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May 13, 2005

Comments

That would be nice. I'm sure that is what Don is thinking. However, the export that we produce that the world demands is not dollars but T-bills, and those come due over time.
I think though that there is less to fear about this debt than some fear. The dollar has already crashed heavily against the euro and no one seems to have noticed (except importer and exporters). Still, I believe that it would be better for the U.S. economy to avoid the huge budget deficits that yield the current account deficits. I think it causes wild swings in the exchange rates.

The dollar has become the world's reserve currency, so foreigners want to hold dollars for no reason besides the fact that it makes them feel good.

Would we be better off if foreigners decided, instead, that they wanted to hold Euros or gold or something else? Nope.

I think one of the reasons why the Euro has gone up recently relative to other currencies (the dollar and the asian currencies) is because the world is gradually shifting to the Euro. We cannot expect the world to keep using the dollar as the world reserve unit if we don't maintain a strong dollar economic policy.

The trade deficit represents us buying more than we're selling. If this continues, we have to run out of money sometime, or we have already run out of money. If we've already run out of money, then we're borrowing alot. If we're still buying more than we're selling, then we cannot logically pay off the debt. Some of the minor debt holders have come to this realization, thus the recent slide in the dollar, but others, like China, have so much of our debt that if they were to sell, they'd lose their reserves because we cannot buy it. Thus they are forced to buy more of it, to keep the dollar's value up and the value of their reserves. This cannot go on forever, and if we do not offer some solution, they will cut losses and leave. At that point we declare bankruptcy... and the only solutions left are really quite nasty.

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