Re: [OPE-L] Trade Deficit Disorder

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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