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So who gets hurt more by the depreciation of the dollar versus the Euro, Americans or Europeans? Nixon's treasury Secretary John Connelly said about the dollar prior to Bretton Woods, "It's our currency, but it's your problem".
Now it may be everybody's problem. But the pain may be felt in Europe first. And Europe's only option for reducing that pain may be to try to pressure China to let the Yuan appreciate, which will meet with strong resistance.
I still expect this is headed for a negotiated solution, Bretton Woods Two.
The dollar may be the poison gas, but Europe is the canary in the coal mine.
Yeah Jack, that's a good point that many people don't see. If the Euro goes through the roof we are in big trouble. But the US will feel it too, because foreign resources (especially energy) will become inaccessible.
The Bretton Woods Two is a good idea and possibly the only reasonable way out of the current mess. I hope it is possible.
Luis: There are problems associated with a fundamentally strong currency (Euro) and there are problems associated with a fundamentally weak currency (US dollar). The difference is that with a strong currency there are options (lowering interest rates, printing of said currency). With a fundamentally weak currency there are no easy fixes.
Brian you're conceptually right, but as I wrote, we have interest rates at 4%, there's not that much room to steer.
Luis: A global bidding war for declining oil exports is looming- a powerful currency is very important in that bidding war.
Luís,
Bretton Woods Two is a good idea, but it won't happen. The US fundamentally changed around 1975 with the dismantling of the Bretton Woods agreement. Prior to that the US was interested in helping the world. "Rising tide lifts all ships" and what have you. After that the US shifted to a zero sum game with the IMF, World Bank, WTO, off shoring, etc.
I don't know what the plan is. I don't know how this is going to play out, but the US was a generally positive force from WWII to 1975. Then from 1975-Gulf War II it was a generally negative force with an ostensibly positive mission. I expect that in the coming years the US will drop the pretense and become an overt tyrant.
Tim
"It saddens me that this brave experiment in self governance is failing" -my next door neighbor.