[was: RE: [PEN-L:25943] Re: Protectionism US style] On Thu, 9 May 2002, Joseph Stiglitz was quoted as saying: > Many of America's problems are made in USA. America's deteriorating fiscal position is leading to a strong dollar, just as the deteriorating fiscal position of the US after Reagan's irresponsible tax cut of two decades ago did.<
Michael Pollack writes:>Theoretically speaking, how does a deteriorating fiscal position lead to a strong dollar?< The idea is that a rising government deficit implies growing government borrowing, which implies rising interest rates (cet. par.), which attracts short-term capital funds to dollar-denominated asseets (assuming that interest rates in other currencies don't change), which raises the exchange rate of the dollar. I don't think that this is a big part of 2001 or 2002's rising dollar. Especially the latter's since the dollar has begun to peak or fall. > And as a statement of fact, isn't this future progressive tense -- implying that the dollar will get stronger from here on -- a little questionable just right now?< yup. Bush's deficits are extremely small potatoes compared to Reagan's. I'd put more weight on the (still) overvalued US stock market attracting funds from abroad and the safe haven effect. Also, high consumer and, to a lesser extent, corporate borrowing have also encouraged a high dollar. The private sector has been running a deficit that's much more serious than the government's, since the US government seems unlikely to go bankrupt in the near future (to say the least) while private entities can go bankrupt in droves. [Stiglitz seems to be clinging to the balance-the-budget Treasury view, despite his heterodoxy on other issues.] But the endless War On Evil (WOE!) might lead to permanent government deficits that are seen by the money-speculators as justifying not only high long-term interest rates but a high dollar. Which means that the WOE is being financed the old-fashioned way, borrowing from overseas. I've mentioned this before, but recently the US has switched from having a GNP greater than its GDP (due to receipt of income from abroad) to the opposite. The deviations are not large, but symbolic of a significant role reversal. JD
