(apologies for the lack of posting; I've been absolutely slammed this week)
I'm sure most of you expats have noticed the precipitous decline in the dollar ($1.95 to £1 earlier this week) - well it looks like other countries are really starting to take notice now, and The Economist thinks that it will get worse before it gets better:
Many American
policymakers talk as though it is better to rely entirely on a falling
dollar to solve, somehow, all their problems. Conceivably, it could
happen—but such a one-sided remedy would most likely be far more
painful than they imagine. America's challenge is not just to reduce
its current-account deficit to a level which foreigners are happy to
finance by buying more dollar assets, but also to persuade existing
foreign creditors to hang on to their vast stock of dollar assets,
estimated at almost $11 trillion. A fall in the dollar sufficient to
close the current-account deficit might destroy its safe-haven status.
If the dollar falls by another 30%, as some predict, it would amount to
the biggest default in history: not a conventional default on debt
service, but default by stealth, wiping trillions off the value of
foreigners' dollar assets.
The dollar's
loss of reserve-currency status would lead America's creditors to start
cashing those cheques—and what an awful lot of cheques there are to
cash. As that process gathered pace, the dollar could tumble further
and further. American bond yields (long-term interest rates) would
soar, quite likely causing a deep recession. Americans who favour a
weak dollar should be careful what they wish for. Cutting the budget
deficit looks cheap at the price.
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