From: Rakesh Bhandari (rakeshb@STANFORD.EDU)
Date: Tue Nov 11 2003 - 17:58:48 EST
Felix Rohatyn in today's WSJ: "...our trade deficit has been mounting steadily and has now reached a record $500 billion annually. To service our foreign debt of $3 trillion requires an inflow from abroad of $1.5 billion daily. Our answer has been to encourage a global devaluation of the dollar; this may elp our exports for some time but also has negative effects. It is obvious that that deliberately devaluing the dollar is not a policy that is likely to encourage foreign investment in the U.S> Asian central banks now own almost $700 billion in Treasury bonds and have been financing our trade ddeficits and helping to sustain the value of the dollar. However, the 25% recent devaluation of the dollar implies an economic loss of almost $200 billion to the Asian central banks alone, a questionable investment to maintain their American investments. We now run the risk of a possible crisis of the dollar which would bring about large increases in the US interest rates, and a significant decline in the stock market. Keep in mind that foreigners own about $2 trillion or about 20% of all listed stocks." From the International Journal of Political Economy, vol. 29, no, Winter 1999-2000, unlike many Third World or other debtor nations with obligations in foreign currencies (frequently the U.S. dollar), the U.S. government itself has greater room for money creation or monetization of interest-bearing debt because its debt is all owed in dollars, foreclosing threat of default. Moreover, despite the run-up in the U.S. current account deficit, foreigners have continued to show an enormous interest in accumulating dollars through foreign direct and portfolio investments and by their current account surpluses vis-à-vis the United States. Also, already having built up substantial holdings in dollar denominated assets, foreigners are themselves forced to intervene to maintain the dollar in the face of exogenous shocks or even depreciations, the root cause of which is the U.S. government's inflationary monetary policy. Having the top currency thus gives the United States capabilities for macroeconomic stabilization "without tears" far exceeding what other governments can do. The attraction of the dollar derives from its role as the world reserve currency; the pricing of oil in dollars; the stability and safety of assets in a relatively prosperous and especially highly liquid economy; and the willingness of many governments to defend the dollar, given the enormous stake they already have in dollar-denominated assets and their desire to prevent the economic insolvency of the United States, which could lead to a closing of its market to less-favored allies and the retrenchment of the military forces of the lone superpower. As a result, the United States has been able to run up massive current account deficits only to itself organize the depreciation of the dollar and so its foreign debt, usually denominated in dollars-yet without loss of continuing capital inflow.
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