OPE-L dollar crisis

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

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--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

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