Micael wrote:
>>The Journal of Economic Perspectives once had a number of widely differing
>>estimates of the amount of dollars abroad. If the dollar were to suddenly
>>threaten to loose value, say to the Euro, and people wanted to dump them,
>>wouldn't that create serious problems in the US?
Brad answers:
>If it happened today? No. The dollar would fall by a lot--50%?--rapidly.
>But then imports would shrink and exports would boom.
The improvement in the US balance of trade would definitely occur (at least
for a big country like the US). However, as the famous "J curve" effect
indicates, it would get worse before it got better. (Demand is inelastic in
the short-term, so that there would be an increase in the total amount of
money spent on imports because dollar prices would rise than real
quantities fall.) This is one part of what happened after the mid-1980s
spike in the dollar exchange rate: falling exchange rates didn't
immediately help US trade balances. Nowadays, it's more dangerous, because
the US trade deficit -- and the current account deficit -- are so large. It
would encourage the further accumulation of external debt and (crucially)
the rise in US debt-service obligations to the rest of the world. The rise
of the latter means that an increasing percent of GDP goes not for domestic
use but for paying interest & principle.
Also, the rise in the dollar cost of imports associated with a 50% fall in
the dollar would represent a significant fall in U.S. real living standards
(as measured by market indices), as nominal incomes would not be rising by
50%. That is, there would be inflation in which the benefits of rising
prices would be distributed overseas. Not only would a lot of important
consumer and capital goods become more expensive, but imported raw
materials would too. (Possibly this won't include oil, since international
oil prices are set in dollars.) The rising domestic price of imports and
the falling international price of US exports would encourage US
import-competing and exporting industries to hike domestic prices, as the
competitive lid on prices fades away. This inflation would be a nightmare
for the Fed (since Central Bankers hate inflation like the plague), so that
further efforts to spark the US economy would be scrapped. Likely would be
stagflation, the combination of rising inflation and and unemployment.
Eventually, of course, the US balance of trade would improve (and partly
due to any recession that occurs, since this lowers imports). The problem
is that this would have the effect of stimulating the US economy -- or
moderating any recession that occurs -- by beggaring US global neighbors.
It would be raising US net exports to the world by reducing world net
exports to the US. Uncle Sam would no longer be acting as the "consumer of
last resort" for the rest of the world as much, counteracting the
deflationary tendencies arising from the almost-world-wide process of
competitive austerity and export promotion (encouraged by the competition
for the favors of the transnational corporations, by the IMF and World
Bank's Structural Adjustment Plans, etc.) By pulling the prop out from
under the shaky recoveries of some countries or by encouraging the
continuation of stagnation in others, a deep global recession is
encouraged. This in turn feeds back to reduce the world's purchases of US
products, so that a world-wide multiplier (and accelerator) process would
occur.
Obviously the above is mostly speculation, but it's a needed antidote to
the facile optimism that Brad expressed above.
>If it happened at some future time at which the U.S. foreign debt was
>largely denominated in euros or yen? Yes. The U.S. would then be in the
>same position as Korea 1997, in which each decline in the value of the
>currency raises the home-currency value of debt owed to foreigners and
>bankrupts more firms and banks...
Right. The US is _lucky_, since its currency is used as the world money (as
befits its economic, financial, political, and military might). However, a
rapid fall in the dollar might encourage efforts to replace the dollar as
the world currency (with the Euro? the Yen?). A little of this can be seen
in Argentina, where the iron link between the dollar and their currency may
be diluted by linking their currency (the name escapes me...) to not only
the dollar but the Euro.
Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~JDevine
