[OPE-L:1166] Re: Re: monetary inflows versus capital accumulation

From: Fred B. Moseley (fmoseley@mtholyoke.edu)
Date: Thu Sep 09 1999 - 23:58:09 EDT

On Thu, 9 Sep 1999, Allin Cottrell wrote:

> Date: Thu, 9 Sep 1999 22:30:03 -0400 (EDT)
> From: Allin Cottrell <cottrell@ricardo.ecn.wfu.edu>
> Reply-To: ope-l@galaxy.csuchico.edu
> To: ope-l@galaxy.csuchico.edu
> Subject: [OPE-L:1165] Re: monetary inflows versus capital accumulation
> On Thu, 9 Sep 1999, Fred B. Moseley wrote:
> > [I]n the present circumstances, I think it is ... likely
> > that a US recession will occur because of the continuing
> > crisis in the rest of the world, which will continue to
> > increase the US current account deficit, which will
> > eventually cause a significant devaluation of the dollar,
> > etc....
> It's plausible that if aggregate demand remains sluggish in the
> rest of the world, this may spill over into a reduction of the
> rapid growth seen in the US over recent years. But surely a
> devaluation of the dollar would mitigate, and not accelerate,
> that effect.
> Allin Cottrell.

Allin, thanks for your comment.

I know that in most circumstances a devaluation of the dollar would have a
positive effect on the US rate of growth (i.e. would reduce the negative
net exports). But I don't think this will be the case in the current
circumstances. Because a devaluation of the dollar, especially if
significant and rapid, would cause an exodus of foreign capital, which in
turn would bring the stock market down, and with it consumer spending and
the US economy in general.

The US rate of growth right now depends above all else on consumer
spending, which in turn depends heavily on the stock market, which in turn
depends in part on foreign capital. So the negative effect of devaluation
on the stock market and consumer spending would dwarf the positive effects
on net exports. That is why the present situation is so problematic. The
usual way to take care of a current account deficit is devaluation, but in
the present US circumstances, this cure would make things worse, because
of the heavy dependence of the US economy on foreign capital, the stock
market, and consumer spending.

What do you think?

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