When a debtor nation needs to restimulate its economy and resolve some of its debt situation, the short cut solution is simple: Devalue your currency. We see that dollar devaluation occurring in the United States today. Its a series of tradeoffs: Exports become more appealingly priced, but securities — both equities and fixed income — become less desirable, as currency risk offsets much of the potential gains.
Then there’s the entire issue of being paid back in dollars that become worth less than when they were loaned.
So far, its been a measured, modest fall. The danger comes when a currency "breaks" and plummets. We can only hope that such a dollar crash is avoided (or at least postponed) for as long as possible.
click for larger chart
It sounds eerily like the worst economic nightmare for
President Bush’s second term.
Bogged down in a costly war that shows no sign of ending, the United States faces a gaping budget deficit and ballooning foreign indebtedness. The dollar plunges against other major currencies, while turmoil in the Middle East sends oil prices soaring. The rest of the decade is plagued by rising inflation, increased joblessness and sky-high interest rates.
But the president under fire was Richard M. Nixon – not George W. Bush. The war was in Vietnam, not Iraq. And the dollar crash was in 1973 rather than 2005.
Could it happen again? With the dollar down more than 40 percent against the euro since 2002, and hitting new lows since Mr. Bush’s re-election, economists are debating whether America’s foreign indebtedness could lead to a collapse in the dollar and a global financial crisis.
The Dollar Is Down, but Should Anyone Care?
EDMUND L. ANDREWS
New York Times, November 16, 2004
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