SNL Tackles Macroeconomic Imbalances

Last Friday I posted a clip from a video in which Warren Buffet explains the nature of economic relationship between China and the United States. Well... move over, Warren, because the folks at Saturday Night Live have done a much better (and funnier) job.

Dan Drezner analyzes.

Video of the Day: Squandersville v. Thriftville

Warren Buffet explains the very basics of the financial and trade imbalances between the United States and China, complete with funky animations:



This is an excerpt from the film I.O.U.S.A. (via The Browser)

Tuesday Readables

- Holy Hell: the curious economic effects of religion. (This idea probably deserves a post of its own - stay tuned)

- Immigration is very good economics for the United States

- The thinking economically about electric cars

- Gold as the next bubble (see also Buiter on gold as the world's only 6,000 year-old bubble - very smart analysis of gold as a fiat-commodity)

- Global macroimbalances are shrinking at a rapid rate (good). But only because international trade has collapsed (bad). The underlying problems remain.

G20 and the Gordon Brown self-destruction show

For once, Gordon Brown has managed to up-stage his cross-channel compatriot, Nicholas Sarkozy, at a G20 event. This might have had something to do with the fact that neither Brown nor Sarkozy really belonged at a meeting for Finance Ministers and Central Bank Governors, so the Frenchman had understandably stayed at home. But that technical detail was not enough to stop Gordon Brown, oh no.

In case you missed it, Gordon Brown gate-crashed the G20 meeting in St. Andrews by backing a proposal for a transition tax. (For a backgrounder on the transition tax, see here). This continues the trend of the Prime Minister attempting to use home-turf advantage to blatantly hijack G20 meetings to advance his electoral prospects.

The trouble is, it's not working very well. Remember that $1 trillion dollar figure that emerged from the chaos of the London G20 summit? The one which Berlusconi is said to have described as "the most expensive election campaign ever?" No? Well neither is the British electorate come voting time next year.

At least after the London summit, Gordon Brown managed to temporarily project the image of international statesmanship. With his latest PR stunt, the PM just comes across as desperate. He clearly hadn't bothered to build a coalition for the idea, instead trying to catch his colleagues off-guard. The effect was predictable: representatives from Russia, Canada, the IMF, the ECB and, most singificantly, the United States immediately rejected the proposal. Without the US, the idea goes nowhere.

So Brown backtracked from his position by the end of the weekend, looking very much unlike an international statesman.

Here's the thing: I believe that Brown is sincere in his arguments for a new social contract in which taxpayers do not provide costless insurance for large financial institutions. But the way he has gone about promoting this view smacks of political manipulation and panic. His headline-grabbing attempt over the weekend was yet another episode in the Gordon Brown self-destruction show.

The rest:

The big disappointment for me in the G20 communique from St. Andrews was its deafening silence on the issue of macroeconomic imbalances. The Pittsburgh G20 communique from September impressed me in that it actually included a commitment to address the issue head-on (and somehow China agreed!). The real test for G20 commitments, however, is that they continue to appear is subsequent communiques. So far, this one isn't looking good.

Bernanke on Imbalances

The Fed chief has sounded the alarm and echoed my comments on global imbalances, saying it was 'extraordinarily urgent' that the US and Asia implement policies to combat the return to old habits. For the US, this includes a sustainable and credible fiscal consolidation, and for Asia, a shift away from export-led growth and greater exchange-rate flexibility.

He also made the connection between global imbalances (capital flows) and regulatory failures, and called on countries to address these issues simultaneously.

On Currencies and Imbalances

In its biannual report to Congress, the US Treasury has criticized China for its 'lack of [currency] flexibility' and record build-up of foreign-exchange reserves. It said these factors risked undermining the progress made in unwinding global imbalances. Critically, though, the Treasury stopped short of officially labeling the country a currency manipulator.

Despite the fact that the FT characterized this as a 'hardening' of language, the report isn't remarkable. For one, the US can hardly afford to challenge the Chinese over the renminbi. Second, what criticism did exist was meant less for the Chinese and more for congressional and European ears. Plus, the renminbi is obviously undervalued and leaving it out of the report would have exposed the administration to fierce domestic politicking. Lou Dobbs, I am looking in your direction.

Anyway, a couple of interesting points are raised by the reemergence of the renminbi issue. First, the US seems to be doing its part in addressing global imbalances. Despite its 'strong dollar' rhetoric, the US is passively watching the dollar depreciate against the major currencies. China, on the other hand, is continuing to stockpile record reserves as it holds down the value of its currency. This keeps its end of the global ledger swollen, and at least partially offsets the gains made on the US account.

Second, there is little immediate incentive for the Chinese to revalue, either through a gradual appreciation or sudden float. The Chinese are chiefly concerned with sustaining economic growth and averting any domestic political turmoil, and thus appear committed to maintaining the export-led model.

Finally, with the Americans reluctant to offend their Chinese overlords, the Europeans are emerging as China's main antagonists re: renminbi revaluation. Dollar depreciation vis-a-vis the Euro extends to the renminbi through its dollar peg. As China's largest trading partner, Europe's, and especially Germany's, competitiveness thus suffers. Unfortunately, the Europeans have even less leverage with the Chinese than do the Americans, and are therefore unlikely to get the Chinese to move, especially with the US on the sidelines.

The stark reality with respect to imbalances is that it all really depends on the Chinese, and they have yet to show a willingness to alter their exchange rate policy or reliance on export-led growth. China talks a big game about its 'peaceful rise' and has desperately wanted the world to recognize its remarkable economic achievements. But as I asked China's representative to the WTO when he spoke at an Economic Diplomacy seminar at LSE, 'When will China assume its rightful place at the table and take a proactive and constructive role in international relations?' It must be said that on critical issues like climate change, Iran and global imbalances, it hasn't (and in case you're wondering, I never got a straight answer, but that's diplomacy for ya).

As The Economist recently remarked, 'The world has accepted that China is emerging as a great power; it is a pity that it still does not always act like one.'

One (contrarian) view of the IMF's crisis performance

The IMF meetings in Istanbul are something of a victory lap following what many consider a banner year for the Fund. Faced with questions of relevancy just two years ago, the Fund is now globally lauded for its role in fighting fires from Pakistan to Ukraine. While critical questions remain over funding and governance, the IMF looks certain to assume a central role in the post-crisis global financial regulatory regime.

Which makes a new paper out of the Centre for Economic Policy and Research (CEPR) particularly interesting. The think tank argues that, far from helping 31 borrowing countries avert depression, the Fund may actually have made their crises worse.

"More than a decade after the Asian Economic Crisis brought world attention to major IMF policy mistakes, the IMF is still making similar mistakes in many countries," CEPR Co-Director and lead author of the paper, economist Mark Weisbrot said. "The IMF supports fiscal stimulus and expansionary policies in the rich countries, but has a much different attitude toward low-and-middle income countries."

The argument is essentially two-fold: one, the Fund's researchers woefully misjudged the severity of the crisis, both globally and in individual countries, and failed to foresee the risks to the global economy. Two, contrary to what you've heard, the Fund did not learn the lessons of past crises, instead pushing pro-cyclical, austerity and exchange rate policies that plunged low-and-middle income countries deeper into the abyss (Asia-redux). Take, for instance, Latvia. The preservation of the exchange rate peg, which the Fund pushed, has forced the country to pour money into defending an overvalued currency and undertake painful economic adjustment.

The Fund has vigorously denied the allegations in the paper (duh):

"The CEPR reaches seriously misleading conclusions about the pro-cyclicality of policies in IMF-supported programmes, relying on faulty analysis and often inaccurate information.

"The main point of this report is that growth forecasts were too optimistic when programs were designed, leading to excessively tight fiscal and monetary policies. Reality is quite the opposite.

"In virtually all programmes, fiscal targets were quickly and substantially relaxed once the extent of the crisis became apparent. Monetary and fiscal policies have deliberately sought to offset the fall in global demand."

I agree with the Fund. For one, the argument that the Fund's performance is overshadowed by its failure to forecast the crisis is intellectually weak. Just about everyone failed to foresee the extent of the crisis. The Fund's GDP forecasts were in many cases optimistic, but it was highlighting the severity of the crisis well before many big governments. And who is to say that government's would have independently acted sooner had the Fund taken an even more pessimistic line. That's a pretty easy answer: they wouldn't have.

Second, I can't challenge the CEPRs analysis of 41 different arrangements, but I'm pretty sure the Fund's flexibility and counter-cyclical recommendations during the crisis are widely recognized (and applauded), and not just in developed countries. Dominique Strauss-Kahn was calling for fiscal stimulus in early 2008, well before most government's threw-out the neoclassical handbook. The flexible credit facility is downright revolutionary given the Fund's recent history. And even you identify strict conditionality in certain arrangements, I would argue that governments like Ukraine still need to swallow the bitter pill that the IMF is uniquely positioned to provide. The Fund's historical failures are more the result of its inflexible, dogmatic approach, less in the particular conditions it attaches to loans.

No international institution can walk away from this crisis with clean hands. As a pillar of the prior regime, the Fund should be critiqued for its role in fostering the conditions that led to the great unraveling. But its crisis performance was a net success (for now), and the CEPR misses this by wading too far into the weeds.

Why the US Dollar Will Weaken

Predicting the future value of currencies is a tricky business.

For instance, about one year ago, as the US economy started heading down the toilet and investors of all stripes began to panic, one would have thought that the impending collapse of the US economy would be bad for the dollar. But not so. In fact it was the opposite: as the crisis spread, US dollar assets became a safe haven from all the other collapsing world economies. Why? Because the US economy is still the biggest, most open, and most liquid in the world.

Nevertheless, without being too specific, I would argue that we are likely to see a long-run weakening of the US dollar. Here are at least two big reasons why:


Changes in the US Economy
It took having to be beaten over the head with a rather large recessionary stick, but US policy makers have realized that the economic conditions that prevailed in the last decade or so should not be repeated going forward. I'm talking in particular about 1) low domestic US savings, and 2) the US's reliance on everyone else to make stuff, sell that stuff to America on the cheap, and invest the money earned from selling that stuff in US assets with a low rate of return. American financial institutions would then take that money and invest it in riskier assets, earning greater return, and making everyone rich.

That's an oversimplification, but you get the idea. Recognizing that there's a big downside to this state of affairs, Obama's top policy advisors have been advocating a shift in the US economic strategy. Larry Summers has been the most explicit, according to two authors from the Peterson Institute:

"The US, [Summers] said, must become an export-oriented rather than a consumption-based economy and must rely on real engineering rather than financial wizardry. Tim Geithner, the US Treasury secretary, and other top officials have spoken similarly of rebalancing US growth.... Redirecting resources away from finance and consumption towards exports and investment will require relative price shifts, for which the dollar has to move down."

Now, you could argue that the extent to which Summers & friends will be able to achieve this goal is limited. The US competitive advantage is, after all, in financial wizardry and not exports. Nevertheless, that this is the long-run goal of Obama's policymakers is a statement of intent that deserves to be taken seriously. And I think that it is being taken seriously by a country whose policies will likely have an even greater impact on the future of the dollar: China.

China's Investment Strategy

"You should be screaming if your life savings are in dollars."
That's the assessment from FT Alphaville after further evidence that China is trying to quietly tip-toe away from the US dollar - something that is hard to do when you own about 1.5 trillion (!) of them. Nevertheless, China is attempting to escape its "dollar trap" by directing state-owned firms to start investing in dollar-alternatives like commodities and commodity-related companies. As China starts selling US dollar assets there will be more US dollars in the market, the value of any given dollar will go down and the currency will depreciate.

The long-term objective of this strategy is to eventually bring about the full convertibility of China's currency, the remnibi, and have it compete with (or replace) the US dollar as the world's reserve currency of choice. I say "long-term" because Beijing will need a long time to diversify away from the US dollar. But nevertheless, when you own 1,500 billion of another country's assets, your strategic decisions are going to be of some consequence.

Now, as I stated in the opening, currency predictions are fickle things. One could easily imagine a scenario where China's economy has an unexpected downturn and the safety of US assets will once again be appealing. Economic analysts are prone to overstating the long-run significance of current events. But caveats aside, the macro-level economic strategies of the two largest economies in the world suggest that the US dollar is going to weaken. Big time.

A Return to the Gold Standard? Sigh...

One of the interesting side-discussions of the current financial mess is whether the fallout from the crisis will lead to a new international currency order. There is worry that the massive spending deficits that the Americans have initiated will undermine confidence in the US dollar (USD). Enormous spending means the creation of more dollars; the creation of more dollars reduces the value of any given dollar; if the value of the dollar goes down, so does the value of anything priced in dollars.

Like any fiat currency, the value of the USD is based upon little more than a promise, by the government, that the currency is worth something. But since the USD is the de facto reserve currency of the global economy, and most commodities (like oil) are priced in dollars, much of global finance and trade is based upon a shared understanding that the currency of the largest, strongest and most open economy has value. It is a global confidence game, and everyone needs to play for it to work. To understand this is to understand why a deterioration of the confidence in the USD would have deep and wide-ranging consequences.

Which is what makes this set of proposals to ditch the dollar, put forward by reps from national governments, so interesting. The Chinese suggestion to switch to the IMF's special drawing right is especially loaded, but that's the subject of another post altogether. What I want to focus on is the recent talk about returning to the gold standard. Oooooh this makes me angry.

Let's take this article by Gillian Tett that lays out the basic idea of a return to the gold standard. She reminds us of the fragility of a fiat currency system that rests solely on government credibility, and quotes an essay from Alan Greenspan written in the 1960s:

Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets... [but] in the absence of the gold standard... there is no safe store of value," Greenspan wrote back then, pointing out that, without a gold standard in place, there is little to prevent governments indulging in wild credit creation. "Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.

Now Tett does suggest that a return to the gold standard is pretty unlikely, but I still find this kind of reporting irresponsible since it makes no effort to point out why we quit the gold standard in the first place.

Let's review the basic points here. Gold is valuable for no other reason than human beings like shiny metal things. If squirrels ran the global economy, they would probably have an acorn-standard because they like nuts - there is no fundamental difference.

Okay, you're right: the value of gold is also based on the finite amount of gold in the world - but that's precisely the problem. The creation of credit is the lifeblood of the global economy; if the amount of credit in the economy is limited to the amount of metal we can dig out of the ground, world trade would become very difficult indeed. Greenspan is wrong when he writes that, under a gold standard, the amount of credit is determined by the economy's tangible assets: it is in fact determined by a tangible asset. Singular.

Greenspan is technically right in arguing that, under a fiat system, there's nothing physically stopping governments from engaging in "wild credit creation." But there are additional considerations, including the fact that inflation creates enormous costs for the economy. Unless the government is insulated from the consequences (Zimbabwe), those costs are a barrier. For some countries, like Germany, historical experience with inflation has led to the creation of social and institutional mechanisms that act as a pretty strong disincentive for inflation. No gold required.

Moreover, "wild credit creation" is sometimes a necessary option. It is no coincidence that the earlier countries abandoned the gold standard in the 1930s, the sooner their recovery from the Great Depression began. If we had a gold standard right now, our central banks would not have the flexibility to adjust monetary policy to the crisis and engage in "non-traditional" activities.

We can argue about how the US government is choosing to spend money to kick-start the economy, and where that money is going. But there is almost no question that monetary expansion is an absolute necessity in a credit crisis. If our currency was tied to a fixed amount of gold reserves, we would have a complete disaster on our hands.

Plenty more reading: a survey of the rise and fall of the gold standard; Eichengreen & Temin on the gold standard mentalité, and Brad DeLong on Why Not the Gold Standard?

(photo from digitalmoneyworld's photostream)

Macroeconomic Imbalances, Visualized

As a follow-up to Rory's "Uh-oh" quote of the week, here's a cartoon from KAL on the macroeconomic imbalances issue between China and the United States:

Ascent of Money

Niall Ferguson and his ego arrived in town yesterday as part of a speaking and promotional tour for his new book, the Ascent of Money. Last week Rory linked to the Harvard professor's PBS documentary of the same name as required watching for anyone looking for a good summary of our current financial crisis and some historical context (it seems that non-Americans will have to search a little harder to find the video).

I've read bits of Ferguson's other historical books (Colossus and Empire) and have found myself very skeptical about his theories. But I agree with Rory: the Ascent of Money documentary is something I would highly recommend. It's a very digestible way to become familiar with the main elements of the crisis (subprime mortages, derivatives, bond markets) without... well, bothering to read about them.

I particularly liked that he finished off the video with a discussion of the problem of macroeconomic imbalances. My only quibble is that Ferguson has decided to nickname the issue "Chimerica," after the two biggest players in the drama. The trouble is, global macroeconomic imbalances really are global - this Chimerica thing risks ignoring the role played by Japan, East Asia, the Gulf region and other countries in creating the imbalances dilemma. This China-centric view is reminiscent of the (exaggerated) fears about Japan in the 1980s and isn't healthy for the broader public debate. Global macroeconomic imbalances may not be as catchy as Chimerica, but it's more accurate - and it still sounds better than AbuSaudiChimericapan.

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Thanks to Jeff for the pointer. Also: There will be blood - Ferguson predicts an increase in violent conflict as a result of the financial collapse.

Has The American Economy Lost Its "Alpha"?

Willem Buiter certainly thinks so. His essay is, as usual, probably too long and dense for casual readers so I'll try to draw out some of the main points here. Before doing that, here is some background:

For quite some time now, the United States economy has been taking in more foreign investment than its citizens are investing abroad. Despite this negative net investment, American investors are earning more from their foreign investments (in aggregate) than the interest being paid on debts owed to foreign investors. This situation is what is being referred to when we talk of "alpha" - being able to secure positive returns despite a situation of negative net investment. This alpha has resulted from two factors: the very low rate of return offered on US assets and the increasingly risky nature of US-owned assets abroad (leading some to describe the United States as the world's largest venture capitalist).

Buiter outlines one possible explanation for the existence of alpha:

"Because of its unique position as the world’s largest economy, the world’s one remaining military and political superpower (since the demise of the Soviet Union in 1991) and the world’s joint-leading financial centre (with the City of London), the US could offer foreign investors lousy US returns on their investments in the US, without causing them to take their money and run."

The problem is, to the extent that it ever existed, this situation has been undermined:

There is no chance that a nation as reputationally scarred and maimed as the US is today could extract any true “alpha” from foreign investors for the next 25 years or so. So the US will have to start to pay a normal market price for the net resources it borrows from abroad. It will therefore have to start to generate primary surpluses, on average, for the indefinite future.

Thems fightin words. In order to generate those primary surpluses, the American economy will need higher taxes and/or less government spending (as well as higher personal savings). Yet the prospective Obama administration's economic stimulus plan contains precisely the opposite: lower taxes and higher government spending.

Buiter doesn't expect to change the outcome of the stimulus package, but his point is this: while the short run effects of a stimulus package may be beneficial, it will destroy the long-run prospects for the entire US economy. In short, the US economy cannot afford a Keynesian stimulus package. He predicts a global dumping of US assets in 2-5 years.

I wouldn't spend too much time worrying about Buiter's specific predictions on asset-dumping. Keynes himself pointed out that our ability to forsee the long-run is so limited as to be practically useless. Moreover, currency predictions are fickle at the best of times because everything is relative. For instance, even with current US economic weakness, we're seeing a flood to the US dollar a safehaven from other crashing currencies. So in two to five years, just about anything could happen. For more counter-arguments, see Free Exchange here and here.

Nevertheless, Buiter's overall concern is a real one and I'm not willing to dismiss it out of hand. But I think the most important questions to policymakers with more short-run horizons still comes down to: what's the alternative? and can America really afford not to have a Keynesian stimulus? A political consensus appears to forming that makes the answer to that last question a resounding "no."

So either Buiter is overstating the extent to which investors will be scared off by higher US debt levels, or there could be some very real long-run consequences that will make Obama's Harlem-Globetrotter-esque economic advisors look like the Washington Generals.

From The Alan Greenspan Dept. of 20-20 Hindsight

With only a couple of weeks left in office, Hank Paulson has been busy holding interviews to make his views on the financial crisis clear. Here he is explaining how the Treasury lacks sufficient authority to deal with financial crises. Here he is again two days later explaining how macroeconomic imbalances are the true, underlying cause of our recent financial mess. (For a basic run down on the imbalances issue, see my previous essay).

Now, Hank Paulson is absolutely correct in pointing to the imbalances as a source of cheap credit that led to excessive risk-taking. But as my co-author rightly pointed out, it is almost as if Paulson is blaming a concept for the crisis, not unlike those who blame "globalization" for all the world's ills:

"Aha!," say the Americans, "it was those pesky imbalances that made us run huge national deficits and unsustainable personal debt." "It's not our fault either!," retort the Chinese, "those imbalances forced us to manipulate our currency in order to sustain a massive trade surplus." "Don't look at me!," says the investment banker, between Manhattans. "What did you expect me to do with all that cheap credit? Monitor who was holding all that risk?" "Why are we burning through cash at a rate of billions per month after operating for three decades with an unsustainable business model?" asks GM's CEO on conference call from his private jet, "Why, it was the, er... macrosomething imbalances!"

You get the idea. The reality is that the economic imbalances are the culmination of the decisions of governments and individuals over an extended period of time that were self-interested and ignored the bigger picture. The imbalances equation has a savings glut and investment drought on one side, and a collection of irresponsible financial incentives on the other. Ultimately, this situation has been brought on by the unwillingness of the world's major financial actors to take responsibility for the long run implications of their actions. A quote from The Economist:

"A sound international economic order cannot be built on the assumption that the rumbustiously richest country will go on borrowing unprecedented amounts at enormous interest rates from everybody else for ever.”

And yet that's pretty much the model we've been working from (except with low, instead of high interest rates). Oh, and where did I take that quote from? The Economist's 1984 endorsement of Ronald Reagan for president. Twenty. Four. Years. Ago. These imbalances did not creep up on us, folks. We need coordinated action by the G20 economies to address the problem without resorting to protectionist measures. It's too bad we needed a recession to drive this point home to the Secretary of the Treasury, but there you have it.

The Macroeconomic Rebalancing Act

The rapid US dollar resurgence of the past couple of months is being felt in a number of very specific ways. Rory has been following this trend closely (see posts on USD resurgence, other currency stuff and the, er, "GreenPack.") so I won't spend too much time on the specifics. What I have been meaning to discuss is the significance of this shift in a broader context.

I'm referring to the issue of "global macroeconomic imbalances." What are these imbalances, you ask? The expression refers to situation that has arisen because A) countries in East Asia and the Middle East have a lot of money they wish to lend somewhere safe and B) the United States has until recently been very willing to borrow.

Japan, China and others have so many funds to lend because they have exceptionally high national savings rates, relatively low levels of spending (esp. China) and foreign currency reserves generated from trade surpluses. Since the US is the largest, safest, most open economy in the world, these excess foreign reserves have been pouring into their economy as low-yield investments. For instance, Japan holds about $1 trillion in US assets; China about $1.9 trillion. That means the US is indebted to these countries to the tune of several trillion dollars.

Fed Chairman Ben Bernanke has argued that this "savings glut" in developing countries is the main source of the imbalances. These precautionary savings have two problems. First, they provide low-yield return. For instance, China could take a portion of those nearly $2 trillion and invest it in their own country's education and infrastructure - this is in fact less of a savings glut than an "investment drought." Second, developing countries that rely on export surpluses are essentially relying on the United States to buy those exports. In short, the US must act as "consumer of last resort."

On the other side of the equation, the American economy has been saving almost nothing and accumulating debt like it's going out of style (this applies to other rich developed economies, but less so). This is partly because there was no need: cheap credit from abroad helped fuel equity bubbles in the late 1990s and the recent housing bubble - people were getting rich. But this system was only sustainable so long as American deficits continued to grow and American consumption continued to hold up the world economy.

Some people have argued that this balancing act is (was) sustainable, but they are wrong. The real question is when and how will things re-balance themselves. There are two worries. First, that US deficits grow to the point where China & co lose faith in the dollar, dump their assets and cause a recession in the United States. I think that fear has always been overstated. To paraphrase the old banking addage: when you owe the Chinese government $100 million, you have a problem. When you owe the Chinese $1.9 trillion, they have a problem. If the US economy drops 10%, say, these Chinese-held assets will suffer enormous losses. So the fear of a "hard landing" caused by foreign investors was always problematic.

The second worry is that of a Sudden Stop: a slowdown in the US economy prevents them from acting as "consumer of last resort" and emerging markets are forced to readjust internally on short notice. This could also result in a "hard landing" for the economies involved - something to be avoided.

However, last week John Kemp pointed out that we no longer need to worry about which outcome it will be since the decision has been made for us:

The unfolding credit crisis is producing a deep recession, cutting U.S. demand for imports, and forcing the long-overdue adjustment in the trade deficit.

He concludes:

With recession taking care of the current account deficit, financial crisis reducing gross capital outflows, and foreign official buyers continuing to support the Treasury market, the U.S. currency has been a strange beneficiary of the crisis. If the dollar’s earlier decline was a symptom of over-fast growth, its rise is a by-product of recession.

That's all fine and good for the dollar, but what about everyone who was relying on US consumers to fuel growth? A hard landing is still a strong possibility in some parts of the world. Over the next few months we're going to find out just how capable some countries are at redirecting investment inwards and stimulating their own demand.

Further Reading: Patrick and I discuss China's counter-move of devaluing the yuan. Checkitout!

(Photo: Daylife)