Tuesday, December 07, 2004

 

This isn't good news

(Via Brad DeLong):

The Future of the Dollar
Brad Setser says we should all go read The Economist on the dollar:

Economist.com The future of the dollar: over the next few years it seems an excellent bet that there will be a large drop in the dollar. Since mid-October the dollar has fallen by around 7% against the other main currencies, hitting a new all-time low against the euro and a five-year low against the yen. The dollar has lost a total of 35% against the euro since early 2002; but it has fallen by a more modest 17% against a broad basket of currencies....

:::snip:::

Those bearish on the dollar are asking why investors will want to hold the assets of a country that has, by its own actions, jeopardised its reserve-currency position. And, they point out, without the intervention of central banks, which have been huge net buyers of dollars, the dollar would already be lower. If those same central banks were to begin to sell some of their $2.3 trillion dollar assets, then there would be a risk of a collapse in the dollar....

The [trade] deficit is at the heart of this issue. Various economists have put forward at least four arguments why the deficit does not matter and the dollar's reserve status is safe. First, the deficit is a sign of America's economic might, not a symptom of weakness. Second, sluggish demand overseas is a big cause of the deficit, so it is reversible. Third, the deficit exists largely because of multinationals' overseas subsidiaries. And fourth, central-bank demand for dollars creates, in effect, a stable economic system. It is not difficult to demolish each argument in turn....

Worse still, in recent years capital inflows into America have been financing not productive investment (which would boost future income) but a consumer-spending binge and a growing budget deficit. A current-account deficit that reflects a lack of saving is hardly a sign of strength....

For almost two decades, economists have worried about America's current-account deficit and predicted a plunge in the dollar and a hard landing for the economy. The dollar did indeed fall sharply in the late 1980s, but with few ill effects on the economy. So why worry more now? One good reason is that the current-account deficit, currently running at close to 6% of GDP, is almost twice as big as at its peak in the late 1980s, and on current policies it will keep widening. Second, in the 1980s America was still a net foreign creditor. Today it has net foreign liabilities and these are expected to reach $3.3 trillion, or 28% of GDP, by the end of 2004 (see chart 2)....

:::snip:::

In any case, the current-account deficit cannot be corrected by a fall in the dollar alone: domestic saving also needs to rise. The best way would be for the government to cut its budget deficit.... Sterling maintained a central international role for at least half a century after America's GDP overtook Britain's at the end of the 19th century. But it did eventually lose that status. If America continues on its current profligate path, the dollar is likely to suffer a similar fate.... if America continues to show such neglect of its own currency, then a fast-falling dollar and rising American interest rates would result. It will be how far and how fast the dollar falls that determines the future for America's economy and the world's. Not even Mr Greenspan can forecast that.

Of course, people have been predicting doom for years and it hasn't happened. Which means, of course, that it will never happen. Everybody go off and play.

No, no, it doesn't mean that at all. What it means is, America has been the luckiest country in world history. We've earned much of our success, but nobody could possibly have earned all of this much good fortune. It's like George W. Bush pretending that he got where he did in life owing not one blessed tiny little thing to his last name. We've contributed a lot, but we've still received rewards far out of proportion to our merit and our deserts. But we have failed to recognize this - we've been encouraged by politicians, of both parties, granted, to fail to recognize this.

But things are different this time. The world is different. We are not the unchallenged number one. China is challenging us. India is challenging us. The European Union is challenging us.

This is not necessarily a bad thing. As the rest of the world takes up the challenge, world wealth overall should rise. If the United States were up to the challenge, it would be a great thing for us, stimulating us to unleash our people's energies to lead the way once more. But I'm not sure we're up to it. Our scientific and technical education is severely blunted, we are more interested in consuming than in producing, and we are blinkered and looking inward and upward rather than outward and forward. The absolute stark failure of leadership at the national level, the forfeiture of imagination and drive, the propensity of business to see its role as escaping regulation and carving up resources and rewarding itself with ever bigger executive compensation rather than charting the future - all these make me pessimistic that we will enjoy in the future the comfort and power we have in the past.

As a historian, this does not surprise me. Empires have come and gone in the past; with all due respect to Homer Simpson, everything doesn't last forever. If it's our turn, we've had a good run; an amazing run, in fact. No one will ever dominate this planet the way we did. That's probably a good thing.

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Wow what a cool blog you have here! I am impressed. You really put a lot of time and effort into this. I wish I had your creative writing skills, progressive talent and self discipline to produce a blog like you did. Your blog really does deserve an honest compliment. If you have some time, stop by my site, it deals with stuff like, click here: dollar and then feel free to e-mail me with your words of wisdom.

P.S. I'll sure put the word out about your site and I would appreciate any business you may send my way...

Later, Scott ;-)
 
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Comments: "
Wow what a cool blog you have here! I am impressed. You really put a lot of time and effort into this. I wish I had your creative writing skills, progressive talent and self discipline to produce a blog like you did. Your blog really does deserve an honest compliment. If you have some time, stop by my site, it deals with stuff like, click here: bux and then feel free to e-mail me with your words of wisdom.

P.S. I'll sure put the word out about your site and I would appreciate any business you may send my way...

Later, Scott ;-)
 
" "
Wow what a cool blog you have here! I am impressed. You really put a lot of time and effort into this. I wish I had your creative writing skills, progressive talent and self discipline to produce a blog like you did. Your blog really does deserve an honest compliment. If you have some time, stop by my site, it deals with stuff like, click here: dollar and then feel free to e-mail me with your words of wisdom.

P.S. I'll sure put the word out about your site and I would appreciate any business you may send my way...

Later, Scott ;-)
 
" Post a Comment

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