If the US dollar falls what does this mean to
Ecuador? Recently a reader sent me this note:
“Gary your thoughts on this article in regard
to Ecuador and the dollar value there. Thank you.
‘LONDON (AFX) - The OECD has warned that
the eventual rebalancing of the US current account gap 'looks increasingly
unavoidable' and will send shock waves across the globe, starting
with a slump in the dollar's exchange rate.
‘The OECD said in its world economic outlook
that the depreciation faced by the dollar could be 'of the order
of one-third to one-half.'
‘The adjustment in the deficit would 'need
to induce a sharp slowdown in US domestic demand and that this
would have adverse spill-over effects on other economies both through
the trade and asset revaluation channels,' it said.”
I believe that a drop in the US dollar could actually
benefit Ecuador. Because the greenback is Ecuador’s currency,
it has competitive troubles with competing nations such as Peru,
Colombia and Argentina when they devalue their currencies versus
the dollar. In the long term being dollarized is good as it reduces
inflation and stops politicians from turning on the printing press.
A US slow down will not seem good for the global
economy though in the short term. Like all disciplines, the change
appears to create pain. However the world has stretched this imbalance,
letting Americans for a very very long time buy and buy stuff they
cannot pay. The politicians have not corrected this, so the market
will instead. The US really cleans up by the way. If the dollar
drops by half, the spending power of the payback of the huge US
debt is cut in half as well. Bad news for those who hold the dollar.
Good news for future US tax payers.
This is true for Ecuador also. As the purchasing
power of the dollar falls, so too does Ecuador’s significant
US dollar debt!
The total impact of such a huge shift in economic
arrangements is quite murky but one thing is clear. In US dollar
terms, Ecuador real estate will rise. All commodities, labor and
real estate will rise in US dollar terms as the US currency loses
purchasing power.
Ecuador has some other fundamentals that could
help it do well in a global crunch. First, the people are sweet
and easy going with few expectations of government care. Second,
the country is rich with earth, water and sun. Crops grow everywhere
and it is typical as in the picture below that people have a huge
garden right at their home. Third, Ecuador’s low capital,
low cost labor environment could be more stable during difficult
times. Finally Ecuador as a leading oil exporter gains. As the
dollar drops, Ecuador’s debt drops and oil prices rise, helping
fill in gaps.
Be aware, this fundamental shift in how the world’s
economic system works is fraught with danger. The world has been
feasting on debt and America’s unruly consumption. When the
dollar falls dramatically and the global currency system comes
unhinged, everyone will feel the diet. Some will embrace it and
move ahead. Most will suffer and where this suffering leads is
impossible to tell.
Here is that typical house near our village of
Cotacachi, Ecuador with the garden.
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Until next message, I wish you freedom from worry
through good health and knowledge!
May, 2006
Gary
