Fear Factor

Brad Delong podcasts about the dollar's gravity defying act:
The U.S. current account deficit may reach $1 trillion this year--a deficit of $13,000 for every family of four that we are borrowing from abroad to finance our spending and will have to pay back, someday. As more and more time passes without a sharp decline in the dollar, the international economists whose offices surround me are becoming more and more annoyed. Someday the foreigners will want to be repaid the money they have lent us, yes? The way we repay this is by shipping them our exports, yes? In order to ship them our exports, our exports must be competitively priced--which means the value of the dollar has to be lower, yes? And if the value of the dollar in the future must be lower, it will start falling now--there is, after all, lots of money to be made on betting on what seems to international economists to be a sure thing.

The international economists look forward into the future, and see a future in which the value of the dollar will be low.

But foreign-currency speculators and international investors do not see this future. They continue to hold very large positions in dollar-denominated assets. There appears to be nobody in Canary Wharf or Midtown Manhattan who thinks it is their business to bet on a future run from the dollar. In past history, the dollar is something that you run to, not from. George Soros can bet on a run on the pound. Thai import-export firms can bet on a run on the baht by accelerating their dollar receipts. Everyone can bet on a run on the Argentinian peso--a favorite sport of international financial speculators for a century and a half. But nobody wants to bet on a run on the dollar. Not yet.
...
The U.S. economy managed to unwedge itself from large trade deficits in the 1970s and 1980s without any significant economic discomfort. We'll probably manage to do the same this decade. Let's hope so. The chances that new Fed Chair Ben Bernanke and new Treasury Secretary to be Henry Paulson will have a very exciting time in their jobs are growing--growing slowly, but growing every day.

Comments

  1. William M. Connolley11:20 AM

    Totally OT: I'm now receiving Huffington post daily emails, all because I signed up there (on your recommendation, as I recall...). anyway, I wondered if you knew how to get rid of them?

    If you *do*, do email me too, as I may forget to look here.

    ReplyDelete
  2. CapitalistImperialistPig7:26 PM

    belette - I never told you to sign up. I didn't. More (useless advice from me) at your blog.

    ReplyDelete

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