October 2, 2008

Some economic thoughts...

Mike Plaiss e-mails:

Thought you might like to see this in response to your fisking of the Spiegel article. What you are looking at is the US Dollar Index. It is an average of the exchange rate of the dollar and six major world currencies. The dollar is surging. The US economy is struggling but everything is relative. Europe is in just as big of a mess as we are, and investors worldwide are voting with their pocketbooks.

Capital is flowing into the United States, not out. And to buy US assets one needs US dollars. The Dow is down about 20% year to date, and the S&P a bit more (about 22%). Below is a list of major stock indexes from around the world over the same time period:

Dow Jones European Index -30.63%
United Kingdom -23.70%
France -28.34%
Germany -28.98%
Spain -26.13%
Italy - 33.90%
Holland -25.24%
Sweden -28.91%
Japan -27.13%
Hong Kong -34.52%
Australia -24.90%

Yes, a lot of this capital has flowed into US Treasuries as a safe haven, and that has something to do with the surge in the dollar, but a comparison of these stock indicies tells you there is a little more to the story.

And Richard Fernandez (Belmont Club) posts this, by a reader:

...In engineering there is a concept called "design margin" in which extra strength, power, capacity, capability is built into things to account for wear and tear as well as unknowns about the environment.

I think that the reason so many things seem to be "breaking" today is that over the last 20 years we have used up our "margin." Not pumping oil from our own known reserves ate into that margin. Cutting the military back by almost 50% - and then deploying it more than before - cut into that margin. Insisting on environmental, legal, racial, considerations in everything ate into that margin. Political correctness ate into that margin.

No one thought that a number of bad loans made to people who could not repay them would sink the economy - indeed it is not clear that it will even now - but eventually that “margin” in the financial system got eaten away. A single massive award in a lawsuit by a woman who spilled coffee in her lap ate into that margin in its own way, as did innumerable other lawsuits, silly or not.
Posted by John Weidner at October 2, 2008 9:16 AM
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