Economics, Politics, Social Commentary and occasionally Superstring Theory.

Wednesday, December 01, 2004

Japan and the EU Creating A Moral Hazard?

Japan and the EU are considering harmonizing an interventionist response to the falling dollar, Financial Times reports. Apparently, they believe that the increases in U.S. growth aren't properly reflected in its currency valuation. I think that's an excuse to try and snatch the dollar out of an inevitable freefall. When the U.S. (or any other country) prints money wholesale, its value is going to go down. The certainty of this law is somewhat tricky when it comes to the U.S. because of its (present) economic dominance. However, this trickiness is probably more of a suspension than an exception. Printing dollars makes their value slide, and eventually there will be a reckoning.

What would this look like? Probably a coordinated campaign to buy dollars with euros and yen. Japan already holds most of the U.S. debt, so their activities can be somewhat discounted. The EU holds less. If they go on a coordinated buying campaign, all they're doing is staving off the inevitable. Foreign central banks can't keep encouraging the U.S. to run unsustainable deficits by artifically propping up its currency to protect their own exports. Eventually, they'll run out of savings to finance our consumption. Better a little bit of pain now than decades spent on the rack.

If the Japanese and the Europeans do start this, I think it might also push the private holders to start betting against them. Possibly, it could lead to a showdown of the type last seen since Soros took on the Bank of England. And we all remember how that turned out.

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