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Wednesday, March 15, 2006

Sustaining the Insustainable

Brad Setser notwithstanding, I am deeply unsympathetic to this kind of speculation:

"The US current account deficit suffered its fastest quarterly deterioration in the final months of last year, ballooning to a record 7 per cent of national income. The worse-than-expected deficit rekindled fears among economists that global imbalances would undermine the dollar."

While many are not, I at least am convinced that ageing related issues will mean that there will be no 'lasting recovery' in Germany and Japan. The US ca deficit is of course 'long run non-sustainable', but Italian government debt and the Spanish housing bubble are even more unsustainable, and this over a relatively shorter time period methinks. So the bottom line is that the euro isn't going to be rising sharply anytime soon, the yen isn't either, and the Chinese seem to be stubbornly hanging on to a modified version of their peg. In the light of all this, I am at a loss to see how a sustained fall in the value of the dollar would work.

Actually I seem to find myself rather more in agreement with Ronald Rubin:

The U.S. government's budget deficit together with the current account gap represent ``unsound underpinnings'' in an otherwise ``good'' economic landscape, Robert Rubin, chairman of Citigroup Inc.'s executive committee and former Treasury Secretary in President Bill Clinton's administration, said in a Feb. 22 interview. ``At some point, these kinds of deficits are not viable,'' Rubin said. ``The probabilities are extremely high that if we don't address these imbalances, then at some point, and it could be years down the road, we'll pay a very big price.''

It's the years down the road bit that I go for. The problem is obviously an important one, but the US situation is the least unsustainable of all those 'unsustainable' situations we can see oput there right now, which means that, in the short to mid term, the dollar will hold. If any thinging I my outlook is for it to be marginally up on the year in 2006, and if anything should go wrong in Euroland, then that would be revised from marginally to significantly: ie the risk to my forecast is upwards.