Deflation

[James Devine]

Chris writes: >My understanding is that these hints, which Greenspan cannot
confirm, are significant for the strategy I quoted from the Financial Times
a week or two ago: a lower dollar interest rate implies an acceptance of a
larger dollar trade deficit, and the generous willingness of the US to
import billions of dollars worth of goods free produced by the rest of the
world, in return for printing less valuable dollars. <


>No?<

If US interest rates fall, then so will the value of the dollar. This would
make the US balance of trade (and on the current account) shrink. This
would broadcast recession to the rest of the world, despite its longer-term
effect of stimulating US aggregate demand. 

If most interest rates in the world fall in step (as with the G-7
coordination scenario that Greenspan says isn't happening), on the other
hand, the dollar wouldn't change much. So there would be the effect of
stimulating aggregate demand all over the world. 

No?

Jim Devine jdevine at popmail.lmu.edu &
http://clawww.lmu.edu/Departments/ECON/jdevine.html
"Forgive me when 
my instincts start stinking;
I'm easily led
when my little head
does the thinking." 
(Bill's song, lyrics by John Hiatt.)