Wednesday, September 26, 2007

The Phantom Menace

The dollar's steep decline has gotten a lot of talk lately, and with it fear that an even worse decline is on the way. No less than Paul Krugman thinks we're headed for a Wile E. Coyote moment, when the erstwhile predator realizes he's run off the cliff and suddenly plunges Earthward.

My own long-term view on exchange rates is that they are reflective of economic events, as opposed to being economic events in and of themselves. That's a bit of a simplification, to be sure, but consider what currency really is. Its just a means of exchange. We know that currency tends to decline in value over time, a process economists call "inflation." Why does currency movement have to be more complicated? In other words, if the dollar buys fewer ears of corn or fewer yen, what's the difference?

Classically, currency movement either reflects relative inflation in two countries (purchasing power parity) or relative real interest rates in two countries (i.e., that the country with higher rates will attract investment and therefore its currency will rise.) Given this, I wasn't initially concerned when the dollar declined over the last couple weeks. Given that multiple Fed cuts were being priced in by U.S. markets, its logical that:

A) Inflation would be on the rise in the U.S., diminishing the value of the dollar and

B) Interest rates were falling, causing foreign investment to be more attractive.

So a declining dollar seems to be the logical extension of what the Fed was doing. Not surprising at all.

However, there is a growing contingent of economists who believe a more severe dollar decline is likely, to the point where I don't feel comfortable merely dismissing the currency market as no big deal.

So I've embarked on a reading mission, where I'm going to be looking for any and all quality papers I can find explaining why the dollar is vulnerable (or not) to see if my classical explanation requires a bit more depth.

In order for me to be convinced that I should join the bearish dollar crowd, here are the questions I need answered:

  1. If the trade deficit is "unsustainable" at current levels, why has the U.S. been able to run a deficit more or less constantly for the last 30 years?
  2. Same question on foreign debt loads. They have been high for a very long time. Why are conditions today so different?
  3. If the answer to either #1 is that the deficit is historically large, then why is deficit of 6% of GDP a drastically bigger problem than 3 years of 2% deficits?
  4. Can the notion of Bretton Woods II be disproved? Or more to the point, what would cause China, Japan, and others to allow the U.S. currency to depreciate? Particularly in a sudden fashion?
  5. If we assume that a declining dollar coincided with inflation, this would likely cause the Fed to hike interest rates. Why wouldn't this attract foreign investment and thus strengthen the dollar?
  6. If the theory for a dollar decline is portfolio diversification on the part of central banks, why would these central banks choose to diversify suddenly?
  7. If the theory of a savings glut is accurate, then a dollar decline supposes that the glut of savings must travel elsewhere. But if there was someplace to travel, we wouldn't have a savings glut (or as some describe, an investment drought) in the first place. What's going to change in the short run?

I'm riffing a bit with these questions, so I'm sure I'm forgetting something. And many of these are related. But these are the questions I'm embarking to either confirm or deny. I'd appreciate links to any pertinent papers readers know of. Please e-mail me at accruedint (at) gmail.com.

Update: Here.


mOOm said...

In the long-run I believe in purchasing power parity of some sort - some currencies do have permanent premia above PPP like the Swiss Franc and maybe the USD could be permanently undervalued. However, it is hard to see it declining long-term from here against the Euro and Pound given how overvalued they are. Even the Aussie Dollar seems overvalued at the moment in USD terms (though medical and health are cheaper everything else is more expensive here). The Yuan needs to appreciate against all currencies.

mOOm said...

PS - Big Mac index is misleading. McDonalds is exceptionally cheap here in Oz.

venkat said...

You should find the link below useful. The paper as such is not very quantitative, but it has a list of other papers at the end which you might find interesting.


venkat said...

I did not paste the link properly earlier. Here it is again.

Anonymous said...

A piece which should answer most of your questions:


Note when it was written.

RW said...

There's an article in the November 17, 2006 FRBSF Economic Letter (Number 2006-31) titled Interest Rates, Carry Trades, and Exchange Rate Movements that you might be interested in (available at http://tinyurl.com/24czk9).

Basically classical models of currency movements may be used when performing necessary tasks such as setting forward exchange rates but they can not explain why some currency trading strategies work and others don't; e.g., according to the covered interest parity model an investment strategy based on exploiting differences in interest rates across countries should yield no predictable profits but ...the carry trade works anyway.

I asked an experienced currency trader about this article some time back and his response was sufficiently arcane that I won't try to reproduce it here except in summary form: "It's not just an exchange, it's a market."

psychodave said...

Are there many participants, e.g. big institutions, that use Programmed Trading by computer in the Bond Market?

Does the Bond Market have curbs that get set automatically like the NYSE does?

David Pearson said...

"...what would cause China, Japan, and others to allow the U.S. currency to depreciate?"


I suggest you keep track of food inflation in places like China, India, Brazil, Argentina, Saudi Arabia, and others.

Ask yourself why so many emerging markets countries face accelerating food inflation. Could it be that they are not successfully sterilizing dollar inflows? If so, then what is the best solution to the problem: maintaining the peg with higher interest rates, or revaluing?

Food inflation is a potentially explosive political issue, especially for China. It is in the political interest of these governments to diffuse it.

TDDG said...

I'm reading the various pieces that have been posted and I'll make comments as I gain more insight. So far I've read some pieces that have me thinking a large dollar decline could happen, but the macro economic pain would depend greatly on the catalyst.

David: Do you know where I can find statistics on food inflation in those nations off the top of your head?

As far as program trading in bonds, I think it would only be possible in Treasuries and TBA MBS. Maybe in the futures market as well. I don't think bond options are liquid enough. Nothing else trades electronically in big numbers that I can think of.

Anyway, I doubt anyone is doing it, not in any big way.

psychodave said...


Japan and China might allow U.S. $ to depreciate once U.S. Imports, as %-age of total World Imports, got low enough, iff they could compensate/mitigate by exporting elsewhere, where imports are growing.

Are U.S. imports, as percentage of total world imports, declining?

Brazil + India + developing countries = what percentage of total world imports?

flow5 said...

A nation has a TRADE DEFICIT when the cost of merchandise imports exceeds the receipts from merchandise exports. The CURRENT ACCOUNT balance encompasses merchandise, service items, commodities, and “current” financial transactions; while the BALANCE OF PAYMENTS includes the entire above plus capital flow items; all transactions involving foreign exchange.

The foreign exchange value of any currency is determined by the supply of and the demand for that particular currency. In international financial analysis supply and demand take on an unique role; for what is demand form our point of view is supply from the standpoint of foreigners – and vice versa. All transactions that require the conversion of foreign currencies into dollars constitute a demand for dollars. These include exports, payments received for services rendered to foreigners, capital flows (interest and dividends collected from foreigners), etc. An increase in the volume of any one of these times will increase the demand for dollars and, ceteris paribus, the foreign exchange value of the dollar. The opposite types of transactions, imports, etc., which involve payments to foreigners increase the supply of dollars and thereby reduce the foreign exchange value of the dollar.

There is no “flow” of money internationally, only offsetting debits and credits on the books of the financial institutions involved in financing trade or other transactions. A slight modification of this statement is necessary to take account of the movement of paper and coin currencies. Their contribution to surpluses or deficits is extremely minor and short run, when not actually offsetting.

In foreign exchange supply always equals demand at the current rates of exchange. International debits equal international credits. The balance of payments always balances since there can be no credit transfer of funds.

When the balance of payments is balanced by foreigners acquiring net holdings of our equities, bonds, and real estate, and capital outflows (interest, dividends, rentals, etc.) exceed inflows, we are either decreasing our net creditor position in the world, or increasing our net debtor position. Beginning 1985 it has been the latter. The trade deficits, plus the unilateral transfers of funds by the Federal Government to foreigners, transformed this country from this world’s largest creditor to the world’s largest debtor – for the first time since 1917. Since 1985 we now have a net debtor position exceeding 5.7 trillion dollars, but the principle villain (since 1973) has been our dependence on foreign oil.

Trade deficits at any particular time for any given country can be beneficial or harmful; can represent economic strength or weakness. In the period before Worlds War I the U.S. had mostly trade deficits. We were a debtor country – and we thrived. Foreign investments accelerated our economic development and our standard of living rose faster as a consequence.

By the end of World War I the U.S. was a creditor nation, but we refused to act like one. We opted for tariffs and other restrictions on imports, rather than free trade. Capped by the sky-high Hawley-Smoot tariff of 1931, U.S. trade policy was an important contributor to the world wide depression of the 1930’s. By 1933 there was not a single major nation on the gold standard except the U.S.

The situation was further exacerbated when Roosevelt and his Treasury Secretary, Morgenthau, exercising the crisis powers delegated to the executive branch by Congress, took the U.S. off the gold standard in April, 1933 by making the dollar inconvertible into gold at a fixed price. And to make matters worse they periodically kept raising the price of gold from $20.67 per ounce to a final price in Dec. 1933 of $35. This had the effect of depreciating the exchange value of the dollar. All of this was done by a creditor nation operating with a chronic surplus in its balance of payments.

The Bretton Woods Agreement of 1944 established, among other things, the International Monetary Fund and confirmed the previous international status of the dollar, that an ounce of gold was equal to $35 and that all dollars were to be freely convertible into gold bullion at that price to foreign and confirmed the previous international status of the dollar, that an ounce of gold was equal to $35 and that all dollars were to be freely convertible into gold bullion at that price to foreigners but not to U.S. nationals.

In 1949, the U.S. dollar was not only as “good as gold”, but it was also preferred over gold. There were not enough dollars to finance the legitimate needs of the world economy. So, the chronic balance of payments deficits which began in 1950 were for a number of years beneficial to the world economy and to the U.S. Because of our large and chronic balance of payments surpluses after World War II, foreigners were unable to accumulate sufficient dollar balances to efficiently finance world trade. These balances were desperately needed because of the total dominance of the dollar as the reserve custodian, standard of value and transactions currency of the world.

The Korean Conflict (1950-1953) temporarily solved the problem but, the longer term solution consisted in implementing our “containment policy” against the U.S.S.R. This involved the establishment of approximately 700 military bases, not only around the perimeter of the Soviet Union but throughout the world. We have paid hundreds of billions of dollars to foreigners to acquire the bases and to maintain a garrison of more than 400,000 military personnel abroad. With diminishing merchandise surpluses this policy proved to be financial overkill.

By the mid 1960’s foreigners found themselves in possession of excessive dollar balances (foreign exchange reserves), excessive in terms of the needs of trade. Some of these excess dollars came to be used as “prudential” reserves in the formation and growth of the Euro-dollar banking system.

E-D banking originated in the city of London & London based banks. As the number of banks participating in E-D transactions increased, the E-D bankers discovered that E-D deposits they created for borrowers often did not result in any diminution of their U.S. dollar balances – the System was merely shifting balances within itself. That is, drafts drawn on E-D banks increasingly were deposited in other E-D banks (E-Yen, E-Yuan, E-Rupee, or any other major currency country & E-Petro).

Thus was laid the economic basis of an international system of “prudential” reserve banking – the discovery that the amount of actual U.S. dollar reserves required to support the E-D banks’ convertibility commitment need be only a fraction of the volume of E-D loans made – and E-D deposits (money) created. Note: the growth rate’s proportion in (1) “the global savings glut”, & (2) the creation of new money & credit by the E-D system is indeterminate.

However, reserve requirements for Eurocurrency liabilities were reduced from 3% to 0% on 12/27/90. Non-transaction time & savings reserve requirements fell to 0% as well. Requirements on transaction deposits fell from 12% to 10%.4/1/92. Consequently, required reserves fell by 40%. Since then “There is general agreement that, for almost all banks throughout the world, statutory reserve requirements are not binding” (Richard Anderson, St. Louis). “The question of whether such (E-D) transactions impair the monetary authorities’ control of monetary aggregates merits investigation.”
ANATOL B. BALBACH and DAVID H. RESLER Eurodollars and the U.S. Money Supply

All prudential reserve banking systems have heretofore “come a cropper.” Money creation by private profit institutions is not self-regulatory – the “unseen hand” simply does not function in this area. Invariably the systems created too much money, speculation became rampant, inflation distorted and destroyed economic relationships, confidence that the banks could meet their convertibility obligations eroded, “runs” on the banks caused mass banking failures, and entire economies were left in ruin.

If the E-D system is not to repeat the tragic record of all previous prudential reserve banking systems 2 things are necessary; (1) the U.S. dollar must remain acceptable as the world’s transactions currency (this requires that the chronic deficits in the U.S. balance-of-payments cease), and (2) the E-D system must be subjected to the restraints of controllable legal reserves and reserve ratios.


The U.S. has had a net liquidity deficit in every year since 1950 (with the exception of 1957), Up to 1976 (when the private sector contributed its first trade deficit ) these deficits were entirely the consequence of excessive U.S. government unilateral transfers to foreigners (re: foreign policy – solely our far flung military bases and personnel). During all this time the private sector was running a surplus in all accounts: merchandise, services and financial. The Vietnam Ten-year War administered the coup d’etat to our gold bullion standard. By 1968, in an effort to keep the dollar at the $35 par, we had exhausted nearly two thirds of our monetary gold stocks, or approximately 700 million ounces to about 260 million ounces.

Although the dollar ceased to be freely convertible in March, 1968, institutional (central bank practices) and attitudinal lags were sufficient to offset, until late 1970, the excessive expansion in the supply of dollars. In August 1971, all convertibility was ended. This further accelerated the decline in the exchange value of the dollar. All fluctuations in exchange rates prior to this time were the result of other currencies changing in value relative to the dollar. Changes in the exchange rates were negotiated by governments, usually through the offices of the International Monetary Fund.

Since 1970, the “western” world has functioned within a system of essentially free exchanges. Before 1973, exchange rates were in terms of a “fixed target”. Now the dollar is a “moving target”.

Under pressure from this country, the Pacific Rim, Oil Exporting, etc., central bankers try to support the dollar. They do not try to arrest the long-term downtrend of the dollar, but seek to erase some of the unnecessary short-term and destabilizing fluctuations. This is a correct statement of what the function of the central bank should be where the objective is to influence rates of exchange.

The policy of the U.S. Treasury and the Federal Reserve is to minimize overt intervention in the foreign exchange markets. In evaluating the effects of central bank intervention it is easy to overstate their importance. In terms of the total volume of transactions, central bank purchases and sales are miniscule. While there are no specific figures on the volume of foreign exchange transactions, the New York Clearing House Inter-bank Payments System reports on the volume of dollars of domestic & foreign payments are cleared by New York City banks. Clearings average 1.2 trillion per day.

During the early seventies of the Nixon administration the dollar was twice devalued, raising the fictional price of gold to c. $41-43. These were non-events. When the dollar was no longer on a gold standard (after March, 1968), the dollar price of gold was determined by the open market. In response to the devaluations, the Federal Reserve Banks marked up the balance sheet values of their holdings of gold certificates. These were also nonevents; since the capacity of the Reserve banks to create credit (acquire Treasury Bills, etc. by creating Interbank Demand Deposits) was unaffected; nor did the devaluations alter the capacity of the fed to pay out Federal Reserve Notes in exchange for these IBDDs.

From late 1970 to 1978, the dollar depreciated relative to other major currencies. .

After the “Marshall Plan”, which did not produce a balance-of-payments deficit, most of this aid was in the form of various types of military assistance, or to maintain our numerous foreign stations and bases, and to finance approximately 400,000 military personnel abroad; except for the Korean and Vietnam wars, which more than doubled that figure. The policy that engendered the outlay of trillions of dollars for these purposes was called dollars for these purposes was called “containment”, i.e., containment of the U.S.S.R.

High interest rate differentials kept international demand for dollars strong and the dollar's foreign exchange value high. In turn, the strong U.S. dollar-which only began to decline in value in the mid-1980s-made U.S. goods expensive abroad and imports relatively cheap at home. As a result, the United States registered an ominously large and growing trade deficit. In 1980 the annual U.S. merchandise trade deficit was $25,500 million; by 1986 it had ballooned to $144,500 million

By the end of the cold war in 1990, the United States still maintained 395 major military bases and hundreds of smaller installations around the world. Most of the bases are part of military alliances formed to contain communism. By 1990, 435,000 American troops, 168,000 Defense Department civilians and 400,000 family dependents were living on foreign bases. Another 47,000 sailors and Marines were stationed aboard ships in foreign waters. A million Americans abroad were on the Defense Department payroll.

Even if we eliminated the trade deficit and ran a surplus sufficient to service our foreign debt, the dollar would still decline because of the war/containment/terrorist deficit. Since actions sufficient to eliminate these deficits are highly improbable, the dollar will eventually decline to a level which will eliminate them. At that level our standard of living, for this and other reasons including financing the federal debt, will be much lower than at present, and the capacity of the Pentagon to project conventional military power abroad will be severely circumscribed.

We have observed, given the situation of this country in the 19th century, (its people government and undeveloped resources) that it was advantageous both to lenders and borrowers for the U.S. to run a trade deficit.

Conversely it is also economically advantageous for creditor nations, and for the world economy, if creditor nations operate with trade deficits: deficits proportionate to their creditor status. That is, the deficits should be large enough to enable the nationals of debtor nations to acquire a sufficient amount of foreign exchange to enable them to serve their international debts.

Since the U.S. is no longer an economically undeveloped nation, but is increasingly an international debtor, what evaluation should be places on our huge trade and current account deficits? For the very short run these deficits keep prices and interest rates lower than they otherwise would be and they subsidize our standard of living. But the deficits also are inexorably forcing the dollar down in terms of its foreign exchange value—and no consortium of central bankers, treasury secretaries, et al. can stop the process

With a chronically depreciating dollar foreigners will be much less inclined to invest in the U.S. on a creditor ship basis, thus pushing up interest rates. The rising cost and diminishing volume of imports will contribute to an increase in inflation, and the expectation of further inflation will also push up interest rates. This spells stagflation.

Although the lags are sometimes unusually long between exchange rate changes and the changes in volume and value of trade, the present situation cannot be explained by these lags.

Trade restrictions have some effect, but the U.S. is not immune from subsidizing exports and using numerous devious devices by the Customs Service to restrict imports.

A weak currency is not a cause; rather it is a symptom of a weak, noncompetitive economy. In time, of course, a declining dollar will eliminate the deficit in our balance-of-trade. But the price exacted will be a sharp decline in imports, principally oil, and the purchase of foreign services, reflecting our relative poverty and inability to compete in the international economy. The fact that we are the world’s number one producer of smart bombs will not arrest that trend.

The real culprit seems to be the cost of our products relative to their quality. Inferior quality is not a good buy at any price. We are even getting a reputation for inferior products.

For the people of limited foresight, which apparently includes a substantial majority, debt expansion can be very exhilarating. One’s standard of living can take a quantum leap forward. Taxpayers are currently being subsidized, in terms of taxes not paid, more than 248 billion annually. It is called the federal deficit. Consumers are being subsidized by approximately $763.6 billion annually, of which, 494 billion is for oil. It is called the foreign trade deficit. In the longer term the problem of servicing all this debt, consumer, corporate, and federal poses daunting problems. And that is a gross understatement. We have temporarily concealed the underlying factors that will shortly push down the future standard of living of most people in the U.S. These circumstances, as we know, are of our own making. The country has not been invaded, and our productive resources have not been destroyed, or even impaired, by national calamities.

The net accounting effect of the Chinese buying U.S. dollars is 1) the importer pays in his own country’s currency, 2) the exporter receives payment in his country’s currency, 3) for very debit there is a credit, 4) there is no net transfer of funds, and 5) money is not flowing in or out of the respective countries. This is proved by using “T” accounts. The balance of payments always balances even though the statistics on payment balances never do. To correct this deficiency, the commerce Department inserts an item called “Errors and Omissions”. Thus, the triumph of theory over “facts”.

In foreign trade, imports decrease the money supply of the importing country (U.S.) while exports increase the money supply, and the potential money supply, of the exporting country (China). Purchasing the deficit countries currency and then purchasing U.S. treasury bills (1.0663 trillion by year ending 2006), will reduce the dollar's supply, but it is important to know that sooner or later the Chinese central bank will have to reverse their positions and the foreign exchange dealers know this (gold will rise at this juncture).

The Chinese loss of income and probable exchange rate losses, when the reverse of these operations is consummated at a later date, are, of course, compensated by the Federal Reserve. The adverse effects on the Chinese economy receive no such compensation.

The trade-off of reducing the pressure on the global dollar by temporarily decreasing the volume of the dollars requiring conversion into Yaun, is the cost of foisting an inflationary policy on China. Obviously, and for good reason, the Chinese have reason to resist this kind of assistance.

China’s continued intervention in the foreign exchange markets requires that they "sterilize" their foreign exchange reserves. That is, the Chinese "mop up" the increase in the Yaun money supply by selling government bonds. This converts surplus Yaun into government debt and delays the inflationary impact of an otherwise increase in the volume of Yuan. But at some future point, as exchange rate reserves grow, the Chinese capital markets will lose their ability to absorb new debt.

Eventually, China's protectionism (currency peg) will crack, and the volume of Yuan will fuel inflation. Meanwhile the Chinese have been desperately 1) selling lots of government bonds to their domestic credit markets, and 2) raising commercial bank reserve ratios (to monetize the debt). Both 1 & 2 are to "sterilize" their foreign exchange reserves, and postpone the inevitable. If there is a flight from the dollar, it will be because the Chinese waited too long to realign the Yuan. And as a sign post, the U.S. National Association of Manufacturers estimates the Yuan is currently undervalued by as much as 40 percent.

While the U.S. will have a temporary gain, as will foreign enterprises engaged in foreign trade who are momentarily freed from excessive fluctuations in the exchange rate, the overall financial effects are a loss to the Chinese and to the Chinese economy. The Chinese central bank suffered a balance-sheet loss of 26 billion Yuan ($3.3 billion) because of currency movements.

Note: Analyst claim that the Chinese $1.202 (mar07) U.S. foreign exchange reserves could buy Microsoft, Citibank, and ExxonMobil Corp. as well as General Motors and Ford. And Japan had $915 (apr07) in U.S. foreign exchange reserves, Euro-zone $451, Russia $372…

The problem is that further depreciation of the dollar will not correct our foreign trade deficit. In fact, further depreciation will only make our stocks and real estate even cheaper and even more attractive as a safe haven in this dangerous would. We are now currently selling our birthright for a mess of pottage. We are becoming the Pacific Rims plantation.

The “foreign trade deficit” & the “domestic federal deficit” have an insidious, if not an incestuous, relationship. An increase in the demand for loan-funds is reflected in higher interest rates than there would otherwise be. Higher interest rates are significantly responsible for an “over-valued” dollar which is in turn the principal contributor to our burgeoning trade deficits.

The volume of dollar-denominated liquid assets held by foreigners is extremely large. Any significant repatriation of these funds, by reducing the supply of loan-funds, will force interest rates up – thus increasing the federal deficit and the burden of all new debt. These events alone could trigger a downswing in the economy resulting in more unemployment,. More unemployment compensations, less tax revenues and larger federal deficits. Truly a vicious cycle.

Unfortunately, in this and other financial areas, expectations become reinforcing self-fulfilling prophecies. No country has become and remained a world power if it is a world debtor and has a weak currency. From these unwanted events we can expect a vicious level of stagflation that will become an enduring feature of our economic landscape. And the United States will be forced into a high degree of economic isolation, operate under a command economy and perhaps into an increasingly totalitarian mold.

The query whither the Dollar? Can only be answered by correctly estimating the future level of foreign investment demand for dollars. The foreign exchange value of the dollar will not fall significantly until foreigners become sated with dollar investments.

If the dollar were really overvalued, speculators would quickly drive its price down to approximately its purchasing power parity (PPP) level:

Note: PPP expresses, in relative terms, the purchasing power of currencies within their respective countries. For example: Assume the U.S. dollar/U.K. pound PPP (from our standpoint) was equal to $2.00. This indicates that $2.00 could buy commodities in the U.S. having an exchange equivalence to the volume of commodities that could be purchased in the U.K. for one pound. . The commodities involved are those included in the weighted price indexes of the respective countries. Obviously comparison of identical commodities with identical weights is not being made. The equation is :PPP = Base year rate of exchange X Current U.S. index/Current U.K indexes X Base year U.K. index/Base year U.S. index. Bilateral calculations yield correct cross rates. The base year rate represents a “normal” or equilibrium rate. The equation adjusts the indexes of the two countries to the save base period, i.e., 1982=100

No one, of course, knows the future trend of the dollar. If it is assumed that the U.S. Government will persist in multibillion dollar unilateral transfers to foreigners and that the trade deficits, even though reduced from present levels, will continue; the future course of the dollar will be down, unless the payments gap is filled by foreign investment.

flow5 said...

"Alfred Marshall, the Cambridge economists, is responsible for developing the cash-balances approach to money. For example, if individuals collectively desire expanding their cash balances (increasing the period over whose transactions purchasing power in the form of money is held), they will initiate a chain of events which will lead to a net reduction in their aggregate holdings of cash. That is, an over-all increase in the demand for money leads to falling prices, a decline in profit expectations, reduced borrowing from the banks -- and therefore a smaller volume of cash balances. Money thus is truly a paradox - by wanting more, the public ends up with less, and by wanting less, it ends up with more. All motives which induce the holding of a larger volume of money will tend to increase the demand for money - and reduce its velocity."

Therefore, if there is a flight from the dollar, there will be hyperinflation in terms of dollar denominated assets.

flow5 said...


The Gov't can of course borrow an indefinite amount through the Fed. ( concealed greenbacking ) given a few changes in existing law. But that would lead to hyper inflation - i.e., a collapse in the credit of the Gov't.







flow5 said...

U.S. dollar fall in Mar. 1995 (same month)
Predictable & preventable

Black Monday Oct 19 1987 (same day)
Predictable & preventable

Asian financial crisis July 1997 (one month late) - without primary time series

Predictable & preventable
Russian financial crisis 1998 (same month)

Predictable & preventable
Mexico Peso crisis Dec 1994 (2 months early) Peso was pegged
Predictable & preventable

Mexico crisis 2/17/1982 (not identified) - Peso was pegged
The currency crisis's were external to the US, but the US has the largest economy in the world & when US imports fall, it causes other countries economies to contract.