Comment by mrtksn
5 hours ago
I have this pet theory that is fueled with ignorance but kind of make sense to me: The correct value of the USD would be adjusted to match the tech company valuations sans AI(Apple can be a good guide IMHO) when they serve 350M people instead of 8B people as AI makes software obsolete and the geopolitics and the US government behavior dismantles any network or lock in effects.
I'm interested to understand your theory better but right now the way you've expressed it is hard to make sense of for me.
As I said, it is fueled with ignorance and I’m sure that it is complete bullshit when examined closely but the reason I kind of find it possible is that currently the American companies have a reach that is order of magnitude bigger than the American population and their valuations as well as their profits are based on that. What America is currently doing is dismantling of the world order that made this possible, therefore the American companies will have drastically reduced reach, i.e. Apple for example, won’t be able to sell hundreds of millions of iPhones per quarter because there are not that many Americans to buy that. Instead of the Market crashing in nominal values, maybe the value of the dollar we will crash. So Apple will still be $4T but an new iPhone will be $10K.
Yes, I’m just throwing some bs numbers around but IMHO things will have to make sense eventually when US can’t just print infinite dollars without crashing its value and Apple can’t just sell iPhones to the entire planet due to wars and trade barriers that are becoming the new normal.
You're not wrong in theory. If you're a small country, your currency's day-to-day purchasing power is influenced strongly by your imports and exports. If you have few things other countries want to buy, there's less demand for your currency, and it will go down in value as expressed in your trade partner's currency. A sustained trade deficit (more imports than exports) might mean your currency goes down and down in value. Certainly if some politicians decide to close the borders, you will export even less, but will probably still need some necessities from abroad, and you have a financial crisis.
The US is a huge whopping exception to this strong correlation between the balance of trade and currency strength. US exceptionalism is usually wrong, but in this case, the US dollar being the 'reserve currency' of the world is an incredible boon. The US has been able to sustain a huge trade deficit for decades without sky high inflation (you think it's bad now, it's nothing). In fact, foreign goods keep getting cheaper and the US dollar and services keep getting more valuable. A lot of this is because foreigners are willing to keep their savings invested in dollars (stocks & bonds, including the magnificent 7) rather than selling off their dollars to buy e.g. Chinese goods.
Also note that the tech companies make up a small portion of imports/exports.
But.. If trade restrictions (or security concerns) make it harder for the magnificent 7 to make money abroad, their profits will go down and there could also be an outflow of capital that puts inflationary pressure on the dollar, just because US stocks and bonds are less attractive - the trade deficit increasing would also contribute a bit, but it would be a much smaller effect.
An economy being propped up by foreign capital is not just a US phenomenon, the Asian Financial Crisis of 1997, Turkey 2000, Mexico 1994 - these crashes all were cause by sudden capital outflows. The proximate cause was a short term arbitrage trade, rather than those currencies being in extensive (structural) demand.
This concern is also why China doesn't let foreigners invest directly in Chinese companies. You can only buy weird derivative certificates that trade on a Hong Kong exchange and are subject to tight capital controls if need be.
Things like a domestic tax on imported goods/services (also called tariffs) are unlikely to lower the trade deficit unless there is already an industry domestically to absorb the demand.
> US government behavior dismantles any network or lock in effects
You should look at where most of the compute of the world is physically located. You might have a shock.
This compute is made in China and Taiwan with European tooling, it’s not really a natural reserve that US holds a grip on. What US has is some of the IP but with the invasion of Greenland and later Taiwan patents and IP becomes unenforceable in this hypothetical scenario.
related:
"It's hard to argue that the yuan isn't undervalued. As the International Monetary Fund noted in its country report published in February, China's external position "is assessed to be stronger than the level implied by medium-term fundamentals and desirable policies." The yuan has nonetheless fallen in real terms due to China's low inflation.
Indeed, the renminbi has depreciated in real terms four years in a row, registering a cumulative 14% decline since 2021, according to IMF economists. They estimate China's real effective exchange rate could potentially be up to 20% undervalued.
China watchers Brad Setser and Mark Sobel, both former U.S. Treasury officials, go further and say the yuan is probably undervalued by as much as 30%. Setser has long argued that China's official balance of payments data understates the country's real surplus and that customs data is the more accurate barometer. By that measure, the trade surplus would be a percentage point of GDP wider."
https://www.reuters.com/markets/europe/chinas-yuan-is-underv...