Trade Adjustment Will Affect US Dollar and Economic Prospects
OECD warns rebalancing of US deficit may drive dollar down sharply - Forbes.com
I had some hestitation about posting this article as it's thick with financial and economic language that's difficult to decipher. OEDC stands for the Organization for Economic Co-operation and Development. It is a international organization of industrialized countries responsible for the study of economic and trade issues. Notwithstanding the thick language, it contains information of a serious nature that could have a broad impact economically.
Long ago, our nation sharply curtailed manufacturing and has increasingly sought to purchase goods that would otherwise be manufactured here abroad. To the extent by which we as a nation import more than we export, we create what's known as a trade deficit. Many of the countries we're carrying trade deficits with (i.e. China) are flush with dollars after they sell goods to us and they have to do something with these dollars.
Since oil is priced in dollars per our 1970's agreement with OPEC, many countries keep some of our currency on hand for the purpose of purchasing oil. Excess amounts over and above that needed for transactional purposes are often invested in dollar denominated investments like US government bonds or other investments. This works well for our trading partners as long as our securities markets offer attractive returns and they can convert their dollar holdings back into their currency at a reasonable exchange rate. If the dollar weakens versus their home currency, they lose money on their US demoninated investments.
The possibility of a sharply weakening dollar is the concern of this article. Since foreign investors stand to incur sharp losses on their investments, there's a strong possibility that they'll exit their US investments. A sharp sell off in US treasuries would result in longer term rates sharply increasing. Higher interest rates on an economy already heavily indebted would be very problematic. Our standard of living could drop dramatically. This is the elephant sitting in the room that absolutely no one talks about.
I had some hestitation about posting this article as it's thick with financial and economic language that's difficult to decipher. OEDC stands for the Organization for Economic Co-operation and Development. It is a international organization of industrialized countries responsible for the study of economic and trade issues. Notwithstanding the thick language, it contains information of a serious nature that could have a broad impact economically.
Long ago, our nation sharply curtailed manufacturing and has increasingly sought to purchase goods that would otherwise be manufactured here abroad. To the extent by which we as a nation import more than we export, we create what's known as a trade deficit. Many of the countries we're carrying trade deficits with (i.e. China) are flush with dollars after they sell goods to us and they have to do something with these dollars.
Since oil is priced in dollars per our 1970's agreement with OPEC, many countries keep some of our currency on hand for the purpose of purchasing oil. Excess amounts over and above that needed for transactional purposes are often invested in dollar denominated investments like US government bonds or other investments. This works well for our trading partners as long as our securities markets offer attractive returns and they can convert their dollar holdings back into their currency at a reasonable exchange rate. If the dollar weakens versus their home currency, they lose money on their US demoninated investments.
The possibility of a sharply weakening dollar is the concern of this article. Since foreign investors stand to incur sharp losses on their investments, there's a strong possibility that they'll exit their US investments. A sharp sell off in US treasuries would result in longer term rates sharply increasing. Higher interest rates on an economy already heavily indebted would be very problematic. Our standard of living could drop dramatically. This is the elephant sitting in the room that absolutely no one talks about.
posted by Greg L at
11:19 PM
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