From: Gene McAloon 

A falling dollar will do nothing for the trade deficit. Theoretically it
should according to classic economic theory, but that theory is far too
simplistic. For
example, when Nixon lowered the dollar in the early '70s, it had no
significant affect on trade. Rather, it made matters worse in that as
imports increased in price, US industry simply increased its prices
commensurately. The result was raging inflation and that without any
significant increase in exports, let alone
decrease in imports.

You are right, however, that the fall of the dollar against the currencies
of major trading partners has not been at all dramatic. Perhaps the only
exception is the euro. Ask the "experts" whey that is happening
and you will get as many answers as experts asked. No one really knows, for
the EU economy is anything but a unified economy and on a
country-by-country basis is doing no better and possibly even worse than
the unified US economy.

China is an oddball case. It ties its currency value to the US dollar. What
would happen if it were to let it float is anybody's guess. Japan is
another example of what government manipulation of currencies can do to
make the real value of a currency seem impossible to judge and what affect
of not trying to protect a currency would have on trade.

In effect what we have got is a globalized neo-classic economic policy
applied to a world economy that doesn't really respond well to neo-classic
theory.

On Fri, 02 Jan 2004 00:41:26 -0800, Randall Parker
 wrote:

>The dollar needs to fall in order to cause the US trade deficit to decrease.
That
>much is obvious. But so far the dollar has basically given back gains it has
made in
>recent years. Here's an excerpt from a post in a totally different forum I
read where
>a software company executive was explaining how recent declines in the dollar
were
>not all that dramatic considered over a slightly longer period:
>
>01/01/04 1 USD = 0.56007 GBP = 1.55522 DEM = 5.21597 FRF = 1.24070 CHF
>01/01/97 1 USD = 0.58411 GBP = 1.54220 DEM = 5.18800 FRF = 1.34250 CHF
>
>01/01/04 1 USD = 107.400 JPY = 1.33014 AUD
>01/01/97 1 USD = 116.050 JPY = 1.25881 AUD
>
>He says he looked it up here: http://www.oanda.com/convert/classic
>
>I favor Warren Buffett's approach to the trade deficit:
>http://www.fortune.com/fortune/subs/print/0,15935,525644,00.html
>
>As for the EU's management: Well, it has higher unemployment rates, a far more
dismal
>demographic picture, and a worse pensions problem (the UK excepted, especially
on the
>  last point). The US has a very serious trade deficit problem that doesn't
get the
>attention it deserves (though I certainly bring it up in various fora). But
the US
>economy has been growing faster for years and the EU integration is not
helping to
>close the growth gap.
>
>If some of the US dollars ever do start coming home then the trade deficit
will shift
>rather rapidly toward being a trade surplus. Inflation may become a problem.
But I
>doubt the shift will happen on such a grand scale that suddenly that it will
not be
>possible to adjust to it.
>
>Phil Payne wrote:
>
>> If the dollar continues this decline (19% year-on-year against the Euro)
>> then those holding these swathes of cash might dump them.  The EU is now a
>> bigger and much better managed (fiscally) entity than the USA - and its
>> currency is a better investment.  Even terrorists and despots manage their
>> cash.
>>
>> How much US paper money is in these caches around the world, and what will
>> happen when it all comes home?
>>

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