Interesting Stuff

The all mighty dollar


Paul Krugman, as I have noted, has explained the real concern for America is not inflation (as conservatives have stated for years) but its opposite deflation.   Deflation, in a nut shell, is when a currency’s value (in this case on the international market) increases when compared to other currencies. For years the Ron and Rand Pauls of the world have inveighed that Obama and the Fed’s policies was destroying the US dollar and killing our economy.

But it turns out the US dollar’s value has not gone down, but gone up.   Way up.   How is this a problem? Go back to my previous article and look at the problem the Swiss are having. Then come back to this article in the Upshot. In it, writer Neil Irwin notices the rising dollar is killing companies in emerging markets. For years businesses in emerging markets of Latin America and East Asia (the so-called fast growing BRIC countries of Brazil, Russia, India and China) were encouraged to borrow in the safe, but cheap dollar (much cheaper than the Euro and certainly the British Pound). Now that cheap dollar is not so cheap. As its value goes up, so does the debt incurred, crushing these businesses:

 Since the Federal Reserve signaled in summer 2013 that it would wind down its “quantitative easing” policy of buying billions of dollars in bonds using newly created money — that the gusher of dollars flowing into the global financial system would come to an end, in other words — the dollar is up 25 percent against a basket of commonly used international currencies.

“Now that the dollar has strengthened and rates are on the rise, it presents a risk and a challenge to many emerging markets in that their debts have become more onerous, more burdensome,” said Hung Tran, an executive managing director at the Institute of International Finance, an association of global banks. “The challenge for authorities in emerging market countries is to understand to what degree their corporate sector is naked or exposed.”

This, Irwin argues, harkens back to the late 1990’s and 2000’s when countries like South Korea, Thailand and Argentina were being crushed financially. The differences is, it’s not governments but businesses that are suffering.  Paul Krugman takes issue with this point, convinced that there is no difference between the early part of the century and now…

… the Asian and Argentine crises were also about private-sector debt, with Asian public debt, in particular, quite low before the crisis hit. And a number of economists, myself included, independently developed models of leverage, currency mismatch, and balance sheet effects to make sense of the Asian crisis.

So the dollar is back and stronger than ever. Boy are we screwed now.


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