Tuesday, November 10, 2009

The Dollar

The Lehmann Letter ©

There’s been much discussion of the dollar’s value lately. Two charts might help put matters in perspective.

Exchange Value of the U.S. Dollar

(Click on chart to enlarge)

(Recessions shaded)

U.S. Balance on Current Account

(Click on chart to enlarge)

(Recessions shaded)

You can see both the dollar’s and the balance on current account’s downward trend over the past 25 years. There are interruptions in those trends, and neither series is at its historic low. Nevertheless the trend is clear.

We borrow more and more from the rest of the world in order to buy more and more from the rest of the world. But the rest of the world lends us those funds reluctantly. Consequently the dollar’s value falls as the rest of the world demands more and more dollars for each unit of its own currency that the rest of the world lends to us.

How long can anyone keep borrowing in order to buy? How long will anyone lend in order to sell? Forever, if the parties are pleased with the arrangement. But the dollar’s fall indicates the lenders are not completely happy. If the lenders balk, the dollar will fall even more quickly. That will make it even more difficult for the U.S. to borrow. If the creditors wish to gain power over the U.S., they may continue to lend for quite a while.

(The charts were taken from http://www.beyourowneconomist.com. [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of economic indicators.)

© 2009 Michael B. Lehmann

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