April 29, 2003
United States currency has significantly weakened against other major currencies, especially against the Euro, the currency of the European Union. Today the foreign exchange rate is 1.10 US dollars to one Euro, and the trend is toward further decline. Many speculators suggest there is a point of balance, and that it will be slow in coming.
There is a perspective, however, that suggests there is no ultimate balance point, and the rate of decline will rapidly increase until it becomes precipitous, even asymptotic. The detailed consequences of this scenario can be developed in future articles. What is of current interest is the validity of the perspective itself, and whether it has predictive value.
Technology is not currency, nor does new technology always dominate existing technology. It does, however, offer an opportunity to evaluate the potential of future industrial trends. A similar analytical technique is then applied to relative currency trends rather than technological innovation. If improved clarity is gained, then the perspective becomes interesting. Two examples of changing technology suffice as illustrations.
The new digital cameras reshape photography. A small digital camera can be purchased for just over USD150. Many are smaller than a deck of cards. They focus automatically, have a good flash, and can store 200 photos of excellent quality. Most take both stills and short movie bursts, allowing later editing to select for the perfect smile or action. When the memory is full the camera is downloaded to a computer by inserting a small plug that connects camera to computer. Nothing further is required. The entire contents of the camera memory automatically copy into the computer memory without instruction.
Once the photos are in the computer memory, they may be cropped, edited or retouched with standard graphics software. The jpg format is easily pasted into a web page, or sent to friends and relatives via an e-mail attachment. A viewfinder picture is displayed on the tiny camera LCD screen for aiming and viewing, and unsuccessful shots can be immediately erased to preserve memory. There is neither processing delay nor cost. The only drawback is the absence of a hard print. But these can be made easily at home with a suitable color printer and glossy stock. Most people seem to prefer the brightness and increased size of the monitor.
While the digital camera does not replace the prints provided by photographic film, to anyone who has a digital camera it does seem that firms like Eastman Kodak and Fuji Film are in serious trouble. They make the expensive processing chemicals that big automatic film developing and printing machines use at the 1-Hour photo shops. The purchasing of rolls of coated celluloid photographic film is obviated by the new digital cameras. There is no cost, delay, inconvenience or necessity in having prints made. Photography is no longer an expensive hobby. Technique and skill are unimportant. Any three-year-old child can take excellent pictures with a digital camera.
The processing shops have not disappeared. Eastman Kodak and Fuji Film have not gone bust overnight. Time is not the important element, it is the recognition that a transition is underway from an old technology to a new. One notes the phasing out of an established industry, and the emergence of a completely new, and largely unforeseen, competitor. The Eastman Kodak corporation is a stalwart of US industry. It is an old component of the US Dow Jones Industrial Average, a much watched index. Look at a chart of its price relative to the overall DJ Industrial Average for the past two years. It looks like a dying dinosaur.
A second example is the computer monitor. The color cathode ray tube (CRT) developed for television and military sonar and radar equipment was adapted to become the favorite display device of computers. The CRT is bulky, emits X-rays harmful to the eyes, and often gives less than reliable service. Now an alternative is available in the flat screen liquid crystal display (LCD). The new screens are of equal visual quality, and easier to look at for long periods. They are lighter and take much less space. The early LCD's were relatively expensive, so most people opted for the cheaper CRT. Now that the price differential has narrowed, the CRT is under such competition that it must soon succumb in favor of the LCD. Probably the CRT will survive a number of years, but the improvement of the LCD is obvious. Demand for CRT's is certain to fall as the market embraces the new technology.
If you already own a digital camera and an LCD monitor, you can easily recognise a similar technique in appraising the declining dollar. A crucial realisation begins to gel, giving a view that a normal cyclical swing is NOT underway. There is a fundamental shift in underlying factors that makes the dollar decline irreversible. We can now take a look at some of the more important fundamentals that say the US dollar is also a dying dinosaur.
First, the US dependence on debt and deficit financing is dancing the dollar along its dangerous decline. It is not just the size of the debt that is troublesome, it is the necessity to rely on foreign financial support when the foreign policy of the country is detestable. People like to think money has no morals, but there are limits beyond which none can hold a stomach. The US government is depending on borrowed foreign money to pursue a selfish unilateral foreign policy, and the days of this unpopular and self-righteous approach to world affairs must certainly challenge the too-big-to-fail theory in the near future.
Second, with its war against terrorism, the US has embarked on an indefinite (“fifty year”) war footing, to be funded by deficit spending. There is an old saying in economics that, "You can have guns or butter, but not both." The US acts as if it expects both, simultaneously. It cannot be done. No matter how appealing it may seem to the American taxpayer, being the world's policeman is just too expensive for even the giant US economy to afford.
It is popular for politicians to say that defense spending strengthens the economy while it maintains a protective shield against aggression. This is only partly true. The primary beneficiaries are limited to defense contractors and their employees. The defense budget must be considered a direct drain away from the legitimate domestic concerns of the country, and when it grows to half the national annual expenditure, it is clearly beyond the point of prudent public policy, incapable of permanent maintenance.
Third, the workers of America have been steadily drawn deeper into an equity market that is now highly inflated. Stock prices have long departed from respectable dividend yields in favor of anticipated capital gains supported by higher earnings expectations. Encouraged by favourable tax treatment, the wage earner has accumulated enormous retirement savings which were invested in the stock market through mutual funds and employee pension plans. The huge monthly inflow into the market from this source has created a mirage of wealth.
Many paper millionaires were made in this way, and now there is widespread pain watching these mountains of paper provenance pounded to powder. What was puffed as a pensioner's palatial paradise now has all the appearances of a scam on the public. It is a classic case of stock being distributed to a gullible public. The irony is that as this money is withdrawn, in an effort to defend what remains, the value of what is left declines further, contributing to a sense of public panic.
Fourth, Capitalism has deteriorated into institutionalised executive cronyism. Where opportunity via entrepreneurship was once the promise, and an honest dollar meant contractual dealings between men of goodwill, now these are replaced by the professional executive manager who receives a vulgar and exorbitant salary, with additional perquisites concealed by the external accounting firm. The broker touting shares to the unwary public takes covert insider fees, while an incompetent Board of Directors cannot discover and derail corporate fraud.
The corruption of capitalism is betrayed by an inability to indict and prosecute trusted managers, who, after all, steal only money. There is a class war aspect, ala Marx. The white collar cannot be sent to a blue collar prison. Corporate executives are therefore allowed to go unpunished. It is always the effete shareholder who is robbed.
Fifth, what is true of the collapse of ethics in the corporation is mirrored in backroom politics. Political parties covertly conspire to corrupt democratic institutions. The day the voting citizen had influence over national affairs has passed. The small country of Israel has more influence over US domestic and foreign policy than US citizens.
Sixth, politicians are no longer trained public servants. They are corporate moneymen, geared to greed. They do not write, neither do they read. What was the American democracy has become a monstrous war machine, every citizen servile in its service. The world is its enemy, but expected to honour its currency, buy its bonds. Such a situation is intolerable. It cannot last. When the inevitable is the reality, the US dollar is doomed to decline to par with the peso. Time is not of the essence. Other currencies, such as the Malaysian Ringgit, pegged to the US dollar, suffer a similar slide.
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