Race to the Bottom


When a debtor nation needs to restimulate its economy and resolve some of its debt situation, the short cut solution is simple: Devalue your currency. We see that dollar devaluation occurring in the United States today. Its a series of tradeoffs: Exports become more appealingly priced, but securities — both equities and fixed income — become less desirable, as currency risk offsets much of the potential gains.

Then there’s the entire issue of being paid back in dollars that become worth less than when they were loaned.

So far, its been a measured, modest fall. The danger comes when a currency "breaks" and plummets. We can only hope that such a dollar crash is avoided (or at least postponed) for as long as possible.

click for larger chart



It sounds eerily like the worst economic nightmare for President Bush’s second term.

Bogged down in a costly war that shows no sign of ending, the United States faces a gaping budget deficit and ballooning foreign indebtedness. The dollar plunges against other major currencies, while turmoil in the Middle East sends oil prices soaring. The rest of the decade is plagued by rising inflation, increased joblessness and sky-high interest rates.

But the president under fire was Richard M. Nixon – not George W. Bush. The war was in Vietnam, not Iraq. And the dollar crash was in 1973 rather than 2005.

Could it happen again? With the dollar down more than 40 percent against the euro since 2002, and hitting new lows since Mr. Bush’s re-election, economists are debating whether America’s foreign indebtedness could lead to a collapse in the dollar and a global financial crisis.

The Dollar Is Down, but Should Anyone Care?
New York Times, November 16, 2004


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  1. David Bennett commented on Nov 16


    According to todays National Review online you are now officially a “chatting liberal pundit of the old established media!”

    Their studied opinion is that thanks to the Bush economic aganda the dollar has no place to go but up. Foreigners will be lined up to get them. They will be on their hands and knees begging for a piece of the new new new economy.

    There is an interesting almost Orwellian language twist here on how in the realm of economics “conservative” has come to mean “boosterism.”


  2. cb commented on Nov 17

    Seems to me the dollar is just going back to where it was before the ‘bubble’ of the late 90’s.

    Seeing as how the dollar is subject to investment flows as well, someone would do a chart of the dollar that was trade and investment weighted. Maybe the #’s are too hard to find.

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