Volume 4, Number 113
20 December 2004

Note: As I step aside (not down) and let Loren take over, one alternative would have been to repeat earlier TQEs that I considered especially important, since many subscribers have joined us since they were published. (That's what the "Peanuts" comic strip writer did when he died.) Having found Loren, however, I decided not to do that. Instead, you are encouraged to visit http://tqe.quaker.org, where you can double click on any back issue since the beginning. Read what you like. It's an almost-free country.

Jack Powelson

The Diminishing Dollar

Because of our declining years, Robin and I decided to sell our mountain cabin with its 20 acres of Colorado woodland adjacent to the national forest. I am about to call the real estate dealer to ask her to take it off the market. Reason: I predict that the future value of real estate will be greater than the dollar investments we would make with the proceeds. (Don't take this as investment advice to you, however.) Why? Because the dollar is declining in its exchange value for other currencies, such as the yen or the euro.

For a long time, Americans have been able to suck goods from other countries by paying for them in IOUs (dollars). This has been possible because other countries have been willing to keep dollars as their exchange reserves ("international money in the bank") instead of spending them. It is as if banks or government in the United States could write unlimited checks on their international purchases, knowing that no one would cash them.

The Economist tells the story as well as I could, and it is more likely to be believed by Quakers than I am. So I quote from the lead article in the issue of 12/04/04, page 9:

"The dollar is not what it used to be. Over the past three years it has fallen by 35% against the euro and by 24% against the yen. But its latest slide is merely a symptom of a worse malaise: the global financial system is under great strain. America has habits that are inappropriate, to say the least, for the guardian of the world's main reserve currency: rampant government borrowing, furious consumer spending and a current-account deficit big enough to have bankrupted any other country some time ago. This makes a dollar devaluation inevitable, not least because it becomes a seemingly attractive option for the leaders of a heavily indebted America... Why would anybody want to invest in a currency that will almost certainly depreciate?

"A second disturbing feature of the global financial system is that it has become a giant money press as America's easy-money policy has spilled beyond its borders. Total global liquidity is growing faster in real terms than ever before. Emerging economies that try to fix their currencies against the dollar, notably in Asia, have been forced to amplify the Fed's super-loose monetary policy: when central banks buy dollars to hold down their currencies, they print local money to do so. This gush of global liquidity has not pushed up inflation. Instead it has flowed into share prices and houses around the world, inflating a series of asset-price bubbles. [America's easy-money policy is gradually and belatedly being reversed; the Fed has raised the interest rate in small increments 5 times this year]*

"America's current-account deficit is at the heart of these global concerns. The OECD's [Organization of Economic Cooperation and Development's] latest Economic Outlook predicts that the deficit will rise to $825 billion by 2006 (6.4% of America's GDP) assuming unchanged exchange rates. Optimists argue that foreigners will keep financing the deficit because American assets offer high returns and a haven from risk. In fact, private investors have already turned away from dollar assets: the returns on investments in America have recently been lower than in Europe or Japan. And can a currency that has been sliding against the world's next two biggest currencies for 30 years be regarded as "safe"? [MY NOTE: Data show that oil-producing countries in the OPEC cartel are shifting their reserves from dollars to euros, and private investors are increasingly tending toward the euro. This could lead to a rush from the dollar, in which case we would have to "pay back" those who have been holding our dollars as reserves. We would do this through higher prices for imports and lower prices for exports.]

[MY NOTE: Asian countries have been supporting the dollar by buying it both as a courtesy to the international financial system and because their currencies are tied to the dollar.] "In a free market, without the massive support of Asian central banks, the dollar would be far weaker. In any case, such support has its limits, and the dollar now seems likely to fall further. How harmful will the economic consequences be? Will it really undermine the dollar's reserve-currency status?" [END OF QUOTATION.]

Economists have different opinions on the last question. Those paid by the government tend to say "No." Academic economists (including me) are more leery. My opinion is that there are three main reasons for the declining dollar: (1) The utter profligacy of the Bush administration, particularly in the war in Iraq, (2) the easy money policy of the Federal Reserve, and (3) the economic ignorance of the American people. I include Quakers among the latter, and my main reason for writing TQE has been to try to educate Quakers in economics (Please see back issues at http://tqe.quaker.org). More and more Quakers and other churches want government to finance those things we should be doing ourselves as Meetings or Churches, such as helping the poor. More and more our economic power helps the poor scantily while it brings down the world economy.

Our government is retreating significantly from a wide array of social services, including welfare, unemployment assistance, adequate pension requirements, job safety, pre-school education, public housing, public health programs, etc. This retreat simply marks the fiscal failures from undertaking these programs in the first place. When government money is tight, the poor are the first to lose.

Sincerely your friend,

Jack Powelson

*To learn how the Fed influences the supply of money, see TQE #73.

Readers Comments:

I agree with the direction the US dollar is heading. However, I wonder about your last concerns about the government usurping the church's role in helping the poor. I cannot recall any particular great strides that any church has made in helping the poor... Our local Coalition of Homeless shelters boasts more beds than homeless people, this because many churches take on the mission of opening a shelter (for women and children only) when there is no need for more. Then, to keep the shelter open they look for government assistance to continue their good work.

I have practiced my faith as a Quaker because of the personal responsibility to love my neighbor, i.e. help the poor, but I don't believe it is any institution's responsibility to do so, simply because we often do it with myopic focus, little counsel and great expectations for appreciation. This naturally conflicts with selfless giving which no matter what work we do can be a part of our lives.

— Phyllis Caves Rawley, El Paso, TX

Jack: Do you think the New Deal was a big error in the first place? Then, following, the Fair Deal, and all other "liberal" economic programs? Are the European welfare policies mistaken? Who do you see as a model in another country? Can economics be somehow abolished?

— Maurice Boyd, Friends Meeting of Washington

Do you mean economics or finance? Economics is the study of how and why people trade. Unless everyone lost interest in that, how could economics be abolished? You might as well speak of mathematics being abolished. As for your other questions, I'll let Jack and/or Loren reply. — Russ Nelson, TQE Publisher

Thanks to Friend Powelson for sharing his lifetime of thoughts about things economic. As a trained economist, I've enjoyed his sage observations and wide experiences. I do question the continued call for higher savings... If we insist on a higher saving level, then we have to have attractive investment opportunities to soak up those savings... People need to save to permit investment, and investment needs to be sufficient to fully utilize productively the savings undertaken.

Around my city, much commercial property stands vacant, people build huge houses and drive expensive cars, which tells me that non consumer investment alternatives aren't attractive enough to keep them from spending on consumer durables... What in the private sector crys out for more investment? There are many examples in the public sector where investment in the health and education of people would benefit our society, but not in the private consumer sector that I can see. Do we need more airports, expressways, etc? My vision fails to see what we need more of in private investment that people should save more to allow to be created... Cheers,

— Jim Booth, (no affiliation given)

Jim, the call for a higher US savings rate is based on fact that the US is absorbing most of the world's savings, a very unstable situation. — Loren

Just a note of thanks for your success in getting Friends to seek truth rather than letting it be imposed upon us. I wish you well as you take a liesurely break from your endeavors. With much appreciation,

— Joseph Mills, Kalamazoo (MI) Friends Meeting


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Publisher: Russ Nelson, St. Lawrence Valley (NY) Friends Meeting

Editorial Board

  • Loren Cobb, Boulder (CO) Friends Meeting, co-Principal Editor
  • Chuck Fager, Director, Quaker House, Fayetteville, NC.
  • Virginia Flagg, San Diego (CA) Friends Meeting
  • Valerie Ireland, Boulder (CO) Friends Meeting.
  • Asa Janney, Herndon (VA) Meeting.
  • Jack Powelson, Boulder (CO) Meeting of Friends, co-Principal Editor
  • Norval Reece, Newtown (PA) Friends Meeting.
  • J.D. von Pischke, a Friend from Reston, VA.
  • John Spears, Princeton (NJ) Friends Meeting
  • Geoffrey Williams, Attender at New York Fifteenth Street Meeting.

Members of the Editorial Board receive Letters a week in advance for their criticisms, but they do not necessarily endorse the contents of any of them.

Copyright © 2004 by John P. Powelson. All rights reserved. Permission is hereby granted for non-commercial reproduction.

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