In My Post!

Sorry if my reference was confusing. I was covering two different topics there and, obviously, didn't make it clear enough which of the two topics invovled microtheories.

The principles of dollar valuation on the price of imported goods is a microeconomic concept. The market, or industry, in question is the exchange market. The supply and demand curvature is predicated on the value of each unit vs. the number of units needed to purchase one item. So, when it comes to the impact on price of any single imported good, it's microeconomic.

The impact of that importation phenomenon is then macroeconomic, or overall price inflation.

So, you're right. But, so was i. I just didn't make my point clearly enough. Thanks
The Professor

[freestatevet]

27. But ONLY if that

importation results in inflation; thus far, it has not. Especially at a rate commensurate with the drop in the dollar vis-a-vis the Euro, yen, et al.

[ProfessorGAC]

30. Read My Other Post

Then look up the data on SAUS. You keep saying it hasn't happened, and it has! It's not profound yet, but it's happening. You went from a broad statement of fact, with no theory to support it, to anecdotal evidence and a narrowed observed horizon, now to flat out misstatement.

Get your facts straight. They are available on the SAUS database. While that's a subscriber service, most univeristy libraries have access to it.
The Professor

[ctex]

28. Thanks for the reply.

We wouldn't want folks to search their attics or basements for the wrong college textbook. :)

[freestatevet]

25. No professor I am not

wrong. Given that the "sky is falling" crown claims that the dollar has lost 30% of it's purchasing power, 3.27% inflation is LOW. Also, the relative cost of imported goods SHOULD rise as the dollar weakens, but we have NOT seen that happen on a large scale yet. The Japanese car I just bought was CHEAPER than it was last year, despite the upgrades it had.

The point is, the dollar is NOT 30% weaker domestically. That is a fact no matter how you try to spin it.

[ProfessorGAC]

29. How Convenient!

I am not one of the "Sky If Falling" crowd, so that defense is useless to me.

You are wrong. The highest rate of total inflation in 10 full years is not low! It's the highest in 10 years, the third highest in 13. By no relative measure can that be considered low.

We are seeing increases in the cost of modestly priced clothing (almost 1% in the last quarter), on mature consumer electronics, (over 0.6% 4Q03), and on oil (about 0.25%), despite the fact that the currency of oil is still the dollar.


So, you're wrong about that, too!

I never said the dollar was weaker domestically. I said you were wrong about the fact that a weaker dollar doesn't mean buying power gets reduced. Now, you're changing the horizon of your argument to be only what is happening right at this moment. As a said, how convenient.

Lastly, i'm spinning nothing. I am refuting your contention that just because dollar valuation changes, the economic impact is moot. That's just not true. You chose to use short term anecdotal information to support an broad statement. Nice induction there, but inductive logic doesn't apply very well to economics.

It would appear that by altering the terms of the debate, twice now, you are the only one spinning anything in this conservation.
The Professor

[freestatevet]

32. Are you really a professor?

Because you are mixing apples and oranges. Just because the inflation rate is the highest in 10 years, that doesn't make it a "high" rate. It's just "high" relative to the last 10 years. If we had 10 years of zero inflation and then had a year of 2 % inflation, would you consider that high? Inflation in the US REMAINS low.

Now, as far as the buying power of the dollar, I was responding to this... "They seem oblivious that the dollars they've acquired are worth much less"

That statement is false. The dollars are not worth less domestically speaking (which is all the vast majority of Americans care about), they are only worth less in relation to other currencies. Those dollars are STILL buying Americans at least 97% of what they did previously. Tell me how is this "much less?"

I never said the economic impact was moot, it isn't. But we have NOT seen a 30% drop in the true value of the dollar (e.g. domestic buying power)either, have we??

[ProfessorGAC]

33. Yes, I am

In the economics arena i provide graduate training in causative modeling of macroeconomic data. (And other complex systems.)

The inflation rate is statistically significant vs. the last 13 years. If that's unacceptable to you, tough!

I'm not mixing apples and oranges. I'm analyzing the data. If that's too detailed for you, tough!

All goods are not imported so the 30% reduction in value CANNOT cause a 30% drop in buying power. To suggest such is an indication of economic ignorance. If that too harsh, tough!

Your knowledge is too limited and your mind too closed to continue this debate. You're boring me with your pedantic nonsense. I'm out.
The Professor

[freestatevet]

34. You need to be out

since you didn't follow the argument at all. You MISSED completely my point that the dollar has NOT BEEN DEVALUED by 30% as was ALLEGED by others. The low inflation rate we have now is NOT statictically significant. See below the inflation rates for 1970-1990. PLEASE tell me, Mr Professor how anyone can consider a rate of 3.26 percent HIGH? Seems to me, it is on the LOW end.

Year Inflation Rate
1970 5.94
1971 4.31
1972 3.31
1973 6.20
1974 11.11
1975 8.98
1976 5.75
1977 6.62
1978 7.59
1979 11.28
1980 13.48
1981 10.36
1982 6.16
1983 3.21
1984 4.37
1985 3.54
1986 1.86
1987 3.66
1988 4.12
1989 4.81
1990 5.39
1991 4.22
1992 3.01
1993 2.98
1994 2.60
1995 2.76
1996 2.96
1997 2.35
1998 1.51
1999 2.21
2000 3.38

[ProfessorGAC]

36. Same Numbers As Mine

This is a statistically significant shift in inflation rate. Sorry if you're incapable of grasping that.
The Professor

[freestatevet]

37. You may be a professor

but a mathematically challenged one.

Average rate of inflation for the 31-year period from 1970-2000 was 5.19%, almost two full points higher than your "current" rate of 3.27%.

The 3.27% rate is lower than all but 10 of the rates recorded in that 31-year period. In other words, from 1970-2000 we had 21 years where the inflation rate was HIGHER than the current rate (as reported by you).

You ARE right, it is a significant difference; significantly LOWER.

[ProfessorGAC]

42. You, Sir ,Are Clueless

You don't have the first notion how to analyze these type of data properly.

Inflation data are autocorrelated, you ignoramus. The value of one year affects the next and so on in an exponentially leveraged way. So, looking at the data as one whole set as you did is mathematically USELESS! That should be no surprise to anyone who read the rest of your posts. If you don't do the proper analysis you have absolutely no frame of reference on which to base inferences, which is the whole point of mathematical modeling. (Not that i expect you to understand.)

So, if you want to pretend that since you took Econ 101 and have it all figured out, go ahead. I'll rely on my expertise, my education, knowledge of statistics, and years of experience to use the right techniques, and then decide what the data say.

I'm not about to worry that someone who knows 1% of what i know disagrees with me. Your opinion of economics and of me is worth less than nothing.

You are dismissed from class permanently.
The Professor

[freestatevet]

43. You just hate

being wrong. And you are--100% wrong. Time to tun in your professorship. The data speaks loudly. A CPI of 2.65 percent is LOW especially when viewed in historical context. Actually since the historically inflation data used CPI, inflation has been higher 26 out of the last 31 years! Thanks for playing. Playing at being a professor that is!

[bobbyboucher]

44. Uh, you might want to quit while

you are behind. I think the adding up the inflation rates and dividing by 30 sealed the deal. If it were only so simple, Bush would be smart.

[heidler]

45. I'm 78 and feel like the value of my CDs are somewhat in danger

I feel that part of this scheme is to pressure people like me to invest in the stock market which is a risk and not too great at my age. I also believe that Bush put this into motion without a clue as to where it will end up. Greenspan was thouht to be somewhat of a brake, but they would cut his throat if he interfered and they are lost. These low intrest rates are hurting retired people.

[aneerkoinos]

10. rate

I believe current REAL rate of US inflation is something between 5%-9% (and going up), even as most of inflation is moved to Japan (who needs inflation) by mutual agreement.

Don't believe the official figures for a second.

[freestatevet]

12. You believe?

Gee, okay, didn't realize we used your figures and not the Govt figures. I see no reason to doubt the real rate of inflation as published by the Govt, especially when the products I buy cost the same now as they did a year ago.

Show some figures to support your "belief."

[aneerkoinos]

14. Link

There's a whole thread on this very subject. Check it and continue there:

http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=102&topic_id=300794

[freestatevet]

15. Sigh read it

No big deal. Inflation is still very low.

[Kathy in Cambridge]

31. My grocery bill went up 20% since last year

and I no longer buy 'goodies' (I'm very frugal).

Cost of commodities rising is a sign of big trouble ahead...

[BlueEyedSon]

17. Awful nice of them Yerpeens to take less cash for their goods!

So they keep giving us deeper discounts as the dollar falls?

I guess the problem with the French is that they have no word for "entrepreneur."

[freestatevet]

19. They must be

my French wine costs just as much as it did last year!

[aneerkoinos]

8. My take

(1) What's the relationship between the growth in the Dow Jones Industrial Average and the devaluation of the dollar?

Stock bubble is inflation.

(2) Is the dollar really devalued 30% or is it just down 30% relative to the strength of the euro?

Only thing dropping is dollar (and yuan, sort of). Gold price in euros and other currencies has been stable.

(3) Does the dollar devaluation hurt us at home or does it just affect us relative to import/export transactions?

It makes the ordinary USAns poorer.

[freestatevet]

13. The

dollar devaluation does not hurt us domestically UNTIL domestic prices start to rise. So far, there are no signs that is occuring. NOTCIE I said SO FAR.

[aneerkoinos]

16. From the other discussion (link above):

Federal Government "Standard of need" was up 5% in 2003.

But you are right, it's been nothing SO FAR compared to what is coming, even as Japan is willingly sharing the US inflation (without massive BoJ interventions US probably would be in state of hyperinflation right now).

[freestatevet]

18. Hyperinflation?

Highly unlikely. Inflation will rise, of that I am certain, but let's not engage in hyperbole.

[ProfessorGAC]

22. Now We Agree

We're in no danger of hyperinflation.
The Professor

[trogdor]

20. Filled up your car recently?

Gas is inching back up - in January when nobody's going anywhere. Dollar drop affects the price of oil (in dollars) just as it affects the price of gold (in dollars).

This is but one example. The inflation rate for cheap plastic crap from China is flat because the dollar-yuan exchange rate is flat (more or less). This is, however, an abberation. If you look, the dollar is also weak against the pound, the Canadian dollar (I was just there this past weekend - the gravy train for Americans is over, I'm afraid), and just about every other First World currency.

I make the general observation that the only reason US stock indicies are up is because of the weak dollar. Just you wait - as soon as the dollar reaches bottom, the Euros will start selling, and that will be the end of the rally.

[tibbiit]

35. go to my grocery store

313.00 for this weeks grocerys, up from 250.00 per week average december, up from 225.00 per week average in november.
I know this means nothign to anyone but me.
I bought the same old crapola.
They even had to hve the store manager come okay my check, and hang around for all the other people going over their check limit.
We in line, as well as the store checker were talking about this (I was talking about how this is the fault of the chimp, with everyone around me agreeing)!
tib

[freestatevet]

38. Can't explain

why your inflation rate seems to be way out of whack to what I am experiencing. I guess that's the problem with anecdotal information

[Gulf Coast J]

40. Devaluation vs Depreciation

Just some anal-retentive economic jargon on my part, but...

Devaluation is what happens when the value of a currency goes down with fixed exchange rates. So the US wants China to devalue its currency, because they have a fixed exchange rate and most people think it is artificially high.

Depreciation is what happens when the value of a currency goes down with floating (traded in a market) exchange rate. When the US Dollar goes from $1.25 per euro to $1.30 per euro, that is depreciation.

[freestatevet]

41. You are, of course, entirely correct

.

[Barkley]

39. The Dollar's Fall

(1) What's the relationship between the growth in the Dow Jones Industrial Average and the devaluation of the dollar?

I don't know if there's a formal theoretical relationship but I'd say that a rally in the DJ is boosting the expected capital gains for U.S. investments. This will make U.S. investments look good relative to investment in other countries. A cheaper dollars just sweetens the deal. Foreigners attracted to investing in the stock of U.S. corporations need to buy their American stocks in dollars.

However if this foreign demand to invest in U.S. companies is very large and persistent it could drive up the demand and consequently value of the dollar.

I think speculation rather than the falling dollar is primarily force driving the current stock market rise.


(2) Is the dollar really devalued 30% or is it just down 30% relative to the strength of the euro?

The dollar has also fallen against the British pound; so its losing real value.

(2a) Only thing dropping is dollar (and yuan, sort of). Gold price in euros and other currencies has been stable.

The dollar is fiat money, meaning that its value is not based on gold but by supply and demand globally. Most dollars (2/3) are in circulation outside of the U.S. I think that the dollar's value is also artificially sustained by the global oil trading which is done in dollars.


(3) Does the dollar devaluation hurt us at home or does it just affect us relative to import/export transactions?

It makes the ordinary USAns poorer

It depends.

As you pointed out its a lot more expensive to travel to and through Europe with a cheaper dollar; but its also cheaper for Europeans and others to come and spend money in the U.S. as tourists.

For my home state of California, which relies heavily on tourism, agricultural exports and aerospace exports (weapons and planes) the falling dollar is a good thing. And may be Bush's way of getting more votes in Nov.

Letting the dollar fall may also be Bush's way making up to his all important steel industry constituents/voters who got shell-shocked by the Administration's decision to eliminate tariffs on steel imports.

Besides, propping up the value of the dollar would undoubtedly require the coordinated efforts of the G-7 and central bank of the E.U. and I don't think 'old Europe" is in the mood for rescuing the dollar.

The prices at WAL*MART certainly haven't risen 30% because the Chinese tie the yuan to the dollar. I'm not sure how the yen-dollar value is regulated but I suspect a similar arrangement exist.

[spindoctor]

24. As long as China trades in dollars, we're ok

China is by far our biggest trade partner and proud owner of the majority of our trade deficit. Lucky for us, they still accept dollars as payment.
It has been noted that a possible motivation for the Iraqi war was Iraqs policy to accept Euros for oil. If you think your gaz is expensive now......

In short, the buck's value (which is mostly speculative) will affect the price of your European vacation, but not the trip to Florida.

Now once China realizes that they can't spend their dollars outside the US or the Middle-East, they might either change their policy, or decide to buy America from us, one investment at a time.