From: Jerry Levy (Gerald_A_Levy@MSN.COM)
Date: Sat Mar 18 2006 - 08:35:47 EST
From "How Scary Is the Deficit? by Brad Setser et al. via Alejandro: >>>>>>>>>>>>>>>>>> Levey and Brown make three basic arguments. First, they claim that foreign central banks will probably continue to finance U.S. deficits. Second, they predict that even if foreign central banks do pull back at some point, private investors will step in. And finally, they assume that even if this financing does not materialize, a dollar crash would hurt Europe and Japan more than it would hurt the United States. Unfortunately, there is a good chance that all of these assumptions will prove false. Foreign central banks may well stop financing growing U.S. deficits, private equity investors might not take their place, and the resulting adjustment process would prove quite painful for the United States." >>>>>>>>>>>>>>> Additionally, central banks now have the option of switching away from the Dollar to the Euro. The threat of exchanging Dollars for Euros gives debt holders some additional leverage that they didn't have before. The problem, though, for those central banks is that if direct foreign investment in the US recedes and the US economy crashes so might their own economies. While private investors will be concerned with ensuring private gain, the central banks in other nations won't want to damage their own macroeconomies. The irony then for many of those central banks may be that what's good for investors from their nations may be bad for the US economy which may then be bad for their own economies. So long as a nation's economy is heavily dependent on trade with the US it may be a case of "you can't win for losing." Alejandro -- for how many consecutive years have you expected the US economy to crash? Why hasn't it? In solidarity, Jerry
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