US economic decline and the dollar
Anatole Kaletsky here and Ambrose Evans-Pritchard, here, discuss whether the dollar's collapse is a symptom of US economic decline.I disagree with various bits. Kaletsky's is the more sensible, though I do wonder what he is on about with "European policymakers, by contrast, seem to have no idea of how currency markets operate." The Euro is the most free-floating of the world's three major currencies, and it's not really the fault of the ECB that it is currently so strong - you can lay the blame where you like, but the refusal of countries with major trade surpluses to revalue seems a much better place.
Kaletsky suggests the ECB should lower interest rates to reduce the value of the euro, a strange suggestion given much of the point of a single currency is to insulate monetary policy from such considerations, and given many say policy has been too loose anyway. Further, to what degree does the exchange rate matter? Clearly a strong currency is not always in a country/economic bloc's best interest, but people have been fretting about the euro's overvaluation since it went above parity (Kaletsky included) and my copy of The Economist tells me that the Euro Area has a current account suplus of $8bn, which it helpfully adds is 0% of GDP, and the IMF said today growth will be 2.4%, which is reasonable.
Evans-Pritchard has a track record of believing everything in Europe is close to collapse or in chaos, and here is no exception. The strong euro is going to cause an economic 'collapse', 'depression' etc, particularly in Spain. Spain does have a huge current account deficit, 8.6% of GDP, but then again so does Australia (5.5%) and New Zealand (10.2%) both of which have floating currencies and an independent monetary policy. Spain's GDP growth in Q2 was 3.9% annualised, and 2007 growth is set to be higher than earlier estimates of 3.4%.
So if an economic depression is around the corner, it's keeping itself well hidden. This kind of uber-pessimism about the European economy is an exact mirage image (though in much larger supply for various reasons) of some you get about the US economy, where the commentator seems to think that a continental-sized economy, containing most of the world's most successful firms, is going to collapse because some poor people were wrongly sold mortgages. "House of Cards", how are ya?
Anyway, I would overall actually agree with both of them, and be reasonably confident about the long-run prospects for the dollar and the US economy, mainly because (as Pritchard says to a bit) population growth estimates are in the US's favour compared with Europe, China and Japan. Furthermore the US has all the military power, good universities and many other natural and man-made advantages.
Labels: Attempts to talk up the dollar, economics
posted by Matthew @ 7/26/2007 02:45:00 PM
Comments: 1
