Sunday, October 07, 2007

Mo' (About) Money

Just in case that last post didn't get you thinking about the real state of the economy, here's a couple of more articles to provide some additional food for thought.

The Devil and Alan Greenspan

If Americans have to learn the hard way that they cannot surf the wave of the world's savings forever, it will be a painful but beneficial lesson. If Asians learn that they cannot avoid risk by placing their savings in America, it is worth the cost, although it may be substantial. The fate of 3 billion Asians is the risk to the world economy, and it is delusional to think that it can be insured. Asians must find the means to invest in their own future and buy their own risk. Who started the global credit crisis? I don't mean to wax mystical over mundane issues in the markets, but I think that the devil did. He is just doing his job.

Why The Dollar is a 98-lb Weakling

Currencies rise and fall over time because countries really do get richer and poorer. Dig something valuable up from under the ground, or devise products or services that people value, and your money will be worth more. Let your industries fall behind, or allow inflation to debase the value of your money, and its global standing will decline.

The puzzle is that there's no real evidence that the economic prospects of Western Europe have suddenly improved 40% compared with the U.S. This makes it tempting to assign the dollar's drop to the customary moodiness of currency markets, in which traders make guesses about the future and inevitably get things wrong for years on end.

Why haven't these countries' currencies been gaining on the dollar? Because their governments won't let them. China's dollar peg, established in the mid-1990s, is often portrayed in the U.S. as a mercantilist attempt to sell more stuff here (if the Chinese yuan is cheap relative to the dollar, imports from China are cheaper too). But there's much more to it than that: by reining in the often pointless fluctuations of currency markets, countries can bring stability and encourage trade.

That's what the U.S. and the world's other big economies did during the 25 years after World War II. Up to now they've been content to recycle most of them (dollars) by buying Treasury bills and other U.S. securities. The U.S. has enjoyed the low interest rates that have resulted, while China, the Gulf States and Japan haven't wanted to face the consequence that by selling dollars, they would decrease the value of their remaining dollar holdings.

This is an arrangement that can't go on forever. It should unravel; that's the way of economic change and progress. But there's no plan in place to make it happen in an orderly fashion. The fear that the ensuing adjustment might be even more chaotic than in the 1970s probably explains most of the dollar's recent decline. It's not that we Americans have gotten a lot poorer. It's that we might be about to.

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