The dollar will decline further

Brad Setser has produced a “scary graph” showing the sudden stop of the inflow of foreign capital into the USA:

Capital flows into the USA

Paul Krugman asks “Is this the Wile E. Coyote moment?“:

So, according to the story, one of these days there will be a Wile E. Coyote moment for the dollar: the moment when the cartoon character, who has run off a cliff, looks down and realizes that he’s standing on thin air – and plunges. In this case, investors suddenly realize that Stein’s Law applies — “If something cannot go on forever, it will stop” – and they realize they need to get out of dollars, causing the currency to plunge. Maybe the dollar’s Wile E. Coyote moment has arrived – although, again, I’ve been wrong about this so far.

Krugman adds that the Saudis are rumoured to be about to diversify into euros. Certainly, if they had been buying euros instead of dollar for the last 5 years, they’d be a lot better off now, as this graph shows:

USA-EUR exchange rates

(You can get a dynamic version of this graph from Yahoo)

So it seems likely that governments, worried about the fall in value of their dollar holdings, will not buy dollars in future and will diversify their existing holdings into other currencies, particularly the euro. This reduction in the demand for dollars will in turn cause further drops in the value of the dollar, prompting those countries that haven’t already shifted their holdings out of it to do so. It seems likely that we are seeing the end of the dollar as the world’s reserve currency.

(via Salon)

This entry was posted in economics, Europe, Saudi Arabia, USA and tagged , . Bookmark the permalink.

2 Responses to The dollar will decline further

  1. Cullinan says:

    A lot of the Yuppie-ish folks I knew back in college– I’m East Coast Bachelor’s with West Coast advanced degrees– are skipping across the Atlantic and getting set up in Euroland. Nobody’s going to the UK, with its own banks about to tumble into the morass, but a lot of Americans/Canadians/Australians are heading off to work in France, Belgium, Netherlands, Italy and especially Germany and Austria. We have to at least read, preferably also speak and even write German in sci/tech and engineering fields, and so it makes sense for many people to take the next logical step, which is moving to work in a German country for good.

    And raise children there. After all, not only are the Euro schools good quality, they’re also basically free– in the USA, you have to mortgage your home just to pay a year’s tuition!

    The smartest career move for a young, well-educated North American or Australian professional, just starting a new career and planting roots, is probably to move to a Euro country and earn money in Euros, set up businesses there, even stay there permanently in some cases. The only challenge really, is language, but German and French are both easy to pick up for someone from USA or Australia, and German’s useful in general.

    Also, Americans/Canadians/Aussies who work in e.g. a German country can nicely supplement income by doing translation work from English to German– of documents, novels, nonfiction books, music, movie dubbing, lots of opportunities there. And many locations, such as southern Italy and especially eastern Germany, are modern tech-friendly locations that also have inexpensive housing and expenses.

  2. prohodu says:

    This is Inevitable, the dollar will decline slowly and by the end of 2011 EURO ~ 2$ … This is Inevitable..

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