Why does the US have to reinvent its earnings foundation and the EU and the UK don't?
I believe the US dollar is in a long term downward trend because it is slowly slowly losing its reserve currency status as the US is losing its economic predominance. That's not a bad thing. It's just a reflection of Asia becoming less bad economically, which is neither difficult nor surprising considering how bad they used to be.
I can't see one single indicator to suggest that the USD isn't in a long term decline.
The only reason this isn't yet glaringly obvious to everyone, is that the Euro and GBP are also stuck on a downward trend.
Speculatively, I believe the Euro and GBP will 'save' themselves out of trouble within the next 5-7 years, whereas the US will practically have to reinvent the earnings foundation of it's entire economy before it can break out of this current downward spiral of excessive debt.
If this continues, couldn't it represent a significant problem for the US? Not just in terms of ability to throw its weight around due to being the world's currency, but more concretely. The US operates with a persistent trade deficit; it can get away with this long-term because there's a constant demand for USD, and countries are happy to stockpile them and hold US Treasuries as foreign reserves. But if it loses that reserve currency status, ISTM that significant devaluation of the currency could follow, as the holders of those foreign reserves look to divest. And the only way to ultimately draw them down would be to reverse the trade deficit, which is currently running at ~$1T I believe. Of course, significant devaluation of the currency would help with that, but I expect it wouldn't be fun.
I'm far from an expert though, so am probably over-simplifying. I guess it's likely this would all happen slowly enough as to not be too disruptive.
I agree, but I think that is more of a long term concern. The USD will be dumped as the worlds reserve currency but I presume this will be a long and volatile process. There are 2 reasons why I think the USD will slowly be dethroned as the reserve currency: 1) the US has made the USD their weapon in punishing opponents and many countries have already started to think about alternatives. 2) the USG has very big long term unfunded liabilities which will need to be inflated away. China and other big holders of US debt know this, hence, they are trying to slowly come up with alternatives. The good part for the USD is that the alternatives, at the moment, are shit.
The dollar recently hit a 26-year low against sterling and an all-time low against the euro. Just about everything is pointing to a lower dollar. US growth is disappointing (YC excepted ;-) and is set to underperform Europe [IMF]. US rates are expected to be cut later in the year whilst the UK and Eurozone are set to rise. The UK rate is already higher than the US, normally a predictor of bad things to come. US inflation is a bit high which lessens the dollar's appeal as a holding asset.
The US deficit, still 6%, is depending on the sale of US Gov. bonds. Oil producing nations are buying, and so are Asian central banks because they want to see their exports look cheap in USD. (Doesn't China hold USD1.2 trillion?)
The dollar looks set to drift lower. If holders get concerned they have too many and dump some of their wedge it'll plummet.
Interesting times. You could all be millionaires real easily. ;-)
One reason right now is that the US Dollar is high right now. 10 years ago the Euro was 20% higher, GBP was 60% higher. AUD was 5% higher(but getting stronger).
Despite forecasts I think in 5 years the USD is likely to fall back again.
Look at a graph of USD against GBP, Euro and Yen for the past 5 years. I agree with the general sentiment but this isn't a problem that is exclusive to the UK.
The big problem for the US in the near future is: the US dollar is suffering massive inflation. As this happens, they lose purchasing power, even compared to nations like China, and especially oil producing nations of OPEC.
This happens at the same time when China and their trading partners are looking to decouple from USD holdings, afraid of the threats made by the US. Don't be fooled, this is the beginning of a realignment where commodity exporting nations will start to privilege Asian countries and reduce their exposure to US/EU nations that will spend several years mired on stagflation.
It is just where we are in the long term debt cycle. The US dollar will devalue in the next decade, but we aren't facing a collapse or anything. We are out of monetary tools (interest rates near zero) to stave off deflation, so we will turn to fiscal tools (printing money). This is a good thing as it will make the US more competitive on exports. We may lose our global reserve currency status but that is not a sustainable position, so it is somewhat inevitable.
The US is still one of the most desirable places for foreign talent. I hope we maintain that position. That creates demand for US resources and provides the people currently here with a comfortable retirement. China is not so welcoming to foreigners, nor is it very desirable given the pollution.
Useful info for guessing at the cause of this: the exchange rates to the euro, pound, and yuan are all shifting toward strong dollars and yet the real value of dollars is still plummeting.
I've seen an argument that we have reached the end of benefit from being the global reserve currency and that the US dollar should weaken to balance out trade. We have been a net importer (of goods) for so long, the upper class has reaped the benefits of cheaper goods while the manufacturing class has lost their jobs. China moved away from feeding the system by ceasing US bond purchases and starting the Belt and Road initiative. It seems like we're there and I'm pretty excited about a domestic manufacturing capability.
Combining this with low interest rates, a ton of money is exiting the bond market looking for yield. A lot of it is flowing to stocks, decreasing earnings. Overall, I believe it means greater investment availability. It's really the perfect storm for a very prosperous time in the US (expansion!).
I'm not sure it's so much a story of the British pound, as of the US dollar, given that the pound-euro exchange rate is still well within it's range for the last 5 years:
The Chinese yuan and Japanease yen are also both at their lowest value vs the dollar in recent years, and moving faster than they normally do.
For each of these (UK, EU, China, Japan) there are local conditions you can blame the currency depreciation on, but given the number of major currencies depreciating rapidly vs the $ I think it makes more sense to look at what the US is doing as the simplest explanation.
Good points. The decline we should be worried about is not in the currency, but in the competitive advantage of the US relative to other countries. If it gets more affordable to do business elsewhere, you'll find fewer and fewer good companies on US financial markets. (Many claim SarbOx has already done significant damage here.) If emerging economies can continue to reduce costs -- by tackling security problems, corruption, red tape, improving education and infrastructure, etc. -- faster than we can, US equities may lose their world-leading position. That's not to say it's a zero-sum game; it's quite possible that all the world's equities markets could do well, and the US could lead without being dominant. But equity investments are more strongly tied to their country of origin than globally traded "real" commodities like timber or oil, so if you think the US might lose some competitive advantage -- like if it got significantly less appealing for valuable workers to immigrate here -- you might want to skip the stock certificates and instead buy the paper they're printed on.
The USD has a century of relative stability behind it - there have been ups and downs, but there's never been a full-fledged currency crisis, and a USD from 1911 can still be used today. The Euro is a stronger threat to the dollar than we've had in some time, but it's still a relatively new currency and it's showing strains already. There's a reasonable scenario which the Euro is a secondary reserve currency, but it's going to take some time and some drastic crises in the US which somehow don't spill to the rest of the world before the USD gets dethroned.
You're right, though - the picture's looked an awful lot rosier. I don't believe there's anything concrete that assures the US's decline, but that's not for lack of trying on the part of Congress.
I believe the US dollar is in a long term downward trend because it is slowly slowly losing its reserve currency status as the US is losing its economic predominance. That's not a bad thing. It's just a reflection of Asia becoming less bad economically, which is neither difficult nor surprising considering how bad they used to be.
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