Tuesday, 27 October 2009

The benefits of dollar devaluation

John Mangun
Outside the Box
Business Mirror

WITH the Bangko Sentral ng Pilipinas (BSP) doing everything it can to “stabilize” (read: devalue) the peso and the desperate Americans trying to talk the dollar up, it is probably hard to believe those of us who are sure the dollar is going to fall.

Many of the economic experts are saying the US dollar is just fine and wonderful and there is nothing to worry about. But when you look closely at their arguments, it always comes around to everything being great because it is the almighty US dollar we are talking about. For more than 100 years, the dollar has been doing really good despite wars, political turmoil and global changes.

I think, though, that you have to look at the situation in the current context. There are more dollars in circulation than there ever has been before in history because the US government has been printing greenbacks like crazy. Some of us are very skeptical of the fact that the US can raise enough money to pay off its debts. And historically, when a nation has had more debt than it can handle, it devalues the currency to make the debt less.

The reason for storing wealth in a particular currency is to be able to use that currency to buy something. That is sort of problematic since, comparatively speaking, the US does not sell the world much of anything. So holding dollars to buy US goods does not seem to be a very good reason to have dollars.

The other reason to keep one’s wealth in a particular currency is to be able to put your money in that particular country’s banks and take advantage of high deposit rates. Except that US interest rates are the lowest in history. On the other hand, Australian interest rates just went up. Maybe that’s why the Australian dollar is at a 14-month high against the US dollar.

I don’t see anything changing in the future that would alter this equation, and, therefore, there’s no reason to assume the demand for dollars is going to increase.

Three weeks ago I wrote this: “Mark this: As of this writing the dollar index is 76.293, the spot gold price is $1,040.88, the peso is 46.60 and the PSE [Philippine Stock Exchange] index is 2,967.06. Three of these four will be significantly increased in value by the end of the year.”

Now in the short amount of time since then, note the following: The dollar index has gone down 1.5 percent, the price of gold is up 1.5 percent, the local stock market is down about 1 percent and the peso value is also down around 1 percent.

It seems all these things are connected. The important question to ask is, what is the driving force behind the movements? It looks to me that people are moving out of dollars and into gold. It looks like a weaker peso keeps people out of the local stock market.

You only have to look at the price of oil to see what is happening to the dollar. Demand for oil keeps going down and the price keeps going up. That goes against what should be “supply and demand” normal pricing. But if I am holding oil, which people want, and it is priced in dollars which people do not want as much as they want oil, then the dollar price of oil goes higher.

Most of our economic policymakers have knelt before the altar of the US dollar for so long, it is hard for them to get off their knees and look at other currencies. Even now the Department of Finance is considering more peso borrowing to keep the value of the peso down. When local gasoline hits P50 a liter, they may have to change their strategy.

Assuming the dollar dumps down and the peso is allowed to rise proportionately, one benefit will be capital flight out of the US into places like the Philippines. The more the dollar devalued against the yen in the 1970s (when Japan had a developing economy), the more Japan gained share in valued-added manufacturing. That is what China has been doing. Particularly since 2002, China has taken over the US consumer market as the dollar index has fallen from 121 to its current 75.

While the local “experts” talk about a weak peso being beneficial to the economy because of exports and remittances having greater peso value, the opposite may be true.

Capital flight, even from our overseas workers and residents to get out of dollars and into the peso, may offset any potential loss of purchasing power from peso appreciation. If gasoline is $5 a gallon in the US and you cannot afford to drive, and that Chinese-made television just doubled in dollar price, you might as well send money back to the Philippines where it can still buy something.

The greatest advantage of dollar devaluation may be a reverse of the Filipino “brain drain.” Local workers may see the advantages of making a little less in nominal terms while preserving a higher purchasing power for the longer term. This is because dollar devaluation will create greater inflation, perhaps crippling inflation in the US and in those countries which are determined to peg their currency to the value of the dollar.

The Philippine government is going to have to make a choice very soon: allow an independent and market-valued peso, or continue to march with the US dollar, a journey that may lead to a currency nightmare.

PSE stock-market information and technical-analysis tools were provided by CitisecOnline.com Inc. E-mail comments to mangun@email.comThis e-mail address is being protected from spambots. You need JavaScript enabled to view it .

No comments:

Post a Comment