|
|
|---|
Tuesday, October 27, 2009
Barry Eichengreen, the reliably even-handed Berkeley prof, has written an article arguing that the future of the US dollar is not nearly as grim as some would have you believe:
"The blogosphere is abuzz with reports of the dollar’s looming demise."With posts like this one, Barry? Onwards:
"The first thing to say about this is that one should be sceptical about economists’ predictions, especially those concerning the near term. Our models are, to put it bluntly, useless for predicting currency movements over a few weeks or months.... Over periods of several years, our models do better. Over those time horizons, the emphasis on the need for the US to export more and on the greater difficulty the economy will have in attracting foreign capital are on the mark. These factors give good grounds for expecting further dollar weakness. The question is, Weakness against what?"This is precisely the point that one of our readers brought up when I discussed this issue a couple of weeks ago (see? we read your comments). The argument goes like this: the dollar is weakening, but so are the currencies of all other major economies due to stimulus packages and mounting government debt. If you are going to abandon the dollar, you need to switch to something else. Barry dismisses the likelihood of the USD being replaced by the euro or yen, and points out that China will not be ready to introduce the remnibi as a viable alternative for quite some time.
Nor is inflation a plausible threat right now, either: despite what some shrill voices may be saying, the Federal Reserve is still determined (and credible) in its fight against inflation.
So without an alternative currency to the dollar, there's nowhere to go. Aha! that is where gold comes in, right? Not so fast, says Nouriel Roubini in a recent interview:
"I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10 percent in all the advanced economies.... The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense."
I think that these are all important counter-arguments to those inclined to write the dollar's obituary. My earlier post suggested that the evidence pointed to a long-run decline in the dollar - and that argument still holds. But for the short term? I leave the last word to Prof. Eichengreen:
"For the moment, the patient is stable, external symptoms notwithstanding. But there will be grounds for worry if he doesn’t commit to a healthier lifestyle."
Labels: China, Currencies, dollar
