Sunday, September 23, 2007

What Is Falling?

The dollar, that's for sure. Even with the Loonie. A new low against the Euro. Paul Krugman asks if this is the Wile E. Coyote moment. I have a general view about what happens to the economies of large countries.

In almost all cases, the sky is not falling. Prices adjust so that it hangs lower and grayer.

Expect the dollar to decline until the U.S. current account imbalances shrink substantially. Expect some of this decline to happen as major exporting countries become less willing to organize themselves around holding dollars in exchange for their goods. Expect these countries to diversify their new investments and some of their existing ones, but not to dump their dollar holdings. No other country's short-term economic interests are served by devaluing its own asset holdings, and no exporting country's long-term economic interests are served by inviting a nationalistic, political response from the U.S.


Horace said...

I doubt countries will just dump their dollar holdings, that would hurt them almost as much as it would us, but there does seem to be a big movement into Euro-based assets by the oil producers as well as East and South Asia.

Besides shifts in capital flows, seems like there's also a shift in labor flows. I've been seeing an incredible number of well-educated, professional Americans now moving to Eurozone countries in Europe rather than the other way around-- mostly to the high-tech-ish countries like Germany, Austria, the Netherlands, Belgium, Switzerland and the French tech corridor, depending on how well people speak German or French. But also many going to Italy and Spain for example where a tech job paid in Euros isn't the draw.

The consequences of the dollar drop are multifaceted obviously, but it's definitely making the Eurozone a much more attractive place to park investments and to work in. Especially considering the high-quality schools in places like France, Belgium and Germany, there's possibly a big quality-of-life premium for Americans who make the move there. (The UK doesn't seem to be much of a destination-- based on the bank runs they've been having recently, seems like they have their own predicament going.) In any case, if the sales figures I've been seeing for otherwise obscure language software vendors of German and Dutch are any indication, we're only at the tip of this economic migration wave.

Tom said...

Not that we would intentionally interject psychology in an Economics discussion, but a small nugget -- Dartmouth son was in Morocco all summer, and several times his dollars were refused by street vendors, and he was told to go get some Euros. And they like us.

Horace said...

Interesting. So the dollar is now becoming "the North American peso." Maybe it's time to find a different currency to stuff my mattress with.

Mark said...
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