Teddy Bloggie Blog Blogging

Check out the following article from the economist. I think they're mostly right about the prospect of a large Dollar depreciation. Greenbacks are set to be worth less in a few months or years against the Euros and Yens.

Here's why it's happening:

We spend as a nation more than we produce so that we have to borrow money from other countries. China and Japan and Euroland countries buy dollar denominated bonds and assets. Well if everyone's buying dollars to buy dollar denominated assets, that keeps the price of dollars up. But this can only go on for so long. If they decide to cash in their dollar denominated assets, the price of dollars will drop.

They'd sell these dollar denominated assets if:

a) They think we're indebted to them beyond our ability to pay them back. (in 2002, foreign claims against the U.S. exceeded U.S. claims on foreign countries by 3 trillion dollars)

b) Countries other than the U.S. begin to grow faster and foreign investors cash their U.S. investments in for better opportunities abroad. Maybe they'll want to diversify their holdings even if growth doesn't pick up abroad.

c) Some rogues start selling dollars because they think you're going to start selling dollars. More dollars being sold, less people buying - poof! Money gone. And that's the rub.

Financial markets have become much more liquid, meaning that if a unexpected drop happens, it will probably be sharp and painful.

That would be bad. Remember Thailand, Malaysia, S. Korea? How about Argentina? Know what happens if your currency drops far and fast? People stop buying things because they get scared, they stop investing because the perceived risk in the economy is suddenly much higher. The U.S. won't be like Argentina since our debt is in dollars where as in Thailand for example, when their currency (the Baht) fell by 50%, they all of a sudden had twice the debt since their debt was denominated in dollars! Nevertheless, a large change in exchange rate won't be pretty.

Maybe it's time to park your money in a bank in London or Tokyo. But shhh... don't tell anyone you're doing it, otherwise there might be a run on the dollar.

How do we stop it from happening? Well, the government needs to balance its books. We then need to raise interest rates so that people spend less and save more. This might cause a recession and higher unemployment, but you can't drive off a cliff (war spending, tax cuts) and expect to walk away unscathed.