Loving America’s Deficits

With the weak dollar hanging like the sword of Damocles over the global economy, almost everyone laments America’s spendthrift habits. But did it ever occur to anybody how hard Americans must work to make everyone else look good?

Thanks to America’s gaping trade deficits, the biggest headache of every developing country finance minister nowadays is trying to keep his or her country’s currency from going up too fast against the dollar. When was the last time that happened? Chronic debt-crisis countries from Mexico to Russia to South Korea are all fighting off capital inflows from investors looking for an exit as the dollar collapses.

Ordinarily, as the world comes out of a downturn and global interest rates rise, at least one or two emerging market countries suffers a spectacular blowup. Not likely this time, at least for the next year.

True, policy in some countries has improved markedly. Brazil and Turkey, for example, have each instituted market-friendly policies that have made their economies more flexible and growth more durable. But can the same be said for Mexico, where reform has stalled, or for Russia, where reforms have been reversed? America’s reckless deficit spending is making all their currencies look like good investments for 2005.