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storm clouds « Previous | |Next »
January 17, 2005

Storm clouds are gathering around the embattled US dollar.

They are caused by the the US budget deficit, the large current account deficit that is now around 3% of GDP and rising to 5.5%. the drying up of private sector investment into the US, and some central banks selling US dollars as they switch out of US dollars into euros.

Dollar weakness the approaching storm is called. The metaphor is meant to indicate the seriousness of the problems facing the US. It's trade deficit is still growing very, very rapidly.

As Brad Setser points out

...if the dollar's value truly was set in the markets, it would have fallen much more than it already has. We now know Asian countries spent almost $530 billion propping up the dollar in 2004. $530 billion! The sums are staggering: Japan, almost $180 billion; China, $200 billion, other emerging Asian economies, another $150 billion.

Are we not talking about economic fundamentals here? Is not the US Treasury in favour of sound economic fundamentals at home and abroad?

The common argument that unpacks the storm cloud image is that as the USD falls, foreigners will not fund the US current account deficit, inflation and interest rates will rise in the US, tanking the US and world economy.It’s a US problem.This argument is rejected by Stephen Kitchner over at institutional economics.(see post on 20.12.04) He says:

The world economy could well be headed for a recession, but the decline in the USD is not the causal mechanism: it is merely symptomatic of the monetary train wreck unfolding in East Asia... The problem is not that the US has saved too little, but that East Asia has saved too much as a result of the state sponsored mercantilism that is the fundamental cause of global imbalances.

Whatever the fundamental cause, the US dollar is going to continue to decline.

| Posted by Gary Sauer-Thompson at 4:12 PM | | Comments (0)