Soros Says He's Selling the Dollar

[Gauss]

What are the causes of deflation?

In a nutshell, deflation may occur when the supply of goods exceeds significantly their demand.
Demand is influenced by a variety of factors. If people don't earn enough money they could spend demand drops (this happened ~1930), e.g., due to high unemployment. The same applies if they feel they don't earn enogh. Demand also drops when people feel that the prices are too high (currently in Germany called the TEURO phenomenon, teuer means expensive).
Supply is also influenced by a variety of factors. An important one is over-capacity: During the boom years in the mid-90's many companies have built large factories in order to produce enough goods to satisfy the high demand. Now that the demand drops, they still produce the same amount. Cheap imports from other regions raise the supply as well, and a strong Euro benefits cheap imports. (This is why the US currently don't mind a rather weak dollar.)
Things are much more complicated than this but it should be enough to get the idea.

[Olivier]

Things are much more complicated than this but it should be enough to get the idea.

I understand now! Thank you for your explanation!

I wonder why you think Germany could suffer from deflation. Germany is in the euro-zone, so the situation is the same as if there was deflation only in Hamburg but not in the rest of Germany: we would not be afraid of a "local" problem !?
(I may be wrong, tell me).

Isn't Germany "protected" from deflation since we now share the euro?

[Gauss]

Isn't Germany "protected" from deflation since we now share the euro?

No, why should they? The problem with deflation is insufficient demand and excess supply. A way to get rid of the latter is export. But a strong Euro is obstructive for more exports (buying countries would still rather pay in dollars, hence low prices for the producers).
To increase demand you need mainly optimism (in order to prevent people from saving their money) and low unemployment (people have jobs -> have money -> can buy a lot).

I don't see why the Euro should change anything of that. Sure, other european countries could benefit from decreasing prices in, e.g., Germany, buy goods from there and help stabilize the situation. But despite the free trade all over Europe, such problems as deflation/overinflation remain regional phenomena.

[Olivier]

I don't see why the Euro should change anything of that. Sure, other european countries could benefit from decreasing prices in, e.g., Germany, buy goods from there and help stabilize the situation.

That's the phenomenon I thought about.
If I am a belgian entrepreneur, I see that the prices are lower in Germany (because of deflation or whatever) for the goods I need, if it's more interesting to buy them in germany than in France, Ireland or Portugal, then I buy in Germany.
Lower prices can be good for Germany to export inside the eurozone, so the stabilization will come naturally from Europe.

It was impossible before the euro, because it was harder to compare the prices.

There are differences between the Provinces of Canada: the prices are much lower in Quebec than in Ontario... so Quebec sells its products to Ontario.

But despite the free trade all over Europe, such problems as deflation/overinflation remain regional phenomena.

I'm not sure!
Europeans are now living in the same area. Goods and people can travel Europe in only two or three days. I bet that Germany will incrase its exports to France very soon (France is the first commercial partner of Germany).

The enlargement will also create a new dynamic!

[Olivier]

I hope it's not going to rise much more. It might cause deflation in some countries like Finland. And it's definitely bad for exporting since most goods are priced in dollars.

You are right about that! Dutch companies like Phillips, shell and unilever, have great interests in America, and those bring in a lot less money when the Dollar is that low.

The US dollar will probably fall untill the value of 1 € = 1,50$... If the Chinese and the Japanese stop buying the US Treasury Bonds, it can just fall... The USA don't produce goods anymore and they have never bought foreign goods as much as today.
The current value of the US$ is artificial.

I predict a huge crack in the coming months.

[Olivier]

They can only do this because the dollar is still the international currency in which they buy everything ...

This is not 100% true anymore.
I have read interesting articles in the Chinese, European and Canadian press. Some of them are linked by John S in other threads.

- The costs to change euros in a foreign currency are less and less expensive, because more and more € are changed everyday. More your bank changes euros, lowest are the costs.
-> it's less and less necessary to change your local currency in dollars, and then in euros to buy/sell products to/from the European Union.
Moreover, the foreigners won't have to suffer from unstability of change between the dollar and the euro.
The euro is more and more a reference.

- More and more countries want to own euros as a reserve currency. At least to equilibrate their reserve funds. 75% of the world reserves were in dollars. The average is closer to 60%, which means more "free" dollars on the market -> less value.

- A lack of confidence in the US$ would engender a huge crack in all the world monetary system. The war in Irak (which costs a billion $ a day), the brutal US foreign policy, the twin deficits and the debt of several trillion is a topic of fear for more and more investors, when at the same time, the USA need more and more money.
At the same time, the ECB wants to keep the stability of the euro, even if the dollar collapses.
It's a good new for the foreign investors who could put their money in the eurozone.

- A week dollar would not mean more US investments, as the USA product less and less goods on their soil. The US goods are now made in China. The US big companies are more "multinational" than american. The bigest employer in the USA is no more General Motors but... Wal Mart, which sells products made in China.
At the same time, a strong euro would mean lower costs on the international markets, if the major goods are priced into dollars. Oil would cost less to Europe.
And I'm not sure the EU would sell less, elsewhere than in the USA. After all, the other countries such as Russia, Australia, South-Africa, Brasil and China could buy and sell in euros...

-->> The USA should really fight the deficits and the debt instead of wasting billions of dollars everyday.

[Olivier]

But in the mean time, the falling exchange rate for dollars is reason to worry about - Europe might import deflation which is pure poison for the economy. I'm sure John S will post some articles about it at some time.

In that case, a good way of fighting the imported deflation is to consume! The European Commission proposed to start important works: train connections, non-polluting energy plants... More money could be spent in research, in health, in education...

[Olivier]

Isn't Germany "protected" from deflation since we now share the euro?

No, why should they? The problem with deflation is insufficient demand and excess supply. A way to get rid of the latter is export. But a strong Euro is obstructive for more exports (buying countries would still rather pay in dollars, hence low prices for the producers).

Not in the case the US dollar is so weak that it looses all its interest to be payed with.