5.6.06

'Why Deficits Matter"

hey, look what I did: an article on "Why Deficits Matter" --published today by MotherJones.com

3 Comments:

Hasan said...

The US can probably sustain deficits as long as commodities continue to be priced in dollars. However, with Venezuela selling oil in euros, Russia grumbling about the petro-ruble and Iran's new oil bourse, this is not going to come to pass. The Government isn't quite so stupid as to repeat the same mistakes as Napoleon and Hitler in launching an all-out war against Russia, although with this bunch, who knows?

Requiem said...

Nice article!

Just to start an argument, I would point out that the pricing of commodities in different currencies is largely irrelevant to the status of the dollar. If a country wishes to sell oil in euros, a buyer who holds dollars can simply convert them to euros immediately prior to the purchase. In fact, one can establish a dollar value for the commodity by mapping its euro price to the dollar-euro exchange rates.

The real danger to the dollar is not pricing, but in what currencies other nations choose to hold their reserves in. Currencies themselves are fully convertible. By way of example, I would point to the carry trade. That's basically taking advantage of different interest rates for different currencies. Borrow yen-denominated assets at 0% interest, convert the assets to dollars and invest in Treasuries at 5%.

The bigger problem in my mind is not the deficit, but the global economy. The re-balancing that will (and is) taking place over the next few years will have its own impact on the deficit, an impact far greater than any policy changes are likely to impose.

playfulmind said...

"The bigger problem in my mind is not the deficit, but the global economy. The re-balancing that will (and is) taking place over the next few years will have its own impact on the deficit, an impact far greater than any policy changes are likely to impose."

True enough, but keep in mind three things: a, I never said which was the more stressful problem, b, one is much easier to address (the low hanging fruit), and c, keep in mind the audience I was addressing.

cheers,
Melanie