Pressures Drive Dollar Down

The Organization for Economic Cooperation and Development (oecd) warns that the dollar could lose one third to one half its value in the foreseeable future. Why? The current account deficit.

America’s current account deficit, which is now in the neighborhood of $800 billion, is the trade deficit plus certain financial flows. We have this deficit because we import hundreds of billions more of goods and services than we export. Axel Merk, an investment fund manager, defines this deficit this way: “It is precisely the amount foreigners must acquire in U.S.-denominated assets to keep the dollar from falling” (Merkfund.com, May 23).

The oecd says this yawning trade imbalance will correct itself at some point. When that happens, it says it will “send shock waves across the globe, starting with a slump in the dollar’s exchange rate” (Forbes.com, May 23).

The oecd warned that “Already, the widening of current account imbalances has been sustained far longer and with much smaller exchange rate responses than would have been judged plausible even a decade ago.” Indeed, the current account imbalance is now 7 percent of the nation’s gross domestic product—a level above the 5 percent threshold where other currencies have crashed with massive devaluations.

As long as America is able to attract the more than $2 billion per day needed to finance its current account deficit, the dollar should remain fairly stable. But as the current account deficit grows, America is becoming less attractive to investors. Throw in soaring governmental and consumer debt, a deflating housing bubble, and the fact that the euro is now challenging the dollar for reserve currency status, and you have the perfect storm to drive foreign investors away.

How serious would such a devaluation of the dollar be? If the oecd’s “one third to one half” devaluation scenario is correct, anyone with dollar-denominated savings would see their bank accounts become worth one third to one half the value they are today.