Muenchau's article covers a study authored by American economists Maurice Obstfeld and Kenneth Rogoff, which theorized that the current global imbalances would adjust through a decline in the US housing market (currently underway), which would produce a recession, which would cause a much weaker dollar. Obstfeld and Rogoff calculated that the potential for a dollar-devaluation is between 20 to 49 percent.
Muenchau notes, "It seems now that the two had written a script for the U.S. and world economy for the years 2006 and 2007."
What needs to happen if the dollar crashes and burns? A lot, and the time to do so is already too short to achieve the necessary changes before the economic effects are felt.
The moribund US domestic manufacturing sector would have to revive and produce products that foreign markets would be willing to buy. But with most of our consumer production already off-shored, we don't have much to offer anymore. But even if we did, it would take time we don't have to bring this reversal of economic course about.
Even this reversal could itself bring about a recession even if the foreign exchange imbalance didn't, and this time a recession will not pass as quickly as it did in 2001. The U.S. Federal Reserve Board ameliorated the first Bush recession with a near-elimination of the prime rate and an enormous increase in the federal budget deficit brought about by rash slashing of tax receipts to stimulate the economy.
We already know from comments posted above that foreign investors aren't as tolerant of such moves anymore.
This leaves the US with only one other possible course of action to minimize the looming recession: a more assertive trade policy. If we exported more and imported less, foreign borrowing would not be as necessary to finance the trade deficit.
But that would itself take time we don't have to work, and would go against the public position of the Bush Administration regarding "free" trade.
It just goes to show that even "free" trade has a dear price.
Got any Euros you want to part with? How about yen? Rupees? Dinar? I need to get something for these dollars!
Article comments
1 - Ruvy in Jerusalem
Like old uncle Ruvy has been saying for some time - get "realistic" and buy gold coins and a troy scale. Forget the banks, forget the euro, forget sterling. When the sawbuck is sawed up and people start putting up signs, "the buck definitely does not stop here", those gold coins will stand you in good stead.
2 - handyguy
If anyone ever manages to convince China to adjust their currency's value, it might not be such a bad thing for the dollar to slide a bit more. If it really crashes, however, and China continues to dig in its heels, watch out. It's not solely the Republicans' problem, though. Democrats had better step up with some ideas and responsibility as well.
3 - troll
Ruvy - your idea of buying gold might actually stabilize the situation were it legal for Americans to buy gold at its monetary value
4 - Ruvy in Jerusalem
Troll,
You mean there is as ban on buying gold coins again? Boy, your government is a lot more thorough than I thought it was in restricting economic freedom.
5 - Bliffle
I don't think most americans realize the extent to which this republican cabal has chained us citizens to bad economics, whether it's pharma monopolies, no medicare negotiatins in part D, no bid Iraq contracts, unending future indebtedness, etc., all the while spouting propaganda about Economic Freedom.
6 - Maurice
Realist
your lack of understanding of currency trading shows in this post. The dollar drop is very beneficial to trade imbalances. Having a low dollar value allows more trade with other nations especially big ticket items. Having a 'valuable' currency like the euro can cause economic problems.
Here is a quote from a related Economist article.
American policymakers seem happy to let the dollar slide. Europeans, however, complain that the burden of adjustment has fallen disproportionately on their currency, the euro. As the euro has soared against the dollar, central banks in Japan, China and other Asian countries have bought dollars to hold down the value of their own currencies.
7 - Ruvy in Jerusalem
Maurice,
Exchanging one worthless piece of paper for another is fine just so long as the ones exchanging the paper agree that the worthless paper they trade has value. So for now, even the New Israeli shekel, a dubious currency printed and minted in merry olde England, is rising against the dollar. The pathetically dependent Israeli economy is a temporary shelter from the fears of a a falling dollar.
But gold has intrinsic value. At some point a five dollar bill will become nothing more than a nice painting of Abraham Lincoln. The imbalances in America's economy and the unwillingness to do anything to rectify those imbalances, brings that day closer and closer. And the guy with the gold coins will have money and everybody else will be trading different colored toilet paper.
8 - Bliffle
"But gold has intrinsic value."
But it's been a poor investment for many years. And it's clumsy to deal with. Friend of mine inherited a lot of gold from an eccentric uncle. Had to pay rent to store it in a Dallas bank; had to pay armored trucks to haul it around; big brokerage fees to sell the stuff. he dollars per pound is not good, and that's why modern high-level crooks prefer diamonds and other gems for ransom payoffs, etc.
9 - Bliffle
Actually, an economist can argue that gold doesn't have intrinsic value since you can't use it for anything useful. Can't eat it, for example. Gold has the value that society wills it to have, which is extrinsic value. It has perceived value.
10 - Dennis Francis
The falling dollar is great for some. The middle class have not seen a real pay raise. Small business has been screwed by Big Government while feeding their big corporate buddies. Politicians screw the poor and middle class while insisting that they are our only hope for the future.
The investment class fool the middle class into thinking that they are investing for eventual wealth. They forgot to tell them that the Wall Street Ponzi scheme is in full effect.
I love this country, there is never a dull moment.
Much love to my right, left and middle-of-the-roaders.
11 - Teri Motley
Does anyone know if gold coins are actually being used in places like Iraq, Somalia, and other government-free zones?