America’s Opposing Futures

I recently learned something interesting: American international finance economists and American domestically oriented macroeconomists have very different – indeed, opposing – views of the likely consequences of America’s huge current-account deficit. International finance economists see a financial crisis as likely, followed by a painful and perhaps prolonged recession in the United States. Domestically oriented macroeconomists, by contrast, see a forthcoming fall in the value of the dollar not as a crisis, but as an opportunity to accelerate growth.

Domestically oriented macroeconomists look at the situation roughly like this: at some point in the future, foreign central banks will become less willing to continue buying massive amounts of dollar-denominated securities in order to prop up the greenback. When they cease their large-scale dollar-purchase programs, the value of the dollar will fall – and it will fall hard.

But, according to this view, as the dollar’s value declines, US exports will become more attractive to foreigners and American employment will rise, with labor re-allocated to the newly-vibrant export sector. It will be like what happened in Britain after it abandoned its exchange-rate peg and allowed the pound to depreciate relative to the Deutschmark , or what happened in the US in the late 1980’s, when the dollar depreciated against the pound, the Deutschmark , and – most importantly – the Japanese yen.

To continue reading, please log in or enter your email address.

To access our archive, please log in or register now and read two articles from our archive every month for free. For unlimited access to our archive, as well as to the unrivaled analysis of PS On Point, subscribe now.

required

By proceeding, you agree to our Terms of Service and Privacy Policy, which describes the personal data we collect and how we use it.

Log in

http://prosyn.org/RAaJkgN;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.