IMF warns trade gap could bring down dollar Charlotte Denny and Larry Elliott Friday September 19, 2003 The Guardian The International Monetary Fund yesterday warned that the colossal United States trade deficit was a noose around the neck of the economy, emphasising that the once mighty dollar could collapse at any moment. Arguing that the world's big economies were already too dependent on the willingness of American consumers to live beyond their means, the IMF said the US could not continue to run a current account deficit of 5% of GDP. The IMF's chief economist Kenneth Rogoff said that it was just a matter of time before the gap closed, tipping the dollar into a potentially steep fall. "If we were looking at a poor developing country, the world gives them just enough rope to hang themselves. A country like the United States, they give them enough rope to tie the noose around their neck several times. But it does happen in the end," he said. In its twice yearly report on the world economy, the Fund warns that even a controlled slide in the dollar's value is likely to slow US growth and unless other countries picked up the slack, the global economy would suffer. Mr Rogoff said the collapse of world trade talks last weekend in Cancun could spell disaster for a global economy already too dependent on unbalanced growth in the US. Describing the breakdown as a "tragedy", he said global poverty would rise if protectionism took root in the world's biggest economies. Wars in Iraq and Afghanistan and heightened geopolitical tensions worldwide after the September 11 attacks on the US would "unquestionably" hold back growth in the decades ahead, Mr Rogoff told reporters. The report was highly critical of Europe's stagnating economies, blaming governments for failing to embrace deep structural reforms of their labour markets and welfare states. "Reforms to improve the competitiveness of European labour and product markets could yield significant dividends in terms of regional output," the report said. It also warned that an overrigid application of Europe's fiscal rulebook could push the eurozone deeper into trouble. Chancellor Gordon Brown echoed the IMF's criticisms of the eurozone in an article in yesterday's Wall Street Journal, arguing that the credibility of Europe was at stake. Demanding wide-ranging change to policies "that have held back our continent for too long", Mr Brown added: "Reform is not just desirable, it is an urgent necessity." The chancellor said: "Having created a single market in theory, we should make it work in reality - and help it spread competition, cut prices, increase consumer choice and deliver higher productivity." The impact of the stalled trade talks in Mexico on the fragile global recovery will dominate this weekend's annual meeting of the IMF and the World Bank in Dubai. Mervyn King, the governor of the Bank of England, said yesterday: "The failure of the talks in Cancun will cast something of a cloud over the meeting. "That is not a happy background in which to assess the durability of the recovery." Misalignments between the world's biggest currencies are also likely to feature on the agenda, with the US hoping other countries will support its campaign to get China to strengthen its currency, the yuan. Following an upgrading of its growth prospects by the fund, the US is expected to expand by 2.6% this year, the fastest of the big seven economies. http://www.guardian.co.uk/usa/story/0,12271,1045369,00.html Much ado about nothing? Or a legitimate concern?
I said I was being serious. Confidence in the dollar will make it's 'collapse' impossible. That's all I meant.
Nah, it couldn't happen here. We're *America.* We can't keep shipping our jobs and capital overseas. We can howl "free market" all we want, but the bigger the trade gap gets, the weaker the dollar gets. Of course, if the "free market" gives us a worthless dollar and an unemployed labor force incapable of purchasing products, at least we can find comfort in the fact that we stayed true to an archaic 300-year-old disproven theory.
As long as we think the dollar has value, it does. WE don't have to be dependent on ANY reasource or product, we have a back up plan if our money becomes worthless to the rest of the world.
The US needs to import lots of goods and services from abroad. The US also is hugely dependent on foreigners buying US govt treasuries to finance US govt spending and on foreigners using US currency as the de-facto world currency (which helps sustain demand for US dollars). If the US dollar lost significant value, import prices will skyrocket, the US govt will face a budgetary shortfall from less foreigners buying US debt and foreigners switching to the Euro as the world currency. All this this will in turn lead to sky high interest rates. What is this "backup plan" which would prevent all this from happening if the value of the US dollar collapsed?
Here is one thing I don't get. The USA wants the Chinese Yuan to be stronger, and if it does, the dollar will depriciate compared to Yuan. It's the two sides on the same coin. Why worry about the dollar's collapse when depreciation of dollars is what the USA government want?
We have all the essential natural resoruces, lots of them too. We also have lots of domestic workers who are capable of doing overseas jobs.
The largest trade deficit is with China. If the yuan rises, imports from China will decrease improving the trade deficit which apparently is the underlying cause for the concern. If the Chinese markets are open, exports from the US to China would also increase, improving the trade balance more.
Hi all, First post =) I just mainly lurk... And.. I always thought a falling dollar is a trigger for inflation, as imports starts to cost more and it is more attractive for local producers to export their products rather than sell them domestically? All depends on how low the dollar falls, and for how long, but if this is sustained, I think that 20oz soda will soon become more expensive...
If there is excess manufacturing capacity (as there is in the US), its not a significant issue as you simply ramp up production.
Simply not true. There might be excess capacity, but the excess is largely because manufactured goods produced in the United States are more expensive than those produced in the developing world. In other words, buying fewer goods from overseas *will* mean that the price of Coke, automobiles (even American-built vehicles), clothes, and just about everything we use in our daily lives will grow, and grow rapidly. As has also been pointed out elsewhere, the trade deficit the United States runs has been of benefit in a different way: Asian net exporters (like South Korea and China) deposit most of the funds they're accumulating into American treasury bills. Without this trade deficit, the cost of American debt would go way up. (In other words: the budget deficit hurts a lot more, and interest rates goes through the 10% roof in a year.) In essence, the Chinese and Koreans are actually depositing American funds back into the American economy via this debt. And, on top of that, this debt is only occuring because Asia is *creating* efficiency by manufacturing for less. None of this hides the fact that Americans will lose jobs as a result of the trade deficit. But the simple fact of the matter is, these are jobs that should be lost. It's not fair, but it's the way the world is. If you're making '70s-era auto parts in a small manufacturing plant in Kentucky, your job *should* be exported to Malaysia. As far as the currency issue goes... from the point of view of the US, a "collapsed" dollar would be useful on a very short term indeed. American goods would become dirt-cheap overseas (5000 euros for a new Buick?), while foreign goods would become ridiculously expensive here ($50,000USD for a Hyundai?). This obviously helps trade. The problem is that a "collapsed" dollar would probably drag the rest of the world economy into the toilet. The short term trade advantage enjoyed by the United States would destroy the economies of her trade partners, meaning that no one in Europe could afford the 5000 euro Buick in a few years.
i think the IMF was warning against a steep, rapid decline in the dollar. say 30-40% of its value within a short period. the impact of this would be economic armageddon. we're talking our foreign debt rising in relative value by a third overnight. we're talking govts all over the world losing faith in american govt securities which currently forms the backbone of global financial markets. we're talking america potentially defaulting on its loans, and giant american multinationals collapsing under its massively increased liabilities. we're talking countries no longer willing to permit america to run a deficit, or implementing direct protectionism to guard against the cheap dollar. and yes, on the bright side, unemployment might potentially fall in the states, since we'll need to make a lot more of what we need ourselves. on the other hand, developing economies like china, southeast asia, and other export-oriented economies like japan, korea and taiwan, will have their greatest depression in decades. the end of the world as we know it? probably not. but political stability in places like china is highly dependent on economic conditions. and an unstable china is something nobody wants. in the long term, the economies will inevitably adjust, a new standard will be found (remember "sound as a pound" or the "golden dollar"?), and world trade will recover. however, in the short term, there will be a massive decline in the standard of living for everyone the world over, a global depression, a steep rise in inflation (aka "stagflation" the bete noire of macroeconomics), a slew of corporate collapse, and global economy instability unlikely any we've seen since the 1930s. not a pretty picture, but one we as americans should definitely be aware of and try to prevent. oh, as for the $1 soda pop. how about a $2 soda pop? cuz that's where it's likely to be.
