[OPE-L:7548] [OPE-L:1088] Re: Re: Re: Re: Re: Is anyone there

Rakesh Bhandari (bhandari@phoenix.Princeton.EDU)
Sun, 29 Aug 1999 12:04:34 -0400 (EDT)

Dear Fred,
I do remain skeptical of imminent and massive dollar devaluation..
Previously I noted that the inflow of European capital into the US for
purposes of high tech acquistion should put a bottom on any dollar

The main reason for this optimism is that they think
>that the Asian-global crisis is over (as has been proclaimed by the IMF
>and many others) and hence that the demand for US exports will soon start
>to increase again.

Yet net exports have fallen mainly due to a rise in imports (?), not
collapsing demand for US exports. Moreover, an Asian rebound would put
upward pressure on commodity prices and thus remove an important prop for
the US boom. So I would think that a belief that the Asian crisis is over
would make investors pessismistic about US economic possibilities.

> But I think that the Asian-global crisis is far from
>over, which would mean that the US current account deficit will continue
>to worsen. Also, a factor which many people may not recognize is that
>there has been a $50b negative swing in the "investment income / payments"
>line item on the current account in the last 15 years: what used to be a
>$30b surplus is now a $20b deficit and growing every year for the
>foreseeable future, due to the increasing foreign indebtedness of the US
>since 1982. This growing negative item will make it all the more
>difficult to reduce the deficit on current account in the years ahead...

>one important historical comparison is with the US in 1985. The deficit
>on current account as a percentage of GDP in 1995 was approximately the
>same in 1999 (about 3.5%), and the dollar declined over the next two years
>about 40%. So I think that at least this much devaluation will be
>required this time around.

I don't see why this on the face of it is such a problem. Imbalances are
now more easily financed by flows of private capital esp for the reserve
center. For example, Germany's mark appreciated after 1990 though the
current account deficit swelled due to unification. And the dollar
appreciated in the early 80s as the current account deficit rose then too
(one could argue as well that Reagan accepted devaluation as a political,
not economic, manuver against protectionist legislation then coming through
Congress--see Barry Eichengreen). Moreover, the US has been in continuous
current account deficit throughout the 80s and 90s. The dollar has
fluctuated, but the exchange rate movements have bore little relation to
current account deficit.

Yours, Rakesh