In which it is argued that federal deficits not only don’t explain the falling dollar, they ought to be helping stop the fall. I’m not sure why anyone needs to look at budget deficits to find an answer myself – the real interest rate in the US is lower than its counterparts in other countries and we have had pretty substantial credit inflation, aside from the deficits – actual money creation by the banking system. We also had a year of pretty serious political uncertainty here in the US and the dollar market is taking longer than some other markets to correct that risk premium.
Did I learn nothing at all at university? I’m prompted to ask by the increasing tendency of which the BBC is part to blame the falling dollar on the US budget deficit.
This view not only flatly contradicts efficient market theory – we’ve known about the federal government’s red ink for ages – it also contradicts the standard exchange rate models we learnt in the 1980s.
By way of Newmark’s Door.