in Economics

Reflexivity of the dollar

James Surowiecki elegantly encapsulates yet another economic trend, this time it’s the falling-yet-floating dollar. Essentially the dollar is falling because Americans don’t save and keep spending, accumulating incredible debt, and the dollar is not crashing because Americans keep buying… from Asia, who is interested in buying lots of dollars to prop up our currency and our spending habits.

So if no one panics, we’re alright for a while. But once the US population pyramid flattens out, we’ll have less spenders and more older adults wishing they had saved. And then maybe Asia won’t view us as such a great candidate for subsidies.

I was talking to Monika and Ulrike from Germany last night and that country has the reverse problem: a lot of saving and not enough spending. Compared to the US, it seems their habits favor long-term stability and short-term pain.

  1. One thing to keep in mind is that Germany’s population is declining already, and is going to begin sliding quickly. (http://www.destatis.de/presse/englisch/pm2003/p2300022.htm). I don’t mean to imply that saving is not important (the US is headed for a “pop”, in my opinion), but Germany has its own demographic issues which are related to poor immigration policy. In spite of their high rates of saving, there will not be enough working-age Germans to support their aging population.

  2. From what I have read, this makes sense. The current problem is not as US-centered as many would like to think. While the US over-consumes and under-produces, other countries are symmetrically stuck in an under-consume and over-produce economic model. Both are not sustainable,

  3. There was a long article about this in a recent issue of Macleans (Canadian news magazine like Newsweek). This was already a crisis when Clinton was reducing the deficit… and since Bush spiked it again there are policy and econ wonks in Washington who have started using apocolyptic predictions despite themselves.

    (There was some statistic like in 20 years 80% of the world economy will be money owed by the US.)

    It’s really bad news for the US, it’s bad news for everyone else (who won’t be able to sell as much to the US as we do know once they crash — America’s obscene trade deficit is fueling our economies), and it’s especially bad news for Taiwan… it’s hard for the US to stand up to China over Taiwan when China is America’s banker and controls its continued economic well being.

    Anyway, I’m just parroting what I can recall from the article — if you can find it, it’s a good read, though Canadio-centric, of course.

  4. Regarding Germany’s demographic issues, it’s a good problem for now as there’s high unemployment. I’m betting in the future when there’s not enough Germans to do the work and they have to decide between a lower standard of living and relaxed immigration, they’ll be more interesting in letting in the Turks and Poles.

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