Debt, Dollar, Deflation (was Re: The Silent Opposition...)

Yoshie Furuhashi furuhashi.1 at
Sat May 24 11:56:03 MDT 2003

At 7:01 AM -0600 4/21/03, Hans G. Ehrbar wrote:
>During the Reagan years the US turned from the world's biggest net
>international creditor into its biggest debtor.  This does not bode
>well: a debtor nation is tempted to devalue its currency because
>this lightens the debt, but the one price the US has to pay for its
>privilege to print world money is that it has to keep the dollar
At 8:08 AM -0600 4/21/03, Hans G. Ehrbar wrote:
>The business press stresses how much Europe suffers right now under
>its stronger Euro.  They are losing their export markets!  By
>implication, the US does the rest of the world a favor with a strong
>dollar, and nobody is willing to take this chore away from them.
>This is a ruse trying to talk up the dollar, exploiting a short-run
>disadvantage caused by overproduction.  In the long run, after the
>demand-and-supply adjustments are made, a strong currency is much
>more beneficial than a weak one.  I think the effects of the
>continuous hidden value transfer to the US economy, due to a strong
>dollar, are greatly underestimated.  This is like a continuous
>injection of steroids into the economy.
>The role of overproduction is therefore to defer the necessary
>currency adjustments, which is likely to make them more severe when
>they happen.

*****   News analysis: Bush letting dollar do the talking now
Eric Pfanner/IHT IHT
Thursday, May 22, 2003

...In a report released over the weekend, the IMF warned that a sharp
fall in the dollar could export deflation to other regions, a problem
that might, eventually, boomerang on the United States.

''If the dollar decline were severe enough,'' the IMF said, ''foreign
balance sheets could come under significant pressure, aggravating
deflationary pressure there with effects that can rebound on the
United States.''

By highlighting the risk of deflation, analysts say, U.S.
policymakers have managed to avoid a problem that typically
accompanies a sharp weakening of a country's currency - a plunge in
the bond market as foreign investors get cold feet. Instead, U.S.
Treasury bond prices have risen in recent weeks, driving yields down
to the lowest levels since the 1950s.

That is important, because Treasury yields serve as the benchmark for
mortgage rates; a decline in mortgage costs helps prevent a crash in
the U.S. housing market, something a fragile economy could ill afford
to bear.

But U.S. policy, particularly the shift on the dollar, may be less
accommodating to America's trade partners.

George Soros, the international financier, said he thought the
apparent effort to talk down the dollar was a misguided effort to
help the U.S. economy at the expense of other regions - though he
added that he looked to profit from it by selling short the U.S.

''It's a beggar-thy-neighbor policy,'' he said in an interview this
week with CNBC.

<>   *****

What now?

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