America's dollar dilemma
Dec 03, 2009
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In a recent talk, Professor Woody Brock examined the dilemma of how the US economy will grow (and how the UK economy will grow). Consumers have years of retrenchment ahead of them. If we have to wait for them to return to pre-crisis level, the return to growth will take a very long time.
Consumers, until last year, were 70% of the economy, but that was not always the case; in the 1980s their contribution was only 64%. So, if the US economy is to fully recover and grow in strength, another part of the economy needs to improve its game. Whilst consumers spend less and the government is overborrowed, they can only export their way to growth.
But how to be competitive enough to export enough? The answer is simple, by further depreciating the value of the dollar.
When you look at it, the only choice for the US is to significantly increase their export business and the only way they can achieve that quickly is to let the dollar go. Given the limited options available, why would the US authorities act in any way to prevent its decline?
If the US is successful, the rest of the world will cry foul and the dollar as the single reserve currency will come under further attack. If that role were to end, America’s problems would get worse.
By allowing their currency to devalue, they will gain ground on other exporting nations. This might give rise to world-wide protectionism which would seriously curtail international economic activity. The big worry throughout this economic crisis has been an emergence of protectionism.
The economic growth in 'Chindia' and other emerging markets and their growing demand for goods and services will expand at an unprecedented rate. So in the long run there should be enough demand to go round for everybody but in the near term one can see anything but plain sailing.
The period we are now approaching is one of great change. Be sure of one thing if of nothing else; the future will be different to what everybody now expects. The truth is that the huge ills caused by banks’ grossly incompetent and imprudent lending and the consequent collapse of bubble-priced assets, was never going to be resolved easily and not without much more pain.
• This article was written by
Full Circle Asset Management
, and was published in the
threesixty Newsletter
on 19 November 2009
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