Friday, March 1, 2013

Today's links

1---Two Dollar Fallacies, project syndicate

If foreign holders of dollar bonds become concerned that the unsustainability of America’s situation will lead to higher interest rates and a weaker dollar, they will want to sell dollar bonds. If that feeling is widespread, the value of the dollar and the price of dollar bonds can both decline without any net change in the holding of these assets.
The dollar’s real trade-weighted value already is more than 25% lower than it was a decade ago, notwithstanding the problems in Europe and in other countries. And, despite a more competitive exchange rate, the US continues to run a large current-account deficit. If progress is not made in reducing the projected fiscal imbalances and limiting the growth of bank reserves, reduced demand for dollar assets could cause the dollar to fall more rapidly and the interest rate on dollar securities to rise.
2---The unloved dollar standard, project syndicate
But the dollar’s role as international anchor is beginning to falter, as emerging markets everywhere grow increasingly frustrated by the Fed’s near-zero interest-rate policy, which has caused a flood of “hot” capital inflows from the US. That, in turn, has fueled sharp exchange-rate appreciation and a loss of international competitiveness – unless the affected central banks intervene to buy dollars.
, since late 2003, when the Fed first cut interest rates to 1%, triggering the US housing bubble, dollar reserves in emerging markets have increased six-fold, reaching $7 trillion by 2011. The resulting expansion in emerging markets’ monetary base has led to much higher inflation in these countries than in the US, and to global commodity-price bubbles, particularly for oil and staple foods.

Herein lies the great paradox. Although no one likes the dollar standard, governments and private market participants still consider it the best option.
In fact, US trade deficits are primarily the result of insufficient, mainly government, saving – not a misaligned exchange rate, as economists have led policymakers to believe. Large US budget deficits during Ronald Reagan’s presidency generated the famous twin fiscal and trade deficits of the 1980’s. This, not an undervalued yen, caused the bilateral deficit with Japan to widen in the 1980’s and 1990’s.
the much larger US fiscal deficits of the new millennium, courtesy of Presidents George W. Bush and Barack Obama, portend large – and indefinite – trade deficits. But American policymakers continue to blame China, claiming that the renminbi has been undervalued for the last decade.
The claim that exchange-rate appreciation will reduce a country’s trade surplus is false, because, in globally integrated economies, domestic investment falls when the exchange rate appreciates. So the ill will that China-bashing is generating is for nothing. Worse, it detracts political attention from America’s huge fiscal deficit – $1.2 trillion (7.7% of GDP) in 2012 – and thus impedes any serious effort to rein in future spending for entitlements, such as health care and pensions.
3---The Fed and the currency wars, project syndicate
4---Central bank offensive, project syndicate
5---Refugees of the currency wars, unite, project syndicate

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