TrongpaiExpat
February 12th, 2007, 13:44
"Question:
You often talk about global imbalances. Could you explain what that has to do with the dollar?
Answer:
Yes, you are correct, I do spend an enormous amount of time talking about the Global Imbalances.
The Global Imbalances refer to the current scenario where the U.S. continues to add to our deficits while the Chinese and Japanese add to their surpluses/reserves. This is a scenario, which former Fed Chairman Greenspan, termed as "unsustainable".
Eventually, there will be an unwinding of these imbalances, and when that occurs, the dollar is likely to weaken. We could see a slow unwinding which would come about with a slow depreciation of the dollar, which has been happening since the dollar was bounced from the Bretton Woods Agreement in 1971. Some experts believe that as the dollar depreciates our manufacturing has the possibility of recovering, thus applying a tourniquet on the Trade Deficit.
Global imbalances also raise the possibility that Foreign Central Banks could decide that they have accumulated too many dollars and dollar denominated investments and either: 1) to sell and diversify their holdings, which would hurt the dollar, or 2) just stop buying new Government debt issues, which leads us to a lack of financing of the deficits.
There are a few ways to correct a lack of funding the U.S. Federal GovernmentтАЩs Deficits. 1) The Government could raise interest rates so high that it increases the value of our Treasuries, thus attracting foreign investment once again. Unfortunately high interest rates could bring the U.S. economy to its knees, or they could 2) debase the currency allowing the currency to depreciate, so that the тАЬcost of buyingтАЭ our Treasuries is reduced.
Given the choice between a recession and debasement of our currency, the Government will always choose debasement of the currency. That means a much weaker dollar.
So in the end, these Global Imbalances have far reaching tentacles into our future economy and value of our dollar. I hope this explains my interest in and continual hounding about the Global Imbalances in my daily newsletter.
If you have a question about the world of foreign currencies and want to ask an expert, e-mail your question to currency expert Chuck Butler by clicking on the link below."
ChuckтАЩs respected analysis is frequently quoted or referenced by news outlets such as The Wall Street Journal, U.S. News & World Report and CBS MarketWatch. HeтАЩs also the author of the Daily Pfennig, a free, fast-read daily e-letter on world currencies and economic trends.
www.dailypfennig.com/ (http://www.dailypfennig.com/)
You often talk about global imbalances. Could you explain what that has to do with the dollar?
Answer:
Yes, you are correct, I do spend an enormous amount of time talking about the Global Imbalances.
The Global Imbalances refer to the current scenario where the U.S. continues to add to our deficits while the Chinese and Japanese add to their surpluses/reserves. This is a scenario, which former Fed Chairman Greenspan, termed as "unsustainable".
Eventually, there will be an unwinding of these imbalances, and when that occurs, the dollar is likely to weaken. We could see a slow unwinding which would come about with a slow depreciation of the dollar, which has been happening since the dollar was bounced from the Bretton Woods Agreement in 1971. Some experts believe that as the dollar depreciates our manufacturing has the possibility of recovering, thus applying a tourniquet on the Trade Deficit.
Global imbalances also raise the possibility that Foreign Central Banks could decide that they have accumulated too many dollars and dollar denominated investments and either: 1) to sell and diversify their holdings, which would hurt the dollar, or 2) just stop buying new Government debt issues, which leads us to a lack of financing of the deficits.
There are a few ways to correct a lack of funding the U.S. Federal GovernmentтАЩs Deficits. 1) The Government could raise interest rates so high that it increases the value of our Treasuries, thus attracting foreign investment once again. Unfortunately high interest rates could bring the U.S. economy to its knees, or they could 2) debase the currency allowing the currency to depreciate, so that the тАЬcost of buyingтАЭ our Treasuries is reduced.
Given the choice between a recession and debasement of our currency, the Government will always choose debasement of the currency. That means a much weaker dollar.
So in the end, these Global Imbalances have far reaching tentacles into our future economy and value of our dollar. I hope this explains my interest in and continual hounding about the Global Imbalances in my daily newsletter.
If you have a question about the world of foreign currencies and want to ask an expert, e-mail your question to currency expert Chuck Butler by clicking on the link below."
ChuckтАЩs respected analysis is frequently quoted or referenced by news outlets such as The Wall Street Journal, U.S. News & World Report and CBS MarketWatch. HeтАЩs also the author of the Daily Pfennig, a free, fast-read daily e-letter on world currencies and economic trends.
www.dailypfennig.com/ (http://www.dailypfennig.com/)