Thursday, November 30, 2006

Weaker than what?...

While most of us in agriculture have been focused on commodity prices (well, our specific commodity price) other prices have been gyrating as well. For instance the price of a dollar.
And so it has. Against the euro, the dollar had been dropping, little by little, for more than a month before it broke through $1.30 on November 24th, going on to hit a 20-month low (see chart). Against the pound, on November 28th the greenback was at its weakest for two years. It slipped against the yen too, though it later made up the ground. Against the yuan—politically the most sensitive exchange rate these days—it continued a stately decline. [More]
Bad as it is to be playing second fiddle to a made-up currency like the euro, the steady rise of the yuan is the more interesting. We have been hounding China to let their currency appreciate, and now we've essentially done it for them with our slowing economy. Should the trend continue, money flows would change to counteract the effect.
Whether or not the greenback's decline persists, savvy investors can find plenty of ways to hedge against currency risk. The key is to maintain a globally well-diversified portfolio, experts say. Though the dollar may be falling, the sky is not. [More]
Back in the good ol' days, we'd just trot Big Al up to Capitol Hill to unleash a stream of cryptic quotes that the world would take for wisdom and faith in the greenback would miraculously reappear. Not so the with the new guy.

In the past few months, every time a policy maker found a waiting platform, he or she used the opportunity to remind us that the Fed is more concerned about rising inflation than slowing growth.

Their words had predictable results. The prices of interest- rate futures contracts that reflect expectations of Fed policy sank, wiping out the gains registered on weak economic data.

The gyrations have been large. The June Eurodollar futures contract rallied 43 basis points from 94.72 on Sept. 18 to 95.15 on Oct. 4. The gains were completely reversed over the next three weeks as various Fed officials -- Fed Governor Don Kohn and District Bank Presidents Michael Moskow (Chicago), Charles Plosser (Philadelphia), Richard Fisher (Dallas) and Jeffrey Lacker (Richmond) -- reiterated their concerns about inflation accelerating or failing to retreat from its current unacceptably high levels.

Then something strange happened. The market stopped listening.

But do we really care down on the farm if the dollar is weak? It depends on whose import is being gored. If you want to export grain or meat, you usually cheer as the dollar makes your products cheaper compared to competitors. But when you turn around to buy something with those cheaper dollars it gets problematic.

And one big thing we buy is energy. Oil, natural gas, and other imports cost more and this contributes to inflation. In fact, how much you buy and sell outside the country will determine which side you are rooting for. The tricky bit is if oil exporters decide to price in something other than dollars - like those pesky euros.

This would have a profound impact on our economy and our ability to control it within our own borders. As it is a falling dollar may force the Fed to raise rates even as the economy slows further. (It's really hard to tell cause from effect in this exercise, by the way).

We may be winning the corn price battle and losing the economic war.

Update (12/1) - Fortune magazine, presumably having read my post, agrees.

13 comments:

1029barn said...

John:

When there is a global slowdown, it becomes necessary to come up with new products or new means of producing your product more efficiently. The rest of the world can't loan us operating money continuously. One of the most innovative times in our history was the late 1930s to 1950. Think of the inventions during that time-nuclear power, military computers for ships, planes (eventually jet planes), modern construction techniques for houses after the war, and diesel locomotives just to name a few.

A drop in the value of the currency then (40% under Franklin Roosevelt) spurred us on to become the greatest economic power in the world.

Anonymous said...

Is this supposed to mean the FDR was responsible for a recession. All seem to credit the previous Republican administration. Wow !

Anonymous said...

Is this supposed to mean the FDR was responsible for a recession. All seem to credit the previous Republican administration. Wow !

Anonymous said...

Is this supposed to mean the FDR was responsible for a recession. All seem to credit the previous Republican administration. Wow !

John Phipps said...

There is (IMHO) a marked difference between conditions in 1932 and today. For one we run a huge trade deficit today. The Keynesian injection of deficit spending and the war expenditures ended the Great Depression.

Plus it didn't hurt that we were the only major economy left standing at the end of WWII.

Lord knows Hoover made exactly the wrong decisions for the best of all possible reasons. Oddly enough he is still one of my most admired Presidents.

(Note: don't panic if the "comments count" doesn't change when you post - I'm working on that issue)

Anonymous said...

John, sorry for the delay in response, but I have been taught that the previous administration proposed all the economic policies ht FDR is credited with but the opposition saw fit to delay the passage of those new deal policies so that they could receive the credit. What say you?

John Phipps said...

I was very young (-16) at the time, so my recollections are hazy, but my reading of Hoover's biographies show he reacted to reduce the deficit by cutting spending and contracting the money supply. His bad.

Still he was an engineer and literally saved most of Belgium. Moreover, he continued to serve his country after his defeat.

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