Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Wednesday, March 23, 2005

If Not the U.S. Dollar, What?

I have argued before that I do not see what is holding up the value of the U.S. dollar on the foreign exchange markets. The Buttonwood column of The Economist agrees.

The fear that central banks are contemplating industrial action against the dollar—and the collective sigh of relief when it seems they are not—is part of a broader unease about the nature and solidity of America’s economic growth. Based, as it is, on mammoth consumption by both the private and public sectors—ie, on big trade and fiscal deficits—it needs foreigners willing to suspend disbelief and buy shiploads of securities denominated in a currency that has steadily lost value for about 40 years.

The point I have made in earlier postings goes beyond this concern about the U.S. dollar, though. Where else are people outside the U.S. going to invest their money? What else would serve as a good reserve? Gold? Industrial Diamonds?

King Banaian says here that he thinks the U.S. dollar could very well have bottomed out because the Euro is likely to be in such big trouble in the future.

Some of my colleagues, however, think the U.S. dollar is not a good bet so long as the Chinese central bank continues to monetize U.S. gubmnt debt.

For the short term, I'll side with King.
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