The Long Arm of the Dollar
U.S. Currency's Weakness Has Far-Reaching Ramifications
By Paul Blustein
Washington Post Staff Writer
Tuesday, January 4, 2005; Page E01
....For the most part, the cheaper dollar helps the U.S. economy by making American goods less expensive relative to those made abroad. But Americans like (Mary Ann Bell of Middleburg, executive director of a charity called Romanian Christian Enterprises) cannot help but wonder how it can be good if their currency buys so much less overseas than before -- and many economists agree that the long-range implications may be wrenching.
The dollar's downward move, after all, stems from a massive imbalance in the U.S. economy, as reflected in the country's burgeoning trade deficit. Since Americans import more than they export -- the gap is running at about $600 billion a year -- foreigners effectively lend the difference, taking the dollars they receive for their goods and investing them in U.S. assets such as Treasury bonds. The net amount Americans owe foreign creditors has soared over the past eight years, to more than $3 trillion from $360 billion. The amount is equal to nearly 30 percent of the country's annual economic output. The more this sort of indebtedness rises, the more reluctant foreigners may become to continue buying dollars.
No one can predict how this process will unfold. It could come in the form of a sudden sell-off of U.S. stocks and bonds by foreigners, which could throw the world economy into recession. Or it could be much more gradual, with foreigners demanding higher yields on the money they invest in the United States, which could drive interest rates upward.
Even analysts who discount the odds of a crisis think the dollar is probably headed significantly lower in coming years. That is because its drop has shown no sign of shrinking the trade deficit to what economists consider a manageable level. As Federal Reserve Board Chairman Alan Greenspan put it in a speech in late November: "Given the size of the deficit, a diminished appetite for adding to dollar balances must occur at some point."...
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