For a short term:
***** News analysis: Bush letting dollar do the talking now Eric Pfanner/IHT IHT Thursday, May 22, 2003
...In a report released over the weekend, the IMF warned that a sharp fall in the dollar could export deflation to other regions, a problem that might, eventually, boomerang on the United States.
''If the dollar decline were severe enough,'' the IMF said, ''foreign balance sheets could come under significant pressure, aggravating deflationary pressure there with effects that can rebound on the United States.''
By highlighting the risk of deflation, analysts say, U.S. policymakers have managed to avoid a problem that typically accompanies a sharp weakening of a country's currency - a plunge in the bond market as foreign investors get cold feet. Instead, U.S. Treasury bond prices have risen in recent weeks, driving yields down to the lowest levels since the 1950s.
That is important, because Treasury yields serve as the benchmark for mortgage rates; a decline in mortgage costs helps prevent a crash in the U.S. housing market, something a fragile economy could ill afford to bear.
But U.S. policy, particularly the shift on the dollar, may be less accommodating to America's trade partners.
George Soros, the international financier, said he thought the apparent effort to talk down the dollar was a misguided effort to help the U.S. economy at the expense of other regions - though he added that he looked to profit from it by selling short the U.S. currency.
''It's a beggar-thy-neighbor policy,'' he said in an interview this week with CNBC.
<http://www.iht.com/articles/97057.htm> *****
For a medium term:
***** New York Times May 24, 2003 Fear of a Quagmire? By PAUL KRUGMAN
...Though talk of deflation fills the air, most of that talk is subtly but significantly off point. The immediate danger isn't deflation per se; it's the risk that the world's major economies will find themselves trapped in an economic quagmire. Deflation can be both a symptom of an economy sinking into the muck, and a reason why it sinks even deeper, but it's usually a lagging indicator. The crucial question is whether we'll stumble into the swamp in the first place - and the risks look uncomfortably high.
The particular type of quagmire to worry about has a name: liquidity trap. As the I.M.F. report explains, the most important reason to fear deflation is that it can push an economy into a liquidity trap, or deepen the distress of an economy already caught in the trap....
A decade ago all of these fears might have been dismissed as mere theoretical speculation. But in Japan the whole nasty scenario is playing out, just as the theory predicts. And about five years ago I and other economists began writing academic papers pointing out that what can happen in Japan can happen elsewhere. (Part of the I.M.F. report draws on my work on the subject.)
So how seriously should we take the risk that something similar will happen in the world's other major economies? Neither the United States nor Europe, outside Germany, is likely to experience serious deflation in the next year or two. But that's the wrong question - and we should bear in mind that Japan's economic malaise took a long time to turn into all-out deflation.
In fact, it's striking how gradually Japan's catastrophe unfolded. When the stock bubble of the 1980's burst, Japan's economy didn't fall off a cliff. By and large the economy continued to grow, if slowly, and the nation didn't have a severe recession until 1998. But year after year, Japan underperformed, growing less than its potential. Though the Japanese government tried to stimulate the economy using the usual tools - deficit spending, interest rate cuts - it was never enough. By 1995 or so the economy had slid into a liquidity trap; by the late 1990's it had entered into a deflationary spiral.
Our own situation is strikingly similar in some ways to that of Japan a decade ago. Like Japan circa 1993 or 1994, the United States is now facing the aftermath of a huge stock market bubble - the Nikkei and the Standard and Poor's 500 both tripled in the five years before their respective peaks.
Also like Japan, we face a problem not of sharp downturn but of persistent underperformance - an economy that grows, but too slowly to prevent rising unemployment and falling capacity utilization....
<http://www.nytimes.com/2003/05/24/opinion/24KRUG.html> ***** -- Yoshie
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