Dollar Eclipsed by the Euro--Thanks, Bush!

[Doug]

Euro notes cash in to overtake dollar
By Ralph Atkins in Frankfurt

Published: December 27 2006

The US dollar bill’s standing as the world’s favourite form of cash is being usurped by the five-year-old euro.

The value of euro notes in circulation is this month likely to exceed the value of circulating dollar notes, according to calculations by the Financial Times. Converted at Wednesday’s exchange rates, the euro took the lead in October.

The figures highlight the remarkable growth in euro notes since their launch on January 1 2002, three years after the start of Europe’s monetary union...

...By the end of October the $759bn-worth of US dollar notes in circulation was only a fraction ahead of the value of euro notes, converted at exchange rates at that time.

But since October the euro has risen strongly against the dollar and this month the value of euro notes has risen to more than €610bn, or in excess of $800bn at the latest exchange rates. That level is unlikely to have been beaten by the greenback.

Read the rest here.


AND IN A RELATED STORY:

U.A.E. to sell dollars for euros
Matthew Brown Bloomberg
International Herald Tribune
December 27, 2006

ABU DHABI: The United Arab Emirates plans to convert 8 percent of its foreign-exchange reserves to euros from dollars before September, the latest sign of growing global disaffection with the weakening U.S. currency.

The U.A.E. has started, "in a limited way," to sell part of its dollar reserves, the governor of the country's central bank, Sultan Bin Nasser al-Suwaidi, said in an interview. "We will accumulate euros each time the market appears to dip" as part of a plan to expand the country's holding of euros to 10 percent of the total from the current 2 percent.

The Gulf state is among oil producers, including Iran, Venezuela and Indonesia, looking to shift their currency reserves into euros or sell their oil, which is now priced in dollars, for euros. The total value of the reserves held by the U.A.E. is $24.9 billion, Suwaidi said.

The dollar has fallen more than 10 percent this year against the euro.

Part of the reason for the decline is the outlook for slower U.S. growth, which makes the dollar a less attractive investment.

But fears that the dollar's level is unsustainable because of the heavy indebtedness of the United States to other countries is also behind the weakness this year, analysts said.

Read the rest here.

[LaWood]

For old timers like myself who were around and in business the last time we had corrupt administration cutting taxes and waging war simultaneously (Nixon) we recall this scenario well. Middle Americans who ventured to Europe for vacations skimped by while their German and Japanese counterparts lived lavishly. Everytime a leader is foolish enough to run up huge deficits foreign exchanges rates become unfavorable to the US$. The debt is monetized thereby diluting the value of our currency.

Darth Cheney's wisdom comes to mind: "Deficits don't matter."
They don't matter when, like Cheney, you are wealthy and have
the mobility to invest millions in European bonds. But to the rest of
us it means a loss in buying power, in value of our time spent earning.

[ChristianLoeschel]

This is EXCELLENT news! Economically, this is huge, may well prevent another worldwide economic crisis. Just like in the 1920s, insurmountable public and private debt - which has ballooned since the reps took over, but this is pretty classic conservative economics, which assumes largely that debt drives economy - is devaluing the dollar and is threatening to crash it. Before the euro there was no alternative, meaning a dollar crash would take the entire world down with it. Now, a measure of stability is taking over.

Hooray

[Doug]

Before the euro there was no alternative, meaning a dollar crash would take the entire world down with it.

DOUG
Now there are several good alternatives: The Euro, Silver Rounds, and Ozarkia Home-Grown "Cash."

[Savonarola]

Let's put a lid on the flame-baiting, folks.

--Sav, Politics Moderator

[Barbara Fitzpatrick]

CL has a point. Following WWI America gained "superpower" status (a term I think we made up) over Britain. Pound sterling was replaced by the dollar as international currency. While we had it, and a sizable chunk of the world's liquid wealth, if the dollar went down, everything went down. As it was, our loans to Germany allowed them to pay their war debts which was the only thing keeping Britain and France treading water in the post-war years. With the stock market so high, nobody noticed the average American was treading water, too. When our stock market went belly up, everybody sank with it. This allowed both the fascist takeover in Germany and the pacifist takeover in Britain (different peoples in different situations reactions to the same stimuli). With a strong euro, while America's superpower status is slipping, we don't necessarily face a worldwide depression - which, with our increased world population and the stresses of global warming, would make the 1930s one look like a picnic. That won't be nice for a country whose ego has been wrapped up in being Numero Uno for almost a century, but it is survivable.

[Hogeye]

Here's what Ron Paul has to say about it:

The World's Reserve Currency
by Ron Paul

The financial press reported last week that the euro, the new currency created only five years ago and used by most European nations, has supplanted the U.S. dollar as the most widely used form of cash internationally. There are now more Euros in circulation worldwide than dollars.

This alone is not necessarily troubling, as the dollar remains the world’s most important reserve currency. About 65% of foreign central bank exchange reserves are still held in dollars, versus only about 25% in euros. And the European Central Bank faces the same inflationary pressures that our own Federal Reserve Bank Governors face, including a growing entitlement burden that threatens economic ruin as both societies age. European politicians want to spend money just as badly as American politicians, and undoubtedly will clamor to inflate – and thus devalue – the euro to fund their creaky social welfare systems.

Still, the rise of the Euro internationally is another sign that the U.S. dollar is not what it used to be. There is increasing pressure on nations to buy and sell oil in euros, and anecdotal evidence suggests that drug dealers and money launderers now prefer euros to dollars. Historically, the underground cash economy has always sought the most stable and valuable paper currency to conduct business.

More importantly, our greatest benefactors for the last twenty years – Asian central banks – have lost their appetite for holding U.S. dollars. China, Japan, and Asia in general have been happy to hold U.S. debt instruments in recent decades, but they will not prop up our spending habits forever. Foreign central banks understand that American leaders do not have the discipline to maintain a stable currency. When the rest of the world finally abandons the dollar as the global reserve currency, both Congress and American consumers will find borrowing money a more expensive proposition.

Remember, America can maintain a large trade deficit only if foreign banks continue to hold large numbers of dollars as their reserve currency. Our entire consumption economy is based on the willingness of foreigners to hold U.S. debt. We face a reordering of the entire world economy if the federal government cannot print, borrow, and spend money at a rate that satisfies its endless appetite for deficit spending.

At some point Americans must realize that Congress, and the Federal Reserve system that permits the creation of new money by fiat, are the real culprits in the erosion of your personal savings and buying power. Congress relentlessly spends more than the Treasury collects in taxes each year, which means the U.S. government must either borrow or print money to operate – both of which cause the value of the dollar to drop. When we borrow a billion dollars every day simply to run the government, and when the Federal Reserve increases the money supply by trillions of dollars in just 15 years, we hardly can expect our dollars to increase in value.

January 2, 2007
Dr. Ron Paul is a Republican member of Congress from Texas.

[Barbara Fitzpatrick]

Everybody was waiting for Jan 2005 - nobody expected W would manage to steal another election. The only reason Asian didn't get rid of dollars immediately after Nov 2004 was that "dumping" dollars would cause a market panic and they'd be lucky to get "10 cents on the dollar". They've been slowly selling dollars for euros - slowly enough that it only just got noticed.

[Hogeye]

Here is a very informative article about international inflation, by someone promoting hard money in Mexico: Real Money for Mexico. It explains how US$ inflation is "exported" to other countries, how this US legal counterfeiting exploits third world countries, etc. Here's an excerpt with a graph showing central bank reserves.

With the discipline of gold, regrettably, having been expunged from the monetary system, the international dollar-reserve scheme has allowed for an explosion in the amount of fiat dollars created by the Federal Reserve. Alas, America’s leading export, as shown by the following table, is inflation itself. One must keep in mind that the classic, and proper, definition of inflation means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check.



To think that reserves at central banks have gone from $56 billion, in 1970, up to nearly $4.6 trillion by 2006, is incomprehensible. Today much of these reserves are merely account balances represented by nothing more than abstract digits in a computer.

Per Alan Greenspan’s November 14, 2005 speech – delivered to the Banco de Mexico – he confirmed that approximately 60% of foreign exchange reserves were held in the form of U.S. dollars and 25% in the form of Euros. Although Europe is having some success in having its particular brand of fiat money accepted internationally, the United States is still the kingpin of exporting inflation.

[Barbara Fitzpatrick]

Wonder what happens if you overlay a population growth graph on top of the money one? Not that I don't think this administration isn't playing games with the world economy, I do. The dollar gained it's position in earlier days when our economy was strong. What backed the dollar was not gold but American labor. (Anybody who tells you we can have a "jobless recovery" has been hitting the "koolaid" again.) As our economy tanks - and the rest of the world knows it - the dollar is losing ground.

[Hogeye]

World population is a little over 2x what it was in 1960; fiat money is over 150x what is was in 1960.

Barbara, you are right that "the dollar gained it's position in earlier days when our economy was strong." That was of course when the dollar was partially still backed by gold. Conversely, the US economy is weaker in large part due to the debasement of the dollar by the US State. Why work and produce if you can simply print up pretty paper to get goods? Why save up to buy capital goods when you can just print pretty paper and get them? Why not go into debt, since you get pay back with future pretty paper? Fiat money is both economically and "spiritually" debilitating in the long run, but sure feels good when you're high on it. Inflation - crack cocaine for the economy.

[Dardedar]

LEW ROCKWELL citation:
To think that reserves at central banks have gone from $56 billion, in 1970, up to nearly $4.6 trillion by 2006, is incomprehensible.

DAR
Not really. A lot of it is increase in wealth.

Today much of these reserves are merely account balances represented by nothing more than abstract digits in a computer.

DAR
So which is it? Does the chart represent "paper reserves" or "abstract digits in a computer." I don't trust Lew Rockwell to get anything straight.

World population is a little over 2x what it was in 1960; fiat money is over 150x what is was in 1960.

DAR
This might suggest that inflation has gone through the roof. At first I thought you were implying that a 1960 dollar was worth $150 of todays dollars. That would be very wrong.

The site MeasuringWorth gives you five ways to measure relative value. As they say;

"Determining the relative value of an amount of money in one year compared to another is more complicated than it seems at first. There is no single "correct" measure, and economic historians use one or more different series depending on the context of the question.

Most indices are measured as the price of a "bundle" of goods and services that a representative group buys or earns. Over time the bundle changes; for example, carriages are replaced with automobiles, and new goods and services are created such as cellular phones and heart transplants."

"Presented here are five series for making such comparisons in US dollars between any two years from 1790 to 2005. They are the CPI, the GDP Deflator, the unskilled wage rate, the GDP per capita, and the GDP."

DAR
If you use their calculator and dial in $1 in 1960 and put your target year as 2005 (the latest they have available) you get:

$6.59 using the Consumer Price Index

$5.36 using the GDP deflator

$7.96 using the unskilled wage

$14.39 using the nominal GDP per capita

$23.66 using the relative share of GDP

In 1960 the DOW was at about 400, today it's 12,500 (31x).

In 1960 the US per capita GDP (in constant 2003$) was $14,960. Today it's $38,611.

Nice chart comparing gold to the Dow here.

D.
------------------------
"The United States dollar is the most important reserve currency in the world today. At the mid-point of 2006, 65.4% of the identified official foreign exchange reserves in the world were held in United States dollars, 25.4% in euros, 4.2% in pound sterling, and 3.3% in Japanese yen, according to the IMF." --wiki

[Barbara Fitzpatrick]

With all the new stuff out there, especially new stuff that somehow has become part of the bundle of "necessaries" to be at a certain economic level, it is very hard to really compare one year to another. Especially if those years are more than a decade apart. When I was a kid not only did we not have computers or cell phones, even a regular telephone was only considered a necessity if there was a health issue involved. (An elderly person, or someone with a physical disability that kept them from getting around easily would "need" a phone. For everyone else, it was a luxury - and a status symbol.) In my grandmother's childhood, only the wealthy had indoor bathrooms, even if they had indoor plumbing (a pump in the kitchen).

I ran across this problem when I was creating a Social Studies project for my 9th graders. (the one year I taught Social Studies - in Kansas City, KS. That was IT for teaching for me.) In trying to compare 1943 with 1993 - what makes for "middle class" - I ran into issues like middle class didn't necessarily include having a phone or a car in 1943 and it most certainly did in 1993. So the dollar might be worth more, but not "enough more" to keep someone in the middle class from one generation to the next.

As to "pretty paper" money - Hogeye's comments may or may not have some validity for the wealthy. They have none for the lower and lower-middle class. We don't save (or save much) because we're living paycheck to paycheck, not because inflation will make our savings worth less (or worthless).

[Hogeye]

Eric Englund (article)> To think that reserves at central banks have gone from $56 billion, in 1970, up to nearly $4.6 trillion by 2006, is incomprehensible.

Darrel> Not really. A lot of it is increase in wealth.

Do you seriously think that there is more than 820 times the wealth now than in 1970?

Eric Englund (article)> Today much of these reserves are merely account balances represented by nothing more than abstract digits in a computer.

Darrel> So which is it? Does the chart represent "paper reserves" or "abstract digits in a computer."

You're missing the point: There is no actual wealth backing the massive amounts of paper/bits. It's all counterfeit. Whether the counterfeit money is blue or green, paper or digital doesn't matter. What matters is that it rips off producers who created wealth and hands it to legal counterfeiters.

Hogeye> Fiat money is over 150x what is was in 1960.

Darrel> This might suggest that inflation has gone through the roof. At first I thought you were implying that a 1960 dollar was worth $150 of todays dollars. That would be very wrong.

Monetary inflation has gone through the roof. What you are saying is that price inflation hasn't caught up yet. True, but it's only a matter of time - less than you think. The US can't avoid dollar hyperinflation any more than 1790s France could avoid livre hyperinflation or 1920s Germany could avoid mark hyperinflation. When you have 150 times the amount of dollars chasing maybe twice as many goods, shit happens.

Inflation originally meant an increase in the money supply relative to goods. Darrel and Barbara are mistaking the effect, higher prices, for the cause. True, the inflator (the State) has managed in Orwellian fashion to pervert the meaning of "inflation" to this effect. This benefits the State by obscuring the inflationary process and, especially, hiding the guilty party. The State, being the producer of money, has 100% culpability for inflating the money supply. By destroying the meaning of "inflation," it can blame others for its acts - such as hoarders or greedy businessmen or foreign "economic enemies." But those of us who understand what inflation is know better.