Reply #44: Heh, I was thinking exactly the same as this Schiff guy as I was [View All]

[54anickel]

reading the article.

Schiff, who is bearish about prospects for the dollar, says the most interesting thing about this study is not its "ridiculous conclusion," but the fact it was even done.

"If the Fed is studying the effects of a dollar collapse, they must actually believe that one is possible," he said.



How the heck can they compare today with 1985 and the Plaza Accord with a straight face?



Dollar devaluation cannot right the US economy

snip>

Recalling the agreement, an article in last Sunday’s New York Times noted that while the problems facing the Bush administration were not identical to those confronted by President Reagan in 1985 “some economists suggest that the process of policy coordination formalised at the Plaza provides a map that Mr Bush may want to follow.”

But as with generals who fight the last war, this may well be a case of economists reliving the previous economic crisis. The situation confronting the US economy is vastly different from that which prevailed in 1985. The most significant difference is the level of debt. Twenty years ago, despite the growing budget and trade deficits, the US was still a net creditor nation. Today it is the world’s biggest debtor, with external liabilities now amounting to more than $3 trillion, equivalent to about 30 percent of GDP.

Furthermore, there is some doubt about the effect of the Plaza currency realignment in bringing down the US deficit. Even after the agreement, the US trade deficit continued to expand and only started to fall towards the end of the decade as a result of slowing economic growth and a recession in 1991.

According to an analysis by economic commentator Kurt Richebacher, the source of the trade deficit was not the overvalued dollar. Rather it lay in the low levels of savings and capital investment. Richebacher noted that in the years 1989-93, when the trade deficit declined, total credit in the US grew by $819 billion per year. However, during the four years to mid-2004, it grew three times as fast—$2.4 trillion a year, with no letup in sight.

This credit growth is the result of the expansionary monetary policy pursued by the US Federal Reserve, which reduced interest rates 13 times between January 2001 and June 2003. But according to Richebacher, monetary and fiscal stimulation has now largely spent itself without producing a self-sustaining investment recovery. As a consequence, the imbalances and dislocations “make a normal, sustainable economic recovery flatly impossible” and render the US economy “highly vulnerable to a sudden downturn.”