Hydraulics Blog

How do you see the strength of the U.S. dollar?

Frankly my dear...

A weak US dollar causes oil prices to increase.

Pay now or pay later. Greed will always come back to bite you in the ass.

Those of us in sustainables are bouyed by higher oil prices. This was posted today:

"A new solar-to-grid conversion efficiency record has been set by engineers in the US – thanks to an intricate arrangement of carefully aligned, highly reflective mirrors. The solar dish system, created by Sandia National Laboratories and Stirling Energy Systems (SES), enhances the conversion efficiency from the previous record of 29.4–31.25%.

"The old record was held by an excellent system, which has remained unbeaten for over 20 years, but the increase in efficiency we have achieved is a substantial improvement," Charles Andraka, lead project engineer at Sandia National Laboratories, told optics.org. "This is the highest system-level conversion efficiency recorded by any solar generation system."

Things like this encourage me. With the cost of oil going up, the cost of electricity from Concentrated Solar Power (does not burn anything!) is very close to cost effectivenes. This efficiency record demonstrates the efficacy of the Stirling (Carnot Cycle) external combustion engine.

The following two links show Sandia/Stirling's progress in just four years! The future is now.

http://www.sandia.gov/news/resources/releases/2004/renew-energy-batt/Stirling.html

http://www.energylan.sandia.gov/sunlab/overview.htm

We still have assets, facilities, capabilities, labor force, and knowledge behind the dollar. Our system is still ticking away and holding up. When has competition for efficiency and consumer market share been a bad thing? Well I suppose upper levels of management has been a source of controversy. Other than that, I am happy for a strong European economy. Positive developments will lead to a stronger ally and happier people.

It means cheap holidays - assuming one can pass through Customs & Immigration, that is.....

Despite sky-is-falling critics, unless traveling abroad, Americans will notice little about the dollar's value. Meanwhile because of it, the trade deficit will shrink; we have historic low unemployment, historic low interest rates and single digit inflation.

One can find almost anything in the marketplace; peanut butter and jelly sandwiches pre made, with or without the crust, and shrimp in thirty different forms. You cannot get a seat in a restaurant on Friday or Saturday nights. Over 97% of mortgages are paid on time. Who do you know that is unemployed?

Other countries (especially Europe) complain, but the value of the dollar is determined mainly on the Chicago Mercantile Exchange floor, where it can be bought or sold against any currency by anyone who can deposit $5,000 with a broker. Its value is based on one element alone – perception.

In my view, the dollar is falling; gold is rising, and market volatility increasing because:

1. The political season requires bad-mouthing the party in power's economy

2. China's industrialization is consuming massive amounts of energy

3. World instability caused by Islamic revolutionaries

4. Iran, the center of the revolution, is about to get the Bomb.

The cost of food is rising because of the ethanol profits rush. Farmers are planting and harvesting record amounts of corn rather than wheat and other crops. But all that corn is burned by automobiles rather than fed to stock or used as food. The result is higher prices for dairy products, beef, pork and chicken that have lost their breakfast to the carburetor. Still, over all, inflation is under 3%.

Every time a wind farm, oil exploration, coal, nuclear power plant or refinery is proposed it is shot down by popular demand. What can we expect for energy prices if we refuse to tap our own resources?

The economy is strong and resilient, even with the head winds of the real estate credit crunch. Risky sub-prime investors lowered their criteria for credit and income minimums to loan more than prudent to those less than capable. But these lenders charged more than usual – they got their profit. And buyers who normally would not qualify were able to buy homes they could not afford. Now they must go back to renting until they clean up their credit record and accumulate a 20% down payment – the way it should be to qualify for a mortgage.

Since we in the US owe the world trillions of dollars, the falling dollar is great: we get to pay off these debts of in relatively worthless dollars. For businesses who export it is a good thing because it makes their products more competitive. For businesses and consumers who rely on cheap imports things will really suck.

The falling dollar is partly due to global forces: lower wages in the developing world can offset the advantage the US might have in productivity, technology and education. But this was all predictable. It has been our response to these global changes that has made the problem much worse.

We have adopted an 'economic model' is which the solution to every economic problem is to transfer more and more money into the hands of fewer and fewer individuals. According to this theory, people with lots of money are the 'best and brightest', and therefore in the best position to make wise decisions. Generations of college students who spent too many long and lonely nights reading Ayn Rand's smutty little books flocked to this belief. The problem with this is that while many people who are wealthy got that way through hard work and good ideas, many others simply benefited from inherited wealth, celebrity culture, blind luck, government corruption, and other forms of larceny.

What we are left with is the residue of this failed experiment in supply-side economics. After a series of asset bubbles, it is now pretty clear that our largely clueless government subsidized investor class is not wise and disciplined, but are more faddish than even the most dedicated fashionistas. The US could have learned from Japan's experience, when their economy was ruined by an asset bubble based on absurd property values (for a brief time the 'book' value of real estate in downtown Tokyo was greater that the value of the rest of the entire planet) . But we didn't, and now our own grossly inflated property values are taking us down as well.

Free markets and capitalism are great. I am self employed and have been for most of my life, and the market works well for me, but what we have here is not capitalism. We have largely replaced the free market with welfare for the rich and well connected. It often seems that supply-side economics is not so much a theory as a concerted act of class warfare by the rich and powerful, all tarted-up in economic jargon.

Money is the end result of a good economy, but too many people in our wealth obsessed culture think that money IS the economy. Products, services, education, infrastructures, skilled workers, technologies and innovations are the foundation of real wealth, but are now all too often seen as mere commodities to be controlled and manipulated by a chosen few. Unless and until honest businesses and hard working people can come to terms with this, our prospects for maintaining a decent standard of living in this country are slim.

If we look at Zimbabwe as a model for the cause of hyper inflation, it is demand without production. The inflation there is so bad that trying to get needed goods takes all the time away from production. There is strong positive feedback in a very detrimental sense.

Hopefully, and good thing that it is likely that, it won't get that bad here, though many factors are in place to cause some similar trouble on a relatively small scale.

Watch out! Here comes the Amero.

The US dollar is soooo bad they don't even have the cahoonas to tell us how bad it is.

All fiat monetary systems in world history have failed a miserable death.

The only chance the dollar has is to join up with Canada & Mexico and create a new dollar "Amero".....then will sustain it a few more years.

The Amero is a myth or urban legend.

How much [of any item or service] can you get for an hour's work? That is the determining factor. If an hour's labor is worth 3 loaves of bread it does not matter how many dollars are involved. If the McD's combo meal cost $5.25 and their entry level employee was paid $5.25 per hour then the combo meal was worth 1 hour of labor. Raise the entry level wage to $7.50 per hour and the combo meal will cost $7.50. You can't grab your ankles and pick yourself up. Raising the minimum wage devalues the dollar.

Five people working at McDonalds (3 food prep, 1 counter, 1 floater) can easily crank out 100 combo meals in an hour. At $5.25 per hour thats $26.25 total labor costs for $525.00 in sales. If you raise their salaries to $7.50 the labor costs go to $37.50 (ignoring as in your example extra workers comp and social security payments). If McDonald's passes the extra cost along then the combo meal will cost $5.36. Meanwhile the workers (figuring a 30 hour work week) will have $67.60 extra cash each week to spend on combo meals.

You might argue that five workers cranking out and selling 100 combo meals every hour all day is unrealistic. They would quickly run out of supplies, there would be nobody available to take out the trash, and without launching a huge new (and probably doomed) advertising campaign, they would quickly run out of customers. So of course this isn't realistic, but the point is that the relationship between low-end wages and product prices is decidedly non-linear. So in this sense, raising the minimum wage does devalue the dollar, but only by a small amount.

Meanwhile these employees now have spare cash to pay for new shoes, haircuts, beer and pizza. The shoe salesperson, barber, brewer and pizza makers have more customers and more money to spend on combo meals. The faster the money circulates the more value it has. History repeatedly shows that 'the rising tide' that lifts ALL boats is more money at the low end of an economy.

The only flaw with this argument is that the number of combo meals, e.g. "productivity" has not increased - the extra wages did not reflect any more output. Therefore, the extra wages floating around for the barber, the brewer and the pizza guy to accept from the newly enriched fast-food workers is relatively valueless. Now, if you gave the workers a 10% raise, but their ouput went to 125 combo meals per hour, you would have a net GAIN in productivity, even at the expense of increased labor costs. The net gain is the only measure of "improvement" in the economy. The rest if simply more paper floating around without any real, tangible source for it.

Yes, but now there are more people with the cash to buy to combo meals, and the demand will increase. Therefore the workers will spend less down time waiting around drawing wages and producing nothing while they wait for the next customer to show up. At least in the case of combo meals the bottleneck is not production; its waiting around for someone to buy one.

Yes, but there are still only 100 combo meals - if the demand increases because of the increase in the money supply (not a proven metric, by any means), the price of the combo will be go up, given a fixed supply. So the increased money supply has not improved anyone's 'food condition' - the production is the same, the demand may go up, the the only thing increasing is the revenue for the Golden Arches Unless productivity increases to AT LEAST match the rise in the wage level, no one really benefits.

Maybe the combo meal (not my choice) is not a perfect example for this discussion, but I'm willing to stick with it. Your argument would make sense if the 'restaurant' was running at 100% capacity at all times, but this is almost never the case and any reasonable economic model must take that into account.

As the demand goes up the workers spend less time joking and flirting with each other and more time making and selling hamburgers. Therefore productivity does in fact go up. In most industries, especially in food service, there is always some excess capacity that goes unused because of fluctuations over time in demand for the product. Any body who is running a business where they can sell every burger they can make has already decided to 1.) expand their production capacity and 2.) pay their workers more than the minimum wage to keep turnover and absenteeism down.

During the Depression my grandfather earned $15 a week as a mechanic and could buy 300 loaves of bread at a nickel each. In 1980, my father earned about $660 per week as a lead mechanic and could buy 330 loaves of bread at nearly $2 a loaf. The amount one can buy per hour of work of any item is the true measurement, not the number of dollars.

Dollars are just a symbol of exchange, having no real value in themselves. If washing a sink full of dishes for an hour is considered enough work for a sandwich and glass of tea then they are of equal value. Replacing the barter system with money does not change this basic fact. Workers are exchanging labor for goods [or other's labor] at mutually agreed upon values as even trades. Money is merely a convenient way to keep track of it. If the supply of money were matched exactly to the creation of value there would be few problems. But as long as the government prints more money to cover its debts and increases taxes to remove money from peoples pockets and attempts to redistribute the money we will be in trouble.

If raising the minimum wage from $5.25 to $7.50 is so good, why not make sure everyone can be wealthy and make the minimum wage $100 or even $1000 an hour? Carry bales of dollars to buy groceries, because dollars will be worth almost nothing, but you will have lots of money. And if the bottom wage goes up, so will all wages or the customer base drops. Demand for combo meals cannot rise unless the customer base rises, therefore the workers make basically the same number of combo meals per day for the same number of customers at a higher cost, which must be added to the price. All prices and wages then return to the same basic balance, no one is ahead and those earning $7.50 an hour will want $10 and the scumbag politicians will do it again to buy their votes and keep doing it until we use an aluminum $100 coin to buy a stick of gum.

Germany owed a lot of Marks to other countries after WWI and it could not pay, so they just printed million Mark bills and handed over bales of them. Debts paid. Then they revalued their money along the lines of one new Mark for 10,000 old Marks and German money was worth something again. The French did it and the Italians. We owe other countries a lot of dollars, so perhaps we can just print the money and pay them off and then revalue? I doubt it would work today. But raising minimum wage would help everyone to pay off their debts and stick the banks and investors with dollars that buy less than the dollars they put in, a net loss in value. Not good for the economy.

If your father as a lead mechanic could earn no more bread in 1980 than your grandfather could earn during the depression then it would seem pretty clear that labor was valued less in 1980 than it was during the 30's, when perhaps a quarter of the population was out of work and there was obviously a 'surplus' of labor. And that doesn't even take into account the increase in productivity over that period due to improved diagnostic tools. It is true that money is only a place holder for real value and has no intrinsic value beyond what it can buy, but if a more productive worker now is worth essentially the same as a less productive worker back then, it is pretty clear that the additional value due the increase in productivity is going into somebody else's pocket.

It still took the same time to do the repair, even with diagnostic tools to help find the problem. Then you have to consider the number of cars owned and their quality and the number that needed repairs. To increase productivity you need more cars to break down[ or poorer quality cars]. Productivity increases require more customers for these manual labor jobs. Machines have increased the productivity of workers in many jobs, by enabling one person to do what used to take several people to do. It allowed prices of many items to go down rather than paying the worker for producing more, because it was a machine that increased the production and often made the job easier. It is the lowering of production costs by use of machines that has allowed us to buy more of those items per hour's labor and raise our standard of living.

My example with bread and being a mechanic was because those are both relatively unaffected by machines for production. Making a combo meal is also not affected by mechanical aids. If the place has an average of 1000 customers a day eating one combo meal each, how does increasing the burger flipper's wage increase production? It doesn't and it won't keep them from acting just like they do now to pay them more for the exact same job.

As for mechanics, yes they have diagnostic tools and education to work on the complex autos of today. I remember when a mechanic would do a ring job, lift the heads to work on the valves or rebuild a transmission and actually do real repairs. Nowadays they call the car junk and tell you to buy a new one because the cost of repair is more than the car is worth. Compare the wages of a modern mechanic with the number of loaves of a high quality bread he can buy. It is still not all that different from what my grandfather could buy in 1932 for $15, then tell me how having more dollars has made them better off.

It would seem that you are suggesting that for mechanics, despite the increased education and specialized training certificates required for the job, and despite the increased complexity of the job they are doing, that a mechanic is just a mechanic. They are stuck in an economic dead end in which any additional value due to increased productivity accrues only to the consumer in the form of lower prices and to the owners and producers of the new tools.

On the subject of the combo meal, as you say they sell an average of 1000 combo meals per day. This figure is determined by market forces including the perceived quality of the product, location, local competition, cost for supplies, labor costs, the income level of the community, and the return on investment required by the franchise owner and the parent company. An increase in wages of 43% does not mean that the cost of the product will increase by 43%, since labor is only one part of the cost structure. It does however increase the income level of the community so that the worker will now be able to buy a combo meal occasionally for themselves or their family and friends. They might even be able to pay a mechanic to work on their car instead of just driving it into the ground. According to your argument, this is the one permissible way for the mechanic to increase his productivity.

Even the legendary Henry Ford, famous for his innovation and his fascism and bigotry understood the fact that by paying his workers well above the prevailing wage of the time, he increased the pool of potential buyers for his product. He was right (at least about passing on some of the benefits of increased productivity) and was a significant player in one of the greatest periods of growth in American wealth and power.

I agree with you that as a matter of historical fact, that the economic positions of mechanics and burger cooks have not improved over time, and I would argue that in fact the position of and respect for labor has worsened since the 1930's. I am not some Marxist labor organizer. I am a scientist and a businessman, and the only time I ever had any personal involvement with a union was decades ago when I had to join the Musician's Union in order to go on a USO tour and play music for our troops. But I do believe that we are clearly abandoning many of the basic principles that support the free market in a democracy, and that we are drifting toward a new feudalism in which all benefits go to the entrepreneur.

Even if you don't accept this as a valid economic argument, and even if you don't believe as I do that there is a moral dimension to this, there still is a matter of personal self interest, since we still (sort of) live in a democracy, and the growing discontent of ordinary working people is leading to calls for protectionism from demogogs on both left and the right. This monkey wrench will be bad economic news for all of us. Short of adopting a Chinese style capitalism, in which business is given the full protection of the state, and the aspirations of the ordinary working people can be stifled under the heel of the state police, I think this is our best and probably only choice. Smart politics would therefore suggest the we at least claim that our decision is based on a sense of fairness and respect for the needs of all of our citizens.

Hey, they don't spend all of their money on bread. That was just to illustrate the value of an hour's labor. They may only buy 2 loaves of bread a week. The gain in what they can purchase is due to technology and machinery enabling production of goods for lower costs. The mechanic still does the same basic job as in 1932 and the slight increase in productivity does enable him to earn a few more loaves of bread, or an I-pod, TV or whatever else has gone down in price due to technology and machines.

The more robots we use for assembly work, rather than hands, the lower the cost of the finished product. The hourly value of manual labor does not change as much as what it will buy in items not totally dependent on manual labor. Check the prices for items in 1932 and for the exact same items in 2008 in terms of hours needed to earn them. There has been very little change in many items, especially foods, but manufactured goods have dropped in the time required to work to purchase them.

I know that I have simplified the illustration, but the principle is correct. You cannot just raise the minimum wage to any level that someone deems to be a "living wage" and not reduce the value of the dollar. Higher wages do not equal higher productivity, although higher productivity, when not dependent on machines, should be rewarded.

If the burger flipper gets minimum wage for 10 burgers per hour and can learn the skills to make 15 per hour he should get a raise for producing more. But if there is no demand for more than 10 per hour, then no raise even if he can do 20 per hour and there are no customers to buy the extra ones. When this happens the price can drop and he can get a raise because the lower price will attract enough customers to require that speed. All labor is barter, what the worker will accept and what the employer will give. Government and unions often short-circuit that relationship, which has nothing to do with the actual number of dollars and everything to do with what the dollars can be traded for.

"This figure is determined by market forces including the perceived quality of the product, location, local competition, cost for supplies, labor costs, the income level of the community, and the return on investment required by the franchise owner and the parent company. An increase in wages of 43% does not mean that the cost of the product will increase by 43%, since labor is only one part of the cost structure." When ALL wages go up just to keep everyone at the same levels relative to each other and able to purchase just as much as before, then ALL prices go up as the increased labor costs are added in. There will be some lag time before they rise and some jobs will disappear to hold down costs, causing higher unemployment. So some prices will be lower as workers are expected to work harder for their new minimum wage and all wages.

Isn't it better to earn $5.25 and eat than not have a job at $7.50 and starve?

Well let's see. These same arguments were made during th 60's when Lyndon Johnson raised the minimum wage three times in five years. Chamber of commerce types predicted that this would lead to inflation and higher unemployment. It didn't happen.

Here in Oregon where I live, the minimum wage is $7.95, compared to the national figure of $5.85. Taxes and cost of living here are relatively low. Unemployment at 5.5% is only slightly above the national figure of 4.9%. We should have massive inflation and unemployment by your reasoning. But except for the rising cost of fossil fuels, and the bump in food costs due to fuel costs and ethanol production, prices are and have been stable. The logic behind what you say is very convincing, but the facts argue otherwise.

Taganan - This is getting pretty thin. The dollar was trading at $0.85 against the euro in 2002, and it is now trading at $1.56. Gold just hit $1000.00 per ounce, up from $400. I'd say the dollar is weak. These are not fluctuations, they are trends. We could argue until doomsday about whether this is due to the underlying economy or government policies. Considering the extent to which big business and government are now intertwined it's probably a question of semantics at best. Of course there are areas of strength in our economy. The part of my business based on exports is doing well, and I am sure that others in hi-tech industries have similar tunes to sing. But 9 trillion dollars in overseas debt tells the real story. Our single largest source of foreign income has been financial services. Due to bad management based on short sighted economic models that seems to be heading for the toilet as well.

A weak dollar? Or a devalued currency? The latter allows US manufacturers and edge to sell and invest.

Is the US dollar weak? Hardly, though a fluctuating valuation may make the coming AMERO appealing.

Let's see if this gets a bite. Let's not consider the value of the US business' or of the personal wealth of citizens. Let us only consider the corporate wealth of the US municipalities. If you totaled the gross income value of all filers then multiplied the sum by about 70,000 you be +/- 1 trillion of the US corporate wealth; about $61 trillion and this figure the least of the three mentioned.

What say you is the US dollar weak or internally devalued?