Indy Telecom & Industrial Media

The NYT has an excellent article by Professor Tyler Cowen on how a falling USD is not all bad news. The WSJ also has a related article that talks about how the USD may actually rebound.

The crux of both the articles is this that while the USD may have had a significant fall (~19.8%), it still isn’t grounds for fear. For one, it has definitely helped bridge the trade-deficit gap because imports coming into the US are becoming more expensive while exports going out from the US are becoming cheaper.

In fact, some of the people hardest hit by the falling USD are European businesses. As the USD falls, it becomes harder for them to compete in their own local regions because it is a lot cheaper to buy American stuff paid for in USD than it is to buy European stuff paid for in Euro.

Secondly, the WSJ talks about a 30% fall in the USD to equalize the trade deficit — and we’re almost at 20%. Now whether the USD falls another 10% remains to be seen, but once again, that need not necessarily be a bad thing all around.

Also, other economies in the world are in just as bad a shape (or worse) than the US economy. British, Canadian, German and French economies are also struggling, and the falling USD isn’t necessarily helping them, either.

Now, the Chinese are whole another story. That’s a mixed bag — while they have over a trillion in dollar-dominated assets, they aren’t too particular about dumping it all overnight, simply because of what it might do to their assets. It is in their best interests to have a strong dollar, especially since we are their largest consumer.

The biggest problem that’s likely to arise from a falling USD is of course worries about volatility. A shaky currency is not good for any economy, and ours is no exception. And of course, the middle-east, who make money off oil, no matter which way things go.

I think that over the next quarter or so, the USD will slowly stabilize, and that the fall in the USD that’s happened is not necessarily a bad thing for us.

One thing that a lot of people seem to forget is that while a falling USD is not a good thing, it certainly isn’t bad all around for everyone. For instance, the cheap dollar has made items made in US extremely competitive in terms of pricing, especially in comparison to European goods and services within Europe.

As a result, a lot of US products have been in high demand (especially high-tech), causing a serious surge in US exports which has lowered the US trade deficit to record lows in more than 2 years.

And the consequence of a weaker dollar is making it harder for Americans to spend on European goods and services, making the European Central Bank chief to worry that the recent rise of the Euro against the dollar is making life harder for European businesses.

Now China — that’s an entirely different story altogether.

A quick look at the market the past few days would suggest that the banks and other financial institutions are having a particularly bad time. Most of it is the remnant effect of the sub-prime mortgage tomfoolery that everybody happily part-took in, but the other half is the serious credit crunch that’s been going on in the market.

And of course, a lot of this originated from the fact that these guys decided to sell asset-backed securities when their very assets were in question. So, our beloved (I use that term very loosely, of course) treasury department decides that that is not a good thing.

What do these guys do? Citi, JP Morgan Chase and Bank of America decide to come together and build a $100 billion Structured Investment Vehicle backed by - get this - more asset backed commercial paper. Heh.

Quite aptly, the folks at Dealbreaker have termed this “master” SIV as The Entity.