I have a question about something I read in the economy section of yesterday's NYT:

"At a meeting in Paris on Monday, the finance ministers of Germany and
France complained that Europe had unjustly borne the brunt of the
dollar's decline. . ."

Er, what do you suppose they meant by that? (I don't dispute it; I
just don't know what they're talking about).

Are they talking about the reduction in European exports to America,
because the dollar is so low compared to the Euro that their economies
have suffered?

It doesn't sound like it.

Or, how is it that in financial markets Europe "bears the brunt" of
the dollar's decline? In what way?  Do they mean that a weak dollar is
somehow responsible for an inflation or deflation of their own
currency, or is causing problems with their money supply, etc?  I
think this is what they meant, but I don't understand the dynamics of
how this would work.

a weak dollar policy will make the US goods have more capability to
export to other countries. hence create more working positions.

What is going on is called 'competitive devaluation'

By allowing (encouraging ?) the USD to drop in value against the Euro,
imports from Europe become much more expensive - which shafts European
exporters.

It also makes US exports much cheaper in Europe - which makes life
difficult for European manufacturers selling to Europeans.

Because the USD is pretty much a 'global' currency, a lot of other
countries tie their currencies to the USD - the big one is China - so
Europe gets the same effect on exports and imports from China,
Malaysia, S. America etc.

The only real downside for the USA is that imports become more
expensive, but does the US really /need/ to import much from Europe ?

Another effect on Europe is 'Capital flight' - investment
opportunities in the US become much cheaper - so provided investors do
not think the USD will drop further, they have a strong incentive to
invest in the USA.

Being from the UK, I have a sneaking suspicion that the US Government
is well aware of the pain that it is causing, and that there is a
'political element' in their actions. I am pretty sure that the
European finance ministers hold the same opinion.

Problems are compounded by the Euro being a relatively new currency,
and the European finance ministers are wary of devaluing the Euro (the
financial markets tend to be hysterical) so they are stuck between a
rock and a hard place.

A vast oversimplification for the economics-disinclined.

Weak dollar means Volvos, VW's and Mercedes etc are more expensive for
American consumers. If Americans buy less that means less income for
those European companies.

The more dependant a countries economy is on American consumerism the more it hurts.

Frde, I can understand your suspitions that the "US Government
is well aware of the pain that it is causing, and that there is a
'political element' in their actions", however I believe it is quite wrong.  

If the US were facing unusual inflation then there would clearly be
something that could be done by the US to stop the issue.  The US
inflation in 2004 was 3.3% wheras the normal inflation rate has been
2% - 3% over the last 15 years.  That is slightly higher than normal,
but no cause for concern for a 1 year period of above average GDP
growth.  If it continues over 3% for 2 more years or if it jumps over
4% for 2005 then there is cause for concern and the US should have
done more to controll their currency value.

Economic data from St Louis Fred:
http://research.stlouisfed.org/fred2/

Well Jack,

I can't quite agree with that reasoning.

Devaluation is normally the quick fix to adjust for heavy domestic inflation.
Basically to drop the price of domestic labour and assets compared
with that of trading partners.
As a result one should reduce ones current account deficit by
increasing exports and decreasing imports.

In this case the US current a/c deficit is unlikely to be seriously
affected by devaluation as most of its trading partners tie themselves
to the USD.

Where it has interesting effects is on the currencies that are /not/
tied to the USD - who trade heavily with non-USA economies that are
tied to the USD
- in other words German machine tools cost a lot more in China

Frde,

I see your point, however... how does the US control this:
"Basically to drop the price of domestic labour and assets compared
with that of trading partners."

My point was about inflation which is very much influenced by the
government/fed.  Inflation can very much influence what you are
talking about, but I don't see how (without inflation) the government
can influence that.

I might just not know what I need to in order to understand, so I'd
much appreciate if you can fill me in.  But if there is no control
there by the government, then your point holds no water.

US inflation is extremely low
- the same goes for the UK and Europe

It was the mad dog of the 1970's

Keynes (who the UK Observer Sunday newspaper recently called an
American) reckoned that a little inflation was healthy as it
lubricated reductions in |real wages|

If you are interested in how to control exchange rates, then Alan
Greenspan is a master - also look at (UK) Nigel Lawson's famous quote
before things went seriously wrong.

Today a pal of mine sent me this link:
http://news.ft.com/cms/s/0ebca2f4-7304-11d9-86a0-00000e2511c8.html

I personally would buy USD on the back of that.
Darn smart move by the US Government

At risk of being obscure 
- inflation is the daughter of expectations

IMO Economics is largely psychology - or more accurately psychiatry
- it is the study of 'crowd control' - or 'crowd misbehaviour'

Frde, you gave some interesting info.  I have always been of the
opinion also that economics is as much emotional (psycological and
psyciatrical as you put it) as it is financial.

But you failed to mention anything about exchange rates as I asked
about.  You did mention that Greenspan is the expert with exchange
rates, but you gave nothing to back that up... and I disagree.  He is
the expert at inflation and he has done an amazing job at controlling
inflation in the US.  And that has seemed (and has been stated many
times) to be his main concern.

I still see no evidence that the US or Greenspan is encouraging a weak dollar.

@Jack

Fair enough - I was being obtuse
A British Chancellor (Nigel Lawson) once said that he could 'talk the currency up'
It looks to me as if Greenspan can do the same - but is more modest about it.

In my opinion inflation, like exchange rates, is largely subject to
crowd hysteria - although still affected by 'real' market events.

I'm not sure what set off and maintained the current period of low inflation.
I think that there are a number of factors involved.

For a start Governments have made it very clear that they /want/ low
inflation, and are prepared to get nasty if things slip.

Another factor is probably the influx of incredibly cheap goods from
the Far East - specifically China.

There is probably also a shift due to technology, many things that we
now produce have a fairly low 'raw material' input - I think that for
some time raw materials have been comparatively cheap due to a
/reduction/ in demand.

There is also an element of 'creative accounting'. Measuring inflation
is not very easy, and excluding things like real estate prices and
loan rates is a good way of fiddling the figures. I don't know about
the US, but I reckon they do that in the UK.

Inflation (wage inflation) is highly affected by the level of
employment. The US has had a stream of migrant workers (at all levels)
and that has probably relieved pressure on wages.  Here in the UK we
simply fiddle the unemployment figures - for example 10% of our work
force are officially on 'long term sickness benefit'.

I am not really sure what has made us have low inflation.
Perhaps another way of looking at it is that the 1970's were a period
of unusually high inflation - and that in a stable economy low
inflation is the norm - provided people believe that the Government(s)
are determined to keep it low.

As for Greenspan encouraging a weak dollar, in my view he could 'talk
the dollar up' if he wanted to. And since he has not done so, he does
not want to.