Comments on: More on the Dollar

By: Bob McTeer

Bob McTeer — Wed, 21 Oct 2009 21:16:21 +0000

To Brian W.

You are right. I agree with you.

See response to Ehrosen.

Bob

By: Bob McTeer

Bob McTeer — Wed, 21 Oct 2009 21:13:31 +0000

Especially for Ehrosen:

What I did really was not fair. I based my post on a set of identities that I was too lazy to explain. I had done so some time ago, but I shouldn’t expect anyone to remember it. Also, I was motivated in part by the nonintuitive result my logic led me to.

Take my word that I & S, G & T, and X & M must add up to zero, that is the differences add up to zero. I, G, and X are all “injections” into the income stream while S, T, and M are all “leakages.” In equilibrium injections equal leakages. If we don’t want investment to shrink down to inadequate domestic saving, then either the budget deficit must shrink (maybe to surplus) and/or the trade balance must become worse (M grow more than X) to bring in foreign capital. The way things are going, the budget deficit is not likely to shrink; so that alternative is ruled out. So, all the adjustment must come from the other two. If we want I to remain greater than domestic saving, then all is left is a worsening of the trade balance. This is not a “good” outcome, but I think it’s a logical outcome. A better outcome is for the three components of domestic saving to grow: the govt run a surplus, personal and business saving rise. Then you would also be able to enjoy a better external balance. My logic doesn’t explain HOW the external balance worsens, but one possibility is that Kudlow passes a magic wand over the dollar and makes it King Dollar. The irony is that King Dollar (externally imposed) would help finance our investment by worsening our trade balance. Just playing with his head.

By: EHROSEN

EHROSEN — Wed, 21 Oct 2009 15:35:51 +0000

OOPS…. I meant to add this. Thank you again for sharing your thoughts and I very much enjoy reading and learning from your blog. It helps level the playing field for the little guy and we appreciate it.

By: EHROSEN

EHROSEN — Wed, 21 Oct 2009 15:34:30 +0000

I have enjoyed your blog and appreciate your sharing your valuable insights with us non-economists.
The past two posts, today’s in particular, I do not understand fully. Specifically, can you explain as you would to a six year old please, “positive growth in domestic investment relative to domestic saving will require a larger current account deficit to attract a larger capital inflow”. Are you saying that because we need Chinese money to buy ?stuff/?stocks?other investments, their money will flow to us more thus strengthening the dollar?

By: Brian W.

Brian W. — Wed, 21 Oct 2009 14:18:51 +0000

Call it naïvety, but I am wondering why the first priority wouldn’t be to get taxes and government spending under control. Seems like that would provide the needed balance among the three categories that affect the dollar’s strength.

Thanks, Bob, as always for an informative post.