Wednesday, April 13, 2005
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Be afraid but not too afraid about the dollar
Longtime readers of this blog will recognize my occasional concern with the size of the trade deficit and the future of the dollar. On this question, economists split into two clear camps -- camp one thinks the current equilibrium -- in which the U.S. runs enormous current account deficits and Pacific Rim central banks provide the financing for said deficits -- is incredibly fragile and that the dollar's value will fall hard, fast, and soon. The other camp thinks that because most actors in the system have a vested interest in seeing the status quo persist, the current equilibrium is more stable than many think, and that over time, the dollar's slow decline will help sort the system out.
Today the International Monetary fund follows up on the World Bank's warnings from last week and says that the current situation is not good. Andrew Balls provides a recap in the Financial Times:
For more on the IMF's reaction, see the transcipt of their press conference, as well as a link to their World Economic Outlook: Globalization and External Imbalances. This quote by Rajan stands out from the press conference:
On the "don't panic" side, James Surowiecki has an essay in The New Yorker concluding that although a hard landing would be bad, it probably won't happen:
posted by Dan on 04.13.05 at 05:25 PM
Economists gotta problem in that foreign players here are acting in their political interests, i.e., in avoiding domestic change, rather than in their economic interests.
The Chinese government does not want its domestic consumption market to grow enough to absorb increasing Chinese productivity. There are lots of reasons for this which boil down to "that degree of increase in domestic consumption is not in the interests of the Chinese Communisty Party."
The governments of France and Germany do not want their economies to grow enough to threaten the particular domestic interests which support the current governments of France and Germany. While there are other factors which inhibit European growth, this is the biggie.
So the two biggest potential markets for an expansion in American exports to the degree necessary to grow out of the current trade imbalance are closed for domestic political reasons inside those markets.
The other ways to decrease America's trade imbalance are to reduce domestic demand and therefore domestic economic growth, or to institute some sort of forced savings mechanism with almost certain lessened domestic growth. These have their own political drawbacks.
People do not behave like money, and neither do governments.posted by: Tom Holsinger on 04.13.05 at 05:25 PM [permalink]
While I an not a macro-economist, I do have eyes to see with and ears to hear with. Since the late 70's the Prophets of Doom have be preaching about the perils of the dollar imbalance and US oil comsumption leading to immediate collapse of Western Civilazation. After almost 30 years, the US and world economies are larger and healthier than ever. Errr, .....where's the collapse?
Perhaps their macro-economic models are all f**ked-up? I can remember when learned academics and petro-geologists still thought that oil was dinosoar-parts. .....Perhaps the economists are equally on the wrong track entirely??
Nothing here a good recession like we used to have once every 3 years in the 50's wouldn't solve. Makes me pine for William Mc Chesney Martin. Yes, he left this country in great shape.posted by: Richard Heddleson on 04.13.05 at 05:25 PM [permalink]
"Our lenders are trying to strike a delicate balance: they’d like the dollar’s predicament to seem dire enough to make us change, but not so dire as to spark panic." -- New Yorker
It appears it's up to the Chinese Communist Party to "starve the beast."posted by: Carl on 04.13.05 at 05:25 PM [permalink]
Look at the stock market and you see the success of "starve the beast". Why would anyone ever think starve the beast would ever hurt the government before it did massive damage to the economy first?posted by: spencer on 04.13.05 at 05:25 PM [permalink]
Look at the "Bretton Woods 2 is stable" scenario and calculate the percentage, 5 or 10 years out, of Treasury debt held by Asian central banks, as well as the US net international investment position at that time. You might prefer a hard landing tomorrow!posted by: Jim M on 04.13.05 at 05:25 PM [permalink]
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