More on the dangerous dollar …

July 24, 2009

It is the last part of this bit from Brad DeLong that really caught my attention (bold is mine):

The fact is that the approporiate fiscal policy for the U.S, right now is to pass: (a) a bigger stimulus over the next two years, (b) a standby tax increase to return the federal budget to primary surplus by 2012, and (c) devout and lengthy prayers that confidence in the dollar doesn’t collapse and send interest rates on U.S. Treasuries above the economy’s growth rate–in which case the situation changes from its current value of “dire” to “catastrophic.”

2 comments

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I just don’t understand why people listen to baby Krugman or his daddy. They’re fully aware of the threat that runaway deficits pose for the dollar and for interest rates. And yet they propose more stimulus to help “rescue” the economy. This is how California’s problems will go national….

Posted by Rolfe Winkler | Report as abusive

The reality is that we are approaching a SDR world. Which is how it should be.

However, the talk of a devalued dollar is premature. Relative to other world currencies, the dollar is actually strong considering the current environment. While there is pressure, the $ has been rather resilient in the face of a credit crisis compounded by a downturn, volatility and uncertainty. SE Asia and Latin America were not so lucky.

I don’t think Obama will devalue the dollar. China’s reserves are safe. Remember, that the US has top credit-worthiness because, excepting global disaster, it will not default.

This is still a serious correction, that has annihilated global wealth. We should take a lesson from this event. The future will require more precise policy analysis and flexibility in execution, when dealing with economic cyclical variations. The embrace of the boom times, should be accompanied by the tempering of the bust.

Posted by Greg | Report as abusive