Deflation

[Chris Burford]

At 08:17 AM 9/17/98 -0700, Jim D wrote:
>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 

Thanks. I was not confident I had understood the inter-relationship. On
checking the FT article which influenced me, I still see it implies a
connection but it is not clear what is cause and what is effect. Added to
that, Greenspan, so I understand. works by the most subtle of hints.

The closing argument of the article says "There are already signs of
faltering growth" ...etc   

"A stock market crash could have a similar effect, particularly in the US,
where many individuals are relying on stock market wealth for their
savings." ... "Both the US Fed and European central banks must be prepared
to take the risk of cutting interest rates to accommodate a worsening
economic crisis". 

"The US must also be prepared to accept that, as consumer of last resort,
it will suffere a deteriorating trade deficit for some time to come."

How could all this work?

Chris Burford