What's Ailing the Dollar? Part I: Current Account Deficit

[FRED]

What's Ailing the Dollar? Part I: Current Account Deficit

by Eric Janszen

The sliding US dollar is making headlines again. American friends of ours just canceled a vacation trip to Europe because of the unfavorable euro to dollar exchange rate, at US$1.40 as we write. Expense was only part of the reason. The main reason? "It's humiliating," he told us.

This is the first of a several quick comments on the dollar to put the crisis facing the dollar into perspective. We address the questions, What's pushing the dollar down? Why now? Where is the dollar headed long term?

We start with a look at a major factor, the United States' current account.

Current Account

The current account is the net flow of current transactions, including goods, services, and interest payments, between countries. A surplus occurs when a the value of the net flow is positive and a deficit with the net flow is negative.

Do Current Account Deficits Matter?

A report Does the Current Account Matter? (PDF) by Sebastian Edwards at the University of California, Los Angeles and the National Bureau of Economic Research (November, 2000) begins:

The currency crises of the 1990s shocked investors, academics, international civil servants and policy makers alike. Most analysts had missed the financial weaknesses in Mexico and East Asia, and once the crises erupted almost every observer was surprised by their intensity.

This inability to predict major financial collapses is as an embarrassment of sorts by the economics profession. As a result, during the last few years macroeconomists in academia, in the multilateral institutions and in investment banks have been frantically developing crisis “early warning” models. These models have focused on a number of variables, including the level and currency composition of foreign debt, debt maturity, the weakness of the domestic financial sector, the country’s fiscal position, its level of international reserves, political instability, and real exchange rate overvaluation, among others. Interestingly, different authors do not seem to agree on the role played by current account deficits in recent financial collapses. While some analysts have argued that large current account deficits have been behind major currency crashes, according to others the current account has not been overly important in many of these episodes.

The report concludes:

"...in spite of recent claims of the irrelevancy of current account deficits, the evidence provides a rather strong support for the view that, from a policy perspective, large deficits should be a cause for concern."

Current account deficits are a significant contributor to crises among emerging nations. But what about the United States? Too big to fail?

A December 2006 IMF report Do Current Account Deficits Matter? describes the United States as "intertemporally solvent."

"But even if the country is intertemporally solvent—meaning that current liabilities will be covered by future revenues—its current account deficit may become unsustainable if it is unable to secure the necessary financing. While some countries (such as Australia and New Zealand) have been able to maintain current account deficits averaging about 4½ to 5 percent of GDP for several decades, others (such as Mexico in 1995 and Thailand in 1997) experienced sharp reversals of their current account deficits after private financing withdrew in the midst of financial crises. Such reversals can be highly disruptive because private consumption, investment, and government expenditure must be curtailed abruptly when foreign financing is no longer available and, indeed, a country is forced to run large surpluses to repay in short order its past borrowings. This suggests that—regardless of why the country has a current account deficit (and even if the deficit reflects desirable underlying trends)—caution is required in running large and persistent deficits, lest the country experience an abrupt and painful reversal of financing."

How much currency risk does the US current account deficit pose?

Regardless of whether you are in the "current account deficits don't matter" or in the doom and gloom camp, let us put the United State's current account position into perspective relative to other countries.

According to data on the current account balance provided by NationMaster.com, of 162 nations ranked, China is running the largest trade surplus in the world at $197 billion per year. Out of the remaining nations, the United States ranks 162nd–in last place–with a current account deficit of $862 billion per year, the largest deficit in the world.

You might ask, The US has the largest economy, so why not the largest deficit? Fact is, theoretically the United States can fall anywhere on the chart below chart between the 1st and 162nd position. If total inflows were, for example, $420 billion and outflows $400 billion then the United States will instead run a current account deficit of only $20B, placing the US between Portugal and Greece.

Click to Enlarge

The graph shows the USA, from a current account perspective, as more vulnerable to a currency crisis than any nation on earth. Obviously there are other factors that mitigate this risk or else the dollar would have already suffered a massive crisis.

Even if you adjust current accounts for the relative size of nations by GDP, only Spain is in a more vulnerable position.

Current account as a percent of GDP for the 10 highest GDP nations.

Next we talk about factors that support the dollar and additional factors contributing to dollar weakness and why they have recently caused the dollar to decline.

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[don]

Re: What's Ailing the Dollar? – Part I: Current Account Deficit

Eric: hope you don't overlook the "Godfather Protection Racket" aspect of what supports the bonar. I've felt from the beginning that the seizure of Iraq is to prop up the dollar, much more than 'secure' foreign oil. Of course there's many other sub-factors at work. The ultimate neo-liberal playground, etc.

[FRED]

Re: What's Ailing the Dollar? – Part I: Current Account Deficit

Eric: hope you don't overlook the "Godfather Protection Racket" aspect of what supports the bonar. I've felt from the beginning that the seizure of Iraq is to prop up the dollar, much more than 'secure' foreign oil. Of course there's many other sub-factors at work. The ultimate neo-liberal playground, etc.

Nope. Just too much to cover here. Recommend this to anyone who wants to know how the system evolved:

Roosevelt then became the first president to abandon the gold standard and conduct a cold-blooded strategic devaluation of the US currency as a weapon against its putative allies in Europe. This was a policy of deliberate inflation domestically to raise prices as part of his domestic pre-Keynesian overhaul, but it further battered the European exporters, especially Britain, who needed to export to the US in order to acquire the dollars to pay their compounding WWI debts.

This was the first intentional foray into state-initiated economic warfare using currency as a weapon, and it displayed just a glimmer of understanding that in state-to-state economic competition, the central banks would become the primary battlefield. In the competition between private capitals, the state would eventually become the referee to ensure the health of the whole, and one state would dominate the general direction of global capital accumulation. But this was only a glimmer then.

[snip]

The intent was never to destroy the British, any more than it was to replace the direct European colonial rule that World War II would mortally wound. It was to bring Europe and ascendant Asia under the sway of the United States as sub-imperial powers in a new global hierarchy that would extend the influence of the US state beyond anything ever yet imagined by former empires - in a qualitatively new way.

The British were subsumed by the United States into the financial pole of capital, and were eventually reduced to a US financial satellite on the border of Europe. This goes a long way toward explaining the seemingly inexplicable subservience of successive British governments in toadying to the US - even in harebrained military adventures like the current Iraq quagmire. The UK has now been transformed into a financial and military appendage of the US state.

Today's Imperialism - Uniquely American
How credit and debt put the United States on top… so far - By Stan Goff

[RebbePete]

Re: What's Ailing the Dollar? – Part I: Current Account Deficit

Maybe this is "stealing your thunder" from future segments of this series, but, having never lived through a currency crisis, what would one look like for the United States? :eek: Here are some of my "head scratchers" in this regard"

• The US is still the world's "reserve currency" and other nations' currencies are pegged, in whole or part, to it. It's like mountain climbers roped together - one falls, they all fall.
• The US central bank is part of the great international banking cabal of central bankers that are now seeming to act in concert.
• The US central bank seemingly has no hesitation to printing money to "inflate away" debt. In the past, this was the kiss of death for a currency, but with the above two factors in play, could they "get away with it," at least for a long while?

Thanks!

- Pete

[Tet]

Re: What's Ailing the Dollar? – Part I: Current Account Deficit

The British were subsumed by the United States into the financial pole of capital, and were eventually reduced to a US financial satellite on the border of Europe.

The Anglo Empire hasn't changed since 1812 with Britain's insistance on maintaining financial control of the US by getting the US to renew the charter for the Second Bank of the US. Historical accounts of this period clearly show foreign ownership of the First Bank of the US. Britian invades Washington DC and they don't burn down DC, they burn the records of the First Bank of the US. This ownership of the First Bank was British and still is to this day. Read the Treaty of Paris and you get an understanding that the Revolutionary War just transfered the King's abilities to tax colonies over to the Bank of Englands abilities to tax the US through inflation.

The US is and has always been the financial satellite of the Bank of England, the charter of which was granted by the Crown. Not much has really changed in the last two hundred plus years.

[GRG55]

Re: What's Ailing the Dollar? – Part I: Current Account Deficit

The Anglo Empire hasn't changed since 1812 with Britain's insistance on maintaining financial control of the US by getting the US to renew the charter for the Second Bank of the US. Historical accounts of this period clearly show foreign ownership of the First Bank of the US. Britian invades Washington DC and they don't burn down DC, they burn the records of the First Bank of the US. This ownership of the First Bank was British and still is to this day. Read the Treaty of Paris and you get an understanding that the Revolutionary War just transfered the King's abilities to tax colonies over to the Bank of Englands abilities to tax the US through inflation.

The US is and has always been the financial satellite of the Bank of England, the charter of which was granted by the Crown. Not much has really changed in the last two hundred plus years.

My British born mother-in-law wants to know if they actually gave back Hong Kong, or if that was just for show?

[Tet]

Re: What's Ailing the Dollar? – Part I: Current Account Deficit

My British born mother-in-law wants to know if they actually gave back Hong Kong, or if that was just for show?

Hong Kong still has China surrounded.

[FRED]

Re: What's Ailing the Dollar? Part I: Current Account Deficit

This article discussed on other sites:

Greece and Turkey Forum

Market Ticker Forums

Clipmarks

Fulsomforum

[GRG55]

Re: What's Ailing the Dollar? Part I: Current Account Deficit

I often find Doug Noland's writings (Credit Bubble Bulletin) difficult to follow (thankfully EJ and the team at iTulip are reliably lucid).

Noland's comments this week were an exception. Although the views are similar to many I read on this site, the excerpt below caught my attention. Add this to Bernanke's feeble answer to Ron Paul's question, about 10 days ago, on dollar debasement and inflation, and my astonishment level just keeps rising...


...From Noland's Credit Bubble Bulletin:

"Federal Reserve President William Poole spoke Tuesday before the Industrial Asset Management Council in St. Louis.

In the Q&A session, a member of the audience posed the follow question:

"Dr. Poole, on M3 - I believe it is a number the government doesn't now publish - what effect do you think the amount of money we're printing and putting into the economy - what effect does it have as far as devaluing the dollar in the world markets."

Dr. Poole's response:

"The Federal Reserve stopped publication of M3 a year or so ago... It was after extensive exploration of whether anybody actually used the measure. We didn't use it internally and we decided that very few people actually used it... Now that is not in anyway directly related to the other question you asked about the depreciation of the dollar.

The depreciation of the dollar is something that is not explicable. And the way I like to phrase this - I like to put my academic hat back on. If you look at academic studies of forecasts of the exchange rates across the major currencies, you find that the forecasts are simply not worth a damn. Your best forecast of where the dollar is going to be a year from now is where it is now. There is no model that will beat that simple model. And people have dug into this over and over again. Obviously, you can make a ton of money if you were able to have accurate forecasts.

No one has been able to come up with a forecasting methodology that will make you a lot of money. And you can't make money under the forecast that the dollar is the same as it is right now a year from now. I can go a step beyond that though - and this is what I think is really interesting. The academic literature is also full of papers trying to explain exchange rate fluctuations after the fact - after you have all the data that you can put your hands on - data that you can't accurately forecast, but data that after you get your hands on it might logically explain the fluctuations of currency values. And those models aren't worth a damn either. We cannot explain the fluctuations of currencies after they have occurred even with all the data that we can dig out. And therefore, to me, it's completely unsupported idle speculation not only to make the forecast but to talk about why the dollar has behaved as it has. I know the financial pages and the traders love to talk about that, but I would challenge any of them to construct a model that would stand up to a peer review journal in economics or finance. The models just aren't that good."

A post-event question from a Bloomberg reporter: "I was hoping you could elaborate a little bit on the implications of the weakness in the dollar right now... whether implications on inflation or just the economy in general."

Dr. Poole: "I don't see any implications for inflation, at least with the magnitude of the depreciation that we've seen so far. The evidence is that - there's a literature that looks at what's called "pass through" - pass through of changes in domestic prices. And the evidence is that the pass through coefficient has gotten small and smaller."

And Noland's opening salvo:

Dr. Poole and the Federal Reserve more generally are at this point succumbing to Not So Benign Neglect of our nation's currency. For a top U.S. central banker to claim today that the dollar's ongoing five-year devaluation is "inexplicable" is simply hard to swallow...

...I would also suggest to Dr. Poole that there surely won't be a single hedge fund manager or Wall Street proprietary trader interested in submitting an academic paper on the issue of forecasting the dollar: they have been and remain far too busy making enormous and easy speculative profits from dollar debasement.

Well all I can say is here's to more "completely unsupported idle speculation...talk about why the dollar has behaved as it has" on iTulip so we can hopefully understand what these clowns are going to do to us next.

Link to article:

http://www.prudentbear.com/index.php...4786&Itemid=55

[EJ]

Re: What's Ailing the Dollar? Part I: Current Account Deficit

I often find Doug Noland's writings (Credit Bubble Bulletin) difficult to follow (thankfully EJ and the team at iTulip are reliably lucid).

Noland's comments this week were an exception. Although the views are similar to many I read on this site, the excerpt below caught my attention. Add this to Bernanke's feeble answer to Ron Paul's question, about 10 days ago, on dollar debasement and inflation, and my astonishment level just keeps rising...


...From Noland's Credit Bubble Bulletin:

"Federal Reserve President William Poole spoke Tuesday before the Industrial Asset Management Council in St. Louis.

In the Q&A session, a member of the audience posed the follow question:

"Dr. Poole, on M3 - I believe it is a number the government doesn't now publish - what effect do you think the amount of money we're printing and putting into the economy - what effect does it have as far as devaluing the dollar in the world markets."

Dr. Poole's response:

"The Federal Reserve stopped publication of M3 a year or so ago... It was after extensive exploration of whether anybody actually used the measure. We didn't use it internally and we decided that very few people actually used it... Now that is not in anyway directly related to the other question you asked about the depreciation of the dollar.

The depreciation of the dollar is something that is not explicable. And the way I like to phrase this - I like to put my academic hat back on. If you look at academic studies of forecasts of the exchange rates across the major currencies, you find that the forecasts are simply not worth a damn. Your best forecast of where the dollar is going to be a year from now is where it is now. There is no model that will beat that simple model. And people have dug into this over and over again. Obviously, you can make a ton of money if you were able to have accurate forecasts.

No one has been able to come up with a forecasting methodology that will make you a lot of money. And you can't make money under the forecast that the dollar is the same as it is right now a year from now. I can go a step beyond that though - and this is what I think is really interesting. The academic literature is also full of papers trying to explain exchange rate fluctuations after the fact - after you have all the data that you can put your hands on - data that you can't accurately forecast, but data that after you get your hands on it might logically explain the fluctuations of currency values. And those models aren't worth a damn either. We cannot explain the fluctuations of currencies after they have occurred even with all the data that we can dig out. And therefore, to me, it's completely unsupported idle speculation not only to make the forecast but to talk about why the dollar has behaved as it has. I know the financial pages and the traders love to talk about that, but I would challenge any of them to construct a model that would stand up to a peer review journal in economics or finance. The models just aren't that good."

A post-event question from a Bloomberg reporter: "I was hoping you could elaborate a little bit on the implications of the weakness in the dollar right now... whether implications on inflation or just the economy in general."

Dr. Poole: "I don't see any implications for inflation, at least with the magnitude of the depreciation that we've seen so far. The evidence is that - there's a literature that looks at what's called "pass through" - pass through of changes in domestic prices. And the evidence is that the pass through coefficient has gotten small and smaller."

And Noland's opening salvo:

Dr. Poole and the Federal Reserve more generally are at this point succumbing to Not So Benign Neglect of our nation's currency. For a top U.S. central banker to claim today that the dollar's ongoing five-year devaluation is "inexplicable" is simply hard to swallow...

...I would also suggest to Dr. Poole that there surely won't be a single hedge fund manager or Wall Street proprietary trader interested in submitting an academic paper on the issue of forecasting the dollar: they have been and remain far too busy making enormous and easy speculative profits from dollar debasement.

Well all I can say is here's to more "completely unsupported idle speculation...talk about why the dollar has behaved as it has" on iTulip so we can hopefully understand what these clowns are going to do to us next.

Link to article:

http://www.prudentbear.com/index.php...4786&Itemid=55

I'm happy to report that I am up nearly 3x since 2001 on idle speculation in 2001 of dollar depreciation. The process that drove the dollar down this far is about as mysterious as rainfall. Everyone now knows how it works, everyone now knows that the Fed is stuck in its role defending dollar depreciation policies due to the politics that created this state of affairs, and now–six years later–I can't find a fund manager on the other side of the trade. It's all about non-dollar investment and commodities.

Poole and company sound like the management team of a company that everyone knows is in trouble. It is their job to continue to pretend that USA, Inc. is in good shape, and that the next quarter will be fine, etc. They have to pretend in public, but each time they do, public confidence in the Fed declines further because most observers incorrectly expect Fed representatives to convey the truth. That is not their job. Their job is to maintain confidence in The System. The disconnect between what the Fed says and what observers see around them contributes to the source of the dollar's problem; loss of confidence in the system itself.

In 2001 we figured a 40% decline in the dollar was needed to correct trade imbalances. Here we are six years later, the dollar is off 35% since then, and the current account deficit is bigger than ever.

We've been called pessimists but our record is of excessive optimism.

[GRG55]

Re: What's Ailing the Dollar? Part I: Current Account Deficit

I'm happy to report that I am up nearly 3x since 2001 on idle speculation in 2001 of dollar depreciation. The process that drove the dollar down this far is about as mysterious as rainfall. Everyone now knows how it works, everyone now knows that the Fed is stuck in its role defending dollar depreciation policies due to the politics that created this state of affairs, and now–six years later–I can't find a fund manager on the other side of the trade. It's all about non-dollar investment and commodities.

Poole and company sound like the management team of a company that everyone knows is in trouble. It is their job to continue to pretend that USA, Inc. is in good shape, and that the next quarter will be fine, etc. They have to pretend in public, but each time they do, public confidence in the Fed declines further because most observers incorrectly expect Fed representatives to convey the truth. That is not their job. Their job is to maintain confidence in The System. The disconnect between what the Fed says and what observers see around them contributes to the source of the dollar's problem; loss of confidence in the system itself.

In 2001 we figured a 40% decline in the dollar was needed to correct trade imbalances. Here we are six years later, the dollar is off 35% since then, and the current account deficit is bigger than ever.

We've been called pessimists but our record is of excessive optimism.

The source of my astonishment is not that the Fed & Treasury et. al. have to tailor their jawboning to maintain confidence. In the same fashion that Bernanke finally "fessed up" about subprime not being contained, we know we can expect more true confessions. I would have thought they would try to avoid embarrassing themselves quite so much, by continuing to argue that its not raining, while the land is rapidly being washed out from under them.

In respect to non-dollar investments and commodities (and the latest favourite big-cap tech), one look at the major base metal mining shares, or RIMM/GOOG/GRMN since the August 16 low gives an indication of how well loved these themes have become. I am always deeply suspicious of the crowded trade, but is it time to hold ones nose and stock up on the now-hated, deeply oversold US$?

[jk]

Re: What's Ailing the Dollar? Part I: Current Account Deficit

now–six years later–I can't find a fund manager on the other side of the trade. It's all about non-dollar investment and commodities.

(snip)

In 2001 we figured a 40% decline in the dollar was needed to correct trade imbalances. Here we are six years later, the dollar is off 35% since then, and the current account deficit is bigger than ever.

We've been called pessimists but our record is of excessive optimism.

emphasis added

the 35% the dollar is off is, presumably, measured by the dollar index, which is 50% euro. the dollar is not off nearly as much vis-a-vis asian currencies. in general, look at the biggest sources of our imports. our imported oil is priced in dollars, and in general commodities trade in dollars. our asian manufactures are in dollar-pegged currencies. the dollar pegs have forced most of the adjustment on the euro, while preventing a strong correction in trade imbalances.

...is it time to hold ones nose and stock up on the now-hated, deeply oversold US$?

i wonder about this, too. we're so focused, here at itulip, on the dollar's decline and what we all presume will be its eventual inflationary immolation. but in terms of purchasing power, there's a reason that foreigners are coming to the u.s to do their shopping. canadians are buying shoes in upstate new york. europeans are picking up condos in miami. americans travelling abroad are shocked by the astoundingly high prices of common goods and services. the u.s. dollar is -- for the moment -- a bargain!

[jk]

Re: What's Ailing the Dollar? Part I: Current Account Deficit

and i guess the dollar can become an even bigger bargain.

from the alphaville blog at ft.com

The dollar era is over: a long, slow collapse and a central bank firesale

Oct 12 12:06
by Sam Jones
Comment

Sovereign wealth funds aren’t taking over the world - at least, not in a nasty way. According to Merrill Lynch’s report, their rise is a good thing all round, and a significant redress to global economic imbalances. More…

Sovereign wealth funds aren’t taking over the world - at least, not in a nasty way. According to Merrill Lynch’s report, their rise is a good thing all round, and a significant redress to global economic imbalances.
But it will spell the end of the US dollar’s dominance as the “gold standard” currency for the world’s economies. The dollar is entering a long decline - and a crash.
Indeed, Merrill explicitly draws attention to the decline of the gold standard as a foil for the dollar’s outlook:
Following the demise of the gold standard, central banks only slowly moved to reduce the share of gold in their reserves. This process occurred in stages and placed downward pressure on gold prices through the diversification. From this we identify the phases involved and apply them to the USD.
The process, says Merrill, will occur in three stages. We’re entering the second.
Step one - denial
The first phase in the process of reserves diversification is almost over. The first step, we believe, was for central banks to deny that the process is occurring. A few years ago most central banks’ response to the question of diversification was to deny that there was a need to do so. Now, there are many central banks discussing the possibility of diversification and their desire to do so.
Step two - don’t sell, don’t buy
The second phase is for central bank reserve managers to diversify USD holdings in a relatively passive way. They do not actively buy as many USDs from incoming flows and do not sell existing stocks. Given US financing needs even this sort of passive diversification will put downward pressure on the USD.

Step 3 - first-mover advantage and co-operation
The final stage will be to diversify the existing stock of reserves outside of USDs. Given that many central banks have large USD holdings, any move to sell existing stocks will place sharp downward pressure on the dollar. As a signaling device this is an important stage. If it were known to the general market that central bank X were selling its USD holdings, other central banks would wish to sell before the dollar weakened. There is a distinct first mover advantage in this process.
In other words, Merrill are saying there is going to be a long and slow decline for the dollar. And at the end of the third stage, a possible collapse. That “first mover” advantage is talking about a central bank firesale- which could have serious implications for the US economy. Merrill hints that one way to avoid that might be some kind of international treaty similar to the Washington Gold Agreement:
Washington Gold Agreement was implemented to provide a structure to central bank gold sales. This signaled a base in the price of gold. Similarly, we believe that central banks will ultimately come to some agreement on USD sales to limit the risk that USD selling becomes a downward spiral. Until this time the USD may be subject to periodic episodes of intense pressure and face an uphill struggle when cyclical influences would normally favor it.
Expect the whole process to be mired in acrimony - politicians are already making use of the dollar’s current travails as a stick to beat the government with, or else argue for more “patriotic” business measures. Add to this the notion that behemoth SWFs - whose strings are pulled from Beijing, the Kremlin or the Arabian Gulf - are behind US troubles, and there’s a huge political football waiting to get kicked about. How long will it be before Norway, with it’s $315bn SWF - the worlds second largest - joins the axis of evil? By Merrill’s reckoning, 5-10 years:
This process is likely to be a long-term dampener for the USD. The diversification out of gold took 20 years; the move out of USD-only based portfolios should be relatively shorter but still lengthy. It takes time to accommodate global agreements and co-ordination and then physically diversify the massive level of existing stocks. At best guess this should be a 5-10 year process.
So if you’re thinking of a holiday to the US, wait a bit - you’ll get a lot more bang for your buck. Why not visit Norway instead, while you still can?

[jk]

Re: What's Ailing the Dollar? Part I: Current Account Deficit

so here's my 3rd post in a row on this thread:


the prior 2 posts really highlight ej's notion of poom in the form of dollar repatriation. all those dollar assets being held by foreign central banks are in essence sterilized or frozen. they are not a part of the "money" supply. turn them into actively traded liquid assets and suddenly the money supply jumps enormously, and u.s. dollar denominated assets get a huge inflationary bid. this causes me to begin to think about buying equities -- which are, after all, dollar denominated assets.

finster has long maintained that equities are a good inflation hedge. i've been reluctant to accept that, remembering back to the 70's when i first came across that notion. when inflation got serious, it turned out that equities weren't a good hedge at all. but that was inflation in things like wages, causing a wage-price spiral and gravely impairing corporate profits.

Inflation has already appeared in commodities – notably energy and food, and in non-importable services like education and healthcare. House prices are dropping but are still way above trend. Stock prices are rising. I think they are destined to rise [nominally] much higher. Zimbabwe’s rocketing stock markets are the reductio ad absurdum for this process.

But there is still enormous risk embedded in the credit markets; risk which might manifest as craters in financial institutions’ balance sheets, and as impairments in consumers’ income/expense balances. Somehow pm’s seem like more of a sure thing.

[flow5]

Re: What's Ailing the Dollar? Part I: Current Account Deficit

Poole:

And those models aren't worth a damn either.

The exchange value of the U.S. dollar will continue to irregularly fall. There may be some temporary interruptions (interest rate differentials), but as long as the U.S. continues its trade deficits, foreigners will force a balance of payments on us largely because:

(1) imported oil, it was 37% of the current account deficit in 2006 ($302oil/$812deficit)

(2) the Pentagon's unilateral transfers to foreigners, i.e., our foreign military bases & the wars in Afghanistan & Iraq (the Pentagon was solely responsible for eliminating the dollar's convertibility into gold in 1968). Likewise, this was also the plight of the Royal Navy after the 1759 seven years war.

Every currency crisis since 1982 (with 1 exception) was the product of an extremely tight monetary policy. U.S. monetary policy might be targeting inflation, because inflation may still be running higher than wanted. If the "trading desk" maintains a tight monetary policy (to target inflation), it will sometimes conflict with targeting real-gdp (full employment). That almost always has been the case with every currency crisis since 1980.

Since the BLS only reports quarterly statistics, its statisticians may not capture overlapping weaknesses in the economy between their gross domestic product reports. Nominal-gdp may be masking a decline. That's the reason most currency crisis's occur adjacent to, one or another of, BLS's time frames.

If the world's largest economy ($13b+) has a contraction in its economy, imports will fall, & export driven countries will suffer, exacerbating the negative flow of funds, and any currency crisis.