Comments on: Reflections on the weak dollar http://welkerswikinomics.com/blog/2008/05/22/reflections-on-the-weak-dollar/ for students and teachers of AP and IB Economics Sat, 22 Nov 2008 13:11:51 +0000 http://wordpress.org/?v=2.6.3 By: Pete Murphy http://welkerswikinomics.com/blog/2008/05/22/reflections-on-the-weak-dollar/#comment-5140 Pete Murphy Sat, 24 May 2008 00:34:20 +0000 http://welkerswikinomics.com/blog/2008/05/22/reflections-on-the-weak-dollar/#comment-5140 I agree with Steve above. The trade deficit is what's driving the decline in the value of the dollar. The mortgage crisis mentioned by Jason is actually an off-shoot of the trade deficit. In order to finance the trade deficit, the U.S. has to sell off assets. One of those assets is mortgages. (Essentially, our homes are now owned by foreigners who have bought our mortgages from our finance companies.) With each passing month of another $60 billion trade deficit, it becomes ever more difficult to come up with assets to pawn off on our foreign benefactors. Misrepresenting the risk of those MBA's (mortgage-backed assets) is just one trick that's been used. This one came back to bite us and now they're much less willing to extend us credit. It's going to get worse. I agree with Steve above. The trade deficit is what’s driving the decline in the value of the dollar. The mortgage crisis mentioned by Jason is actually an off-shoot of the trade deficit. In order to finance the trade deficit, the U.S. has to sell off assets. One of those assets is mortgages. (Essentially, our homes are now owned by foreigners who have bought our mortgages from our finance companies.) With each passing month of another $60 billion trade deficit, it becomes ever more difficult to come up with assets to pawn off on our foreign benefactors. Misrepresenting the risk of those MBA’s (mortgage-backed assets) is just one trick that’s been used. This one came back to bite us and now they’re much less willing to extend us credit. It’s going to get worse.

]]> By: Steve Latter http://welkerswikinomics.com/blog/2008/05/22/reflections-on-the-weak-dollar/#comment-5138 Steve Latter Fri, 23 May 2008 20:53:25 +0000 http://welkerswikinomics.com/blog/2008/05/22/reflections-on-the-weak-dollar/#comment-5138 Kenneth Rogoff, a Harvard professor of economics once said this in an interview about currency fluctuations: "I mean, most of the time the honest truth is exchange rates move like crazy, and nobody has a clue why it's happening". That being said, most economists, including Rogoff, would attribute the United States rising current account deficit (trade deficit) as the single most important factor causing the dollar to depreciate over the last several years. If you think about it, the trade deficit provides more than enough paper (dollars) to foreigners for their products, which, ultimately causes those dollars to decline in value in foreigners eyes. Kenneth Rogoff, a Harvard professor of economics once said this in an interview about currency fluctuations:

“I mean, most of the time the honest truth is exchange rates move like crazy, and nobody has a clue why it’s happening”.

That being said, most economists, including Rogoff, would attribute the United States rising current account deficit (trade deficit) as the single most important factor causing the dollar to depreciate over the last several years.

If you think about it, the trade deficit provides more than enough paper (dollars) to foreigners for their products, which, ultimately causes those dollars to decline in value in foreigners eyes.

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