>>This is one of those rare instances where somebody important
>>worries about this in public. The orthodox thing for AG to do would
>>be to tighten policy and restrain U.S. growth rates to reduce
>>imports.
>
>Under a gold standard, yes.
Or for ordinary countries (i.e., nonsuperpowers) under the present regime. Ask Mexico or Thailand. Or, to a lesser degree, Australia and Canada.
>But--as long as the U.S. foreign debt is made up of foreign equity
>investments and foreign dollar-denominated securities--a large-scale
>dollar depreciation is not primarily our problem,* it's primarily
>their problem.
True (and FDI inflows helped a lot in the late 1990s too). But when I said "dollar crisis," I meant it as a sign of capital flight - a fall in the currency prompted by large capital outflows. More symptom than cause.
>Since 1980, those countries that have gotten into big trouble from
>current account deficits have done so because their trade deficits
>have cumulated into large foreign currency-denominated debts that
>have meant that home currency depreciation does not write down the
>value of the debt. Thus whenever the currency depreciates, the home
>currency value of foreign debt becomes crushingly large. America is
>going to be able to avoid that (at least, America is going to be
>able to avoid that if the Federal Reserve and SEC do their job and
>keep both eyes on the derivative books of major (and minor)
>financial institutions).
That's a very big if. Who knew, or more accurately cared, that Enron ran a derivatives book larger than most banks?
>*Maury Obstfeld and Ken Rogoff think that when the depreciation
>comes America is going to have to move 4% of its labor force from
>investment-goods industries to export industries within the space of
>a year or so, that that degree of expenditure-switching is going to
>produce some kind of recession, and that if monetary and fiscal
>policy do not hit the sweet spot when the depreciation comes that
>the recession could get very bad. But the absence of large-scale
>foreign currency-denominated debt means that the U.S. economy still
>has room to maneuver to avoid a serious crack-up. It's not--or not
>yet--"we're f***ed, we're totally f***ed."
We don't have to be totally fucked - we could be partly fucked - an adjustment spread over years rather than happening in days or weeks or months.
>Of course, were you to tell me that New York financial institutions'
>derivative books had a net notional principal that was long the
>dollar to the tune of $3 trillion, my mind would change. My mind
>would more than change: I would be reduced to a gibbering, nervous,
>fearful, insane wreck cowering beneath my desk...
Does anyone know the answer to this question? Better store some food & water under your desk, just in case.
Doug