Since 2001 the dollar has lost more than half its value against the euro. It now costs nearly $1.40 to buy one euro. And it isn’t just the euro that seems to be growing stronger against the US dollar. It has declined against many other major world currencies, and even including minor ones like our peso, reflecting the dollar’s loss of purchasing power.
The Philippine Star
There is this joke circulating in financial circles that the once “almighty US dollar,” is fast turning into the “new American peso.” Since 2001 the dollar has lost more than half its value against the euro. It now costs nearly $1.40 to buy one euro. And it isn’t just the euro that seems to be growing stronger against the US dollar. It has declined against many other major world currencies, and even including minor ones like our peso, reflecting the dollar’s loss of purchasing power.
As the Los Angeles Times reported, “in much of the world — from Brazil to Poland to Thailand — one dollar buys less than it did a year ago, and far less than it did four years ago. On Friday, the US currency hit a 30-year low against its Canadian peer.”
There isn’t a single explanation for why currencies rise and fall, the LA Times explains, but many experts believe that the sliding dollar is largely a function of the nation’s borrowing binge of the last two decades. That has left the US with a yawning trade deficit and the fact that it is deep in debt to foreigners.
Alan Greenspan, the former chairman of the US Federal Reserve, blames President George W. Bush for America’s current economic problems. Greenspan says Bush pays too little attention to financial discipline. In a book to be published this week, In The Age of Turbulence: Adventures in a New World, Mr. Greenspan says Mr. Bush ignored his advice to veto “out-of-control” bills that sent the US deeper into deficit.
In theory, a currency is supposed to reflect to some extent, the underlying health of the economy that stands behind it. “The basic thing is, we have been living beyond our means,” Ted Truman, a senior fellow at the Peterson Institute for International Economics in Washington told the LA Times.
A dwindling dollar is, in effect, the market’s attempt to slow those trends, Truman said. The flip side of a weak dollar is that it makes US goods less expensive for foreign buyers. America shipped a record $137.7 billion worth of goods and services abroad in July, 15 percent more than in July 2006, government data show. That’s good news for American exporters.
But even then, Americans still bought more from the rest of the world — including foreign oil — than they sold or exported. Imports reached $196.9 billion in July, up five percent from a year earlier.
The gap between imports and exports is the trade deficit. The broadest measure of a nation’s trade picture is the so-called current account, which includes investment flows. The deficit in the current account for the US reached a record $811 billion last year, more than twice what it was as recently as 2001.
The LA Times reports that “this year the deficit has been shrinking modestly, helped by the surge in exports. But the gap remains massive — another reason, many economists say, that the dollar is likely to keep falling in value… Some believe, however, that the trend could speed up.”
That’s bad for the world economy too. “If the dollar loses value too quickly, it could wreak havoc on the economy and financial markets — driving up interest rates and inflation and slashing Americans’ purchasing power, said Peter Schiff, who heads money management firm Euro Pacific Capital.”
The danger, the LA Times warns, is that a Fed rate cut could spark a much faster downward spiral in the currency. “That could occur if lower interest rates on dollar-denominated bonds caused foreign investors to balk at buying more, or encouraged them to sell US securities and invest their money elsewhere in the world. Worse, wholesale flight of foreign money from US bonds could drive up long-term interest rates if the Treasury and other debtors have to pay more to attract investors to their securities.”
No wonder John Gokongwei, the chairman emeritus of JG Summit told us over dinner in Shanghai last week, he is worried about rough times ahead. He is worried about the view expressed by US Treasury Secretary Hank Paulson that the ongoing subprime mortgage crisis is going to be worse than three of the worst things that ever happened to the global financial system — the Asian crisis of 1997, the $50-billion Mexican meltdown of 1994-95 and the $40-billion Russian default of 1998.
A US recession, Mr. John said, could nip in the bud the boom in the Philippine real estate market. We could end up with a lot of unfinished superstructures of skyscraping condos. Pinoy expats who are fueling all those grand condominium projects will be adversely affected by the US credit crunch. Mr. John said that under US laws, they have the right to ask for the return of deposits they made on local condo units sold to them in America.
Mr. John’s advice: stay liquid and borrow long term.
Mea culpa
I made a terrible mistake in my column last Monday. In the sentence that partly reads “Cebu Pacific’s daily flight to Taiwan will open the floodgates of travel between China’s business capital and the Philippines…” Taiwan should have been Shanghai. I don’t know what possessed me to put Taiwan when the whole column was about Shanghai and we all know China’s business capital is Shanghai. Worse, I missed that mistake when I edited my column.
This is what I get for trying to write a column on the run, while in an exciting city like Shanghai and after having had very little sleep. Good thing I am not a diplomat or that would have been a very serious faux pas.
Importing copra
I got this e-mail from a reader, Teddy Navarro.
I am literally teary eyed as I read your column today as you confirm our importation of copra. I know for a fact that it was inevitable because of how the coconut industry was handled by the government since 1986.
Fresh from college I worked for Mr. Danding Cojuangco from the mid 70’s up to his exile in 1986. I was with the special audit team who saw to it that every step of the industrialization of coconut was in place and functioning well.
We visited a state of the art coconut laboratory and research center in Bugsuk Island in Palawan producing hybrid coconut planting materials that were to be used for massive replanting programs to ensure constant supply of copra, copra buying stations all throughout the country even in far flung areas of Basilan and Sulu and Tawi-tawi, coconut oil mills and and the coconut chemical plant in Batangas.
I still remember Mr. Cojuangco saying that all these facilities were put up to produce chemicals out of coconut instead of exporting it in its raw form, maipagmamalaking sariling atin as he would always say.
Since Mr. Cojuangco left in 1986, I have never seen somebody who had the passion and vision for the coconut industry like he had. At the rate the coconut industry was mismanaged and neglected by the government for the past twenty years, I could only say SAYANG for a God-given opportunity.
Shared faith
This one’s from Lal Chatlani.
A priest and a rabbi operated a church and a synagogue across the street from each other. Since their schedules intertwined, they decided to go in together to buy a car.
After the purchase, they drove it home and parked it on the street between them. A few minutes later, the rabbi looked out and saw the priest sprinkling water on their new car!
The rabbi hurried out and asked the priest what he was doing. “I’m blessing it,” the priest replied. The rabbi considered this a moment, then went back inside the synagogue.
He reappeared a moment later with a hacksaw, walked over to the car and cut off two inches of the tailpipe.
