I wrote: > shouldn't the large US current account deficit signal a fall in
the US$ and a rise in the Euro sometime in the near future?<
Mark Jones asks:
>Why?
because the current account deficit is larger than ever before, with US net
indebtedness contributing via the income account. The dollar's high value
is partly a result of the its special attractiveness as a safe haven (i.e.,
not due to relative interest rates), which is due to the high and bubbly US
stock markets and the stagnation of economies outside the US. Since the
stock market boom cannot last forever, and has in fact entered the bearish
phase, the dollar will not stay high forever. Similarly, a lot of the
world outside of the US is doing better compared to a few years ago and
seems likely to continue to do so as long as the US avoids recession. (If
the US enters a recession, that would improve its current account balance,
of course, assuming that other countries are not pulled down too.)
(Since both Europe and the US are raising interest rates these days,
there's somewhat of a cancelling-out on that front as far as exchange rates
are concerned, even though that has a negative effect on world aggregate
demand. Since real GDP growth rates are not extremely out of synch between
Europe and the US at this point, there's also a cancelling-out as far as
exchange rates are concerned. Both of these growth processes are currently
helping world aggregate demand.)
We should remember that the dollar was also high during the early 1980s,
having a decimating effects on US net exports similar to what's happening
now. A lot of that was due to soaring US interest rates, but some of it was
the "safe haven" effect. Eventually (in 1985-7), the dollar fell (in
inflation-adjusted terms, using the trade-weighted measure), due to the
large trade deficits (which had not yet turned into current-account
deficits) and due to a convergence of US interest rates with those of the
rest of the world.
Jim Devine [EMAIL PROTECTED] & http://liberalarts.lmu.edu/~jdevine
