Dollar's Day of Reckoning

In the Winter 2005 Wilson Quarterly, Robert Aliber has written a thought-provoking tract called: "The Dollar's Day of Reckoning." Aliber looks cold-bloodedly at the macroeconomics of America's rapidly-growing trade deficit, and he sees imminent troubles. The U.S. trade deficit is growing too large to be sustainable, and the situation will correct itself soon, likely to our sorrow. Aliber's purpose isn't to condemn, but rather to explain:

America's falling dollar and mounting international debt are not, as pundits often declare, the wages of profligacy and sin. They are the inevitable products of dysfunctional international financial arrangements - a system that now appears likely to come crashing down, with alarming implications for the American economy.

Aliber isn't interested so much in the particularities of bursting economic bubbles (e.g.: Japan, 1990; SE Asia, 1997) so much as their similarities, especially since 1970:

The pattern is similar in all the episodes of boom and collapse surveyed here, as well as in Mexico (1994), Russia (1998), Brazil (1999); and Argentina (2001). The growth rate of each country's indebtedness (or the indebtedness of a large sector of its economy) was substantially higher than the growth rate of its GDP, and significantly higher than the interest rates the country paid on the borrowed funds. The difference between the two rates of growth was not sustainable.

The U.S. is in a similar bind today:

Today, the U.S. saving rate remains low because of the continued displacement of American saving by foreign saving. But America's reliance on foreign saving is excessive: The nation's international indebtedness is increasing at much too rapid a rate. The inevitable adjustment will require that American's household saving rate increase as reliance on foreign saving decline. ... [The United States] is engaging in Ponzi finance, and the game will soon be up.

And the outlook?

The primary variable that must change is the U.S. trade deficit. It must decline to between $100 and $200 billion a year from its current level of around $600 billion. ...If the decline (in foreign demand for U.S. dollar securities) is too rapid, the value of the dollar could plummet, while inflation and interest rates on U.S. dollar bonds surge.

It's interesting to think about what his observations might mean for our society. Who will we sell our tradable goods to when everyone else seems to want to export here: the Europeans, maybe? Yet, since the 70's, the high value of the dollar has helped ruin our manufacturing base. Hell, even Boeing can't make a dent anymore in Europe (hello, Airbus!) Will we see mass unemployment? Sky-high interest rates? Plummeting real estate values? And when? Sobering stuff!