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The Coming Dollar Crash

The Coming Dollar Crash. Peter Dorman The Evergreen State College March 9, 2006. Review of the Balance of Payments Accounts. (The difference is equal to changes in reserves.). The Basic Principle: Flows are Equal and Opposite (mostly). current account. Rest of World. USA. R. R.

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The Coming Dollar Crash

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  1. The Coming Dollar Crash Peter Dorman The Evergreen State College March 9, 2006

  2. Review of the Balance of Payments Accounts (The difference is equal to changes in reserves.)

  3. The Basic Principle: Flows are Equal and Opposite (mostly) current account Rest of World USA R R capital account

  4. Annualized US Current Account Deficit in $USB

  5. US Current Account Deficit as Percent of GDP

  6. Components of the US Current Account, 2005 in billions of dollars Trade balance in goods -782 Trade balance in services 56 Net transfers -80 Statistical adjustment 15 Total -791

  7. US Trade Deficit by Region, 2005 goods only, in billions of dollars North America (Canada, Mexico) 127 Europe 144 Pacific Rim 329 South and Central America 51 OPEC 93 Africa 49 Others (including India, Thailand) 47 Total 782

  8. Required Capital Account Inflows in billions of dollars + = current account deficit capital account outflow necessary capital account inflow

  9. Why? Overvalued dollar Relative growth rates Competitive disadvantage Oil imports Shortage of national savings

  10. Not a Problem: They Love Us Gross domestic fixed investment as percent GDP

  11. Not a Problem: Dark Matter Will Save Us The US net investment position, in billions of dollars

  12. The Appearance of Dark Matter US net investment earnings, in billions of dollars

  13. Dark Matter, Pro and Con Pro intangibles difficulty of valuing assets Con scale mismatch falling net investment, constant net income transfer pricing in disguise earnings vs repatriation

  14. Soft Landing: The Scenario Slower US growth Increasing national savings Falling dollar

  15. Soft Landing: What Could Go Wrong The J-Curve Limits to import and export price elasticities Interest rates and earnings outflows Risk of default

  16. Hard Landing: What Would it Look Like? Debt deflation Scarcity of imports Financial instability Debt negotiation

  17. Hard Landing: What Could Trigger it? Unanticipated defaults in US Change in central bank policy Financial instability in creditor country

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