Saturday, May 21, 2011

The U.S. Dollar

I've been going on about about the dangers of Greece's and Ireland's (now Spain's) debt problems to the stability of the Euro .  A more immediate concern is the impact of the ever spiralling U.S. debt on the value of the dollar. We are seeing historic lows in the exchange rates of the greenback against the Euro, Pound, Yen, and even the Canadian Dollar (!) Gone are the days when one could take for granted the stability of the U.S. dollar because of the domesticity of its national debt and consumption economy.  The U.S. consumption economy is now globally exposed (imports, excluding energy, far exceed exports) and foreign governments such as China, Britain, Russia, and Japan hold an ever larger share of U.S. Treasuries, relative to domestic holders. The lack of confidence in Washington's resolve to cut entitlement spending (the 'Gang of 6' on Capital Hill has failed) has given foreign holders of Treasuries more reason to hedge against the dollar. The weak dollar will lead to inflation, which, when triggered, will be very difficult to tame because there is already no appetite for austerity measures. Inflation will further attenuate domestic consumption, employment will remain anemic, and the threat of stagflation will become a reality.

1 comment:

  1. I see you really did go home and post an entry after our discussion!

    I was talking with a former coworker from Germany the other day, asking her if she thinks Germany will ever go back to the Deutschmark, and it reminded me of our conversation.

    I now have a feed to your blog, FYI.