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I saw a small box in the FT recently which presented the possibility of
a doomsday scenario for the US economy. The theory is as follows:
The current situation among the three major world currencies is that the
yen remains surprisingly strong, due to repatriation of funds by
struggling corporations; the euro remains weak in an attempt to boost
the economy, and the dollar stays strong, as capital stays away from
Europe.
The doomsday scenario is based on the US trade deficit which is huge by
objective standards, but is easily paid for from the funds fleeing
Europe. If the US economy slows, this may have the perverse effect of
decreasing exports more than imports, worsening the deficit. At the same
time, the weakening of the US economy may cut off the flow of capital.
We would be left with the US having to raise interest rates
significantly to keep capital flows coming to finance the trade deficit,
while the economy becomes incresing weak.
Any comments?
Regards
DanG
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