Sounder than a Dollar… the (third world) Costa Rica Colon!

I got some complaints (one at least) that I didn’t go into detail about the chart, the dollar and the colon when I posted this chart before. Well, this post will remedy that.

The ‘science’ of Economics is such that if you had a roomful of economists, you would also have a roomful of different opinions. I am NOT an economist, though I do follow the subject. What follows is some fact and some opinion. I will try not to stray into politics here, merely give my perspective on something that seems quite peculiar at face value.

I was in the bank today and noticed that the dollar had sunk a tiny bit more against the colon since the last time I checked. This is a fact. Why… is opinion. But it is hardly believable that the local currency is surging because of the great economy here. More likely is the explanation that the US dollar is being intentionally devalued.

The Federal Reserve Bank has done several rounds of what is called ‘quantitative easing.’ I won’t get into what the ‘Fed’ is and if it is good or evil, but it has the power to do several things, and is indeed doing several things. One of the things it does is set interest rates for banks. Currently they are virtually at 0. Zero. Banks can borrow money at 0 percent (almost) and do whatever they want with it. One thing they can do is buy short term treasury bonds and get a slightly better rate or return than they are paying the Fed. Free money.

The Fed has also done the famous (or infamous) ‘TARP’ program, buying up risky assets that banks and other financial entities don’t want to hold. If you are an incurable optimist or a PR person for the banks, you could hope that the Fed is only buying valuable assets. My opinion differs, but it’s just opinion.

In any case, interest rates for everything from mortgages to US Treasury bonds are very low. Historically low. How long they can stay that way, and what happens while they are so low are matters of conjecture even among those who get paid to analyze such things. There are three popular scenereos (sp?) held by those who follow such things. #1 is that we are headed for hyperinflation from printing so much money. Those who hold this view often believe that precious metals are the way to go, and many also believe we need to return to the gold standard.

A second view is that we are now caught in a deflationary spiral. The fact that food and energy are rising in price does not hide the fact that median wages are falling. The high unemployment rate added to falling wages equates to less ‘demand,’ or as I prefer to put it, less ability to buy stuff. The upside of deflation and devaluation of the dollar is that exports FROM the US become cheaper and imports become more expensive.

This brings us to the more conventional view, held or at least promoted by most politicians on both sides of the fence, which is that the US needs to be more ‘competitive,’ that is, it needs to lower labor costs, in order to bring back industry to our own shores. Both major parties believe, or at least preach, that we can return to the ‘good old days’ by tightening our belts and sucking it up. The differences between our two political parties are primarily concerned with whose belt needs to be tightened. The Republicans want to cut non-military spending (with some exceptions) while the Democrats are willing to cut some Military spending.

The fact is that neither party is really serious about reducing deficits (opinion). Debt rose under Bush and it rises under Obama. I will boldly predict that it will continue to rise no matter who is elected and no matter who controls Congress. Talk is very cheap and you will hear lots of it, but nothing is going to get done that will make any difference. You will see plenty of finger pointing and posturing but the ‘economy’ is not going to return to the good old days. Anybody who tells you different is overly optimistic at best, a damned liar and/or crook at worst.

[Opinion] One of the most common mass deceptions ingrained in most Americans is that America became rich and successful because it was somehow ‘special,’ that it was our enterprising and innovative spirit that made our economy the richest in the world (post WW2 to the 70s, at least). The fact that the USA had the only undamaged industrial base during that period, along with a lot of room to grow on (thanks to our taking it from the original inhabitants) was not mentioned until I got to College. Even there it was not something many of us students paid much attention to.

[more opinion] Even now, I believe the majority in the USA believe that they are ‘special’ and there must be somebody or something else to blame for our economic decline… anything but the idea that we were ‘lucky’ much more than deserving. Listening to the political discourse in the media and in bars, it’s hard to escape the conclusion that no more than 15% of the public understands much about what is going on with the economy, even the basic numbers, let alone agree on the conclusions to be drawn or the actions that should be taken.

So what can you do? My advice is simply to be skeptical and prepare for a rough road ahead.

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Comments

  1. Vey Good article. Your right the american people do not do their home work and so they cannot under why things are the way they are.the other day I heard Joe Biden say" Osoma is dead and GM is alive.
    what he for got to say iss oh by the way that bailout we gave GM they took a billion dollars of that and invested in a new car plant in Russia. So how are we better off with the bail outs

    • We (General Motors) build overseas autos to sell in those countries. It is a part of keeping those countries buying GM products, helping the industry. If they were built here, the export and import duties would make the price of shipping them to Russia such that they could not be bought. If they were making cars and sending them back for sale in the US, it wouldn't profit anybody. It builds our markets. However, you are right, (I think) in worrying about companies that are closing here and moving overseas. In that case, we lose.

  2. Great opinion piece D.