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Jeffrey Frankel James W. Harpel Professor of Capital Formation and Growth, KSG

"The Dollar and the Deficit: Is a Crisis Looming and Where Do We Go from Here?" Spring Conference 11:15 a.m. to 12:30 p.m. on Saturday, May 14. Jeffrey Frankel James W. Harpel Professor of Capital Formation and Growth, KSG. The U.S. is going rapidly into debt. Widening US trade deficit.

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Jeffrey Frankel James W. Harpel Professor of Capital Formation and Growth, KSG

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  1. "The Dollar and the Deficit: Is a Crisis Looming and Where Do We Go from Here?" Spring Conference11:15 a.m. to 12:30 p.m. on Saturday, May 14. Jeffrey Frankel James W. Harpel Professor of Capital Formation and Growth, KSG

  2. The U.S. is going rapidly into debt

  3. Widening US trade deficit • Oil imports • Stagnant exports • Slow growth in Europe & Japan • Fading popularity of US X? • Value of the $ • Ultimately, current account deficit is twin of the budget deficit

  4. Sanguine views • Bernanke (FRB): Asians’ high saving makes it easy to fund US deficits. • Cooper (Harvard): There is no alternative to the US where they can put their money. Can go on indefinitely. • Dooley-Garber (DB): RMB peg is a deliberate development strategy for China. US is acting as World’s Banker, taking deposits and lending long (esp. FDI).

  5. Worried views • Eventual hard landing: intl. investors will pull out of US => i ↑, securities prices ↓, $ ↓. • Obstfeld-Rogoff (UC & Harvard): US CA deficit was unsustainable even in 2000. • My view (& many others): It’s much worse now, because budget is no longer in surplus, 90s investment boom ended in 2000, & household saving =0. • Roubini-Setser (NYU): crisis coming.

  6. Tax cuts & spending rise have created record budget deficitsUS Federal Budget Deficit and Spending as % of GDP

  7. Budget deficit ↑ => National Saving ↓ => Current account balance ↓

  8. US international debt heading into alarm zone • > 24% of GDP • 11 times export earnings • In range of crisis victims such as Argentina and Brazil

  9. Then why are US long-term interest rates so low now? During 2001-04, US rates were kept low by • Easy US monetary policy • Asian CBs also buying US T bills • Overoptimistic forecasts re future budget deficits All 3 supports are coming to an end. => US bond market is vulnerable

  10. At some point, foreign CBs will switch out of $ • Geopolitics: US has lost the good will that kept Germany, Japan, & others supporting the $ in 1960s, late 1980s, & 1991 • Economics: Each country will fear to hold a currency that others are selling • As £ lost its international role in 20th cent. • There now exists credible rival for $: the €

  11. In the long run, the $ could lose its role as #1 international currencySimulation of currency shares: If new EU 10 join euro; UK, Swe., Den. do not. + $ continues to depreciate at the 2001-04 rate.

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