Nice Work If You Can Get It
Brad DeLong reports:
A +$400 Billion Week: Pierre-Olivier Gourinchas guesses that last week the U.S.'s net foreign asset position improved by $400 billion. Americans' assets overseas, you see, are primarily denominated in local currencies or are real assets. Foreigners' assets here, you see, are primarily denominated in dollars. The weakening of the dollar thus raised Americans' assets minus liabilities by about $400 billion.
Nice work if you can get it. Exorbitant privilege.
Nice work indeed. James Galbraith has some ideas about privilege, and about how easily privilege can be lost:
The dollar melts as Iraq burns, by James K Galbraith, Comment is Free, Guardian: ...[A]s the greenback approaches two to the pound, old-timers will remember the fall of sterling, under similar conditions of deficits and imperial retreat, a generation back. We have to ask: is the American financial empire on the brink? ...
The US economy is going soft faster than the inflation hawks and growth optimists thought. Housing has been in free-fall for months. With the new Congress anxious to display "fiscal responsibility" - cue Robert Rubin who has moved in very fast on Nancy Pelosi - there won't be any help next year from them. If business investment falls off, recession could hit in 2007 or 2008. With that fear in mind, gloomy profit expectations are setting in, and that's not good for the dollar. ...
So here's the big question: is the age of the dollar economy lurching toward an end? Are China, Japan, Saudi Arabia and other big holders of T-bonds about to start a rush, or even a stately promenade, toward the exits? Let's hope not, because the world is unprepared to replace the dollar with anything else. The euro is not suited for the job... An end to the dollar system would therefore be chaotic, inflationary, and very tough on world trade. The best argument for the dollar has always been: it's not in anyone's interest to bring it down.
Could it happen, though? Yes, it could. And it could be connected to that other unfolding disaster. As the "Pax Americana" goes to hell in Iraq ... let's remember that security and finance are linked. Typically, the country that provides global economic security enjoys the use of its financial assets in world trade. And when the security situation changes, that privilege can be revoked. The consequences are unpleasant. Ask the British: after the sterling area folded, it took a generation for the UK to come all the way back. ...
Update: In Response to Galbraith, Stefan Geens at economonitor says:
Stefan Geens, economonitor: I'm not convinced — the US is hardly facing the kind of existential threat the British Empire did 60 years ago. Nor do I see Asian central banks ever deciding to "punish" the US by piling into euros, as it would harm them as much as anybody else. Nose, face, spiting, etc...
Update: Suggested to me: Who's Afraid of the Euro?
Posted by Mark Thoma on Monday, December 4, 2006 at 01:54 PM in Economics, International Finance, International Trade |
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