As the economic crisis starts to stabilize, hopefully later this year or in early 2021, that realization should hit home just as domestic saving plunges. The dollar could easily test its July 2011 lows, weakening by as much as 35% in broad trade-weighted, inflation-adjusted terms.
The coming collapse in the dollar will have three key implications: It will be inflationary—a welcome short-term buffer against deflation but, in conjunction with what is likely to be a weak post-Covid economic recovery, yet another reason to worry about an onset of stagflation—the tough combination of weak economic growth and rising inflation that wreaks havoc on financial markets.
Moreover, to the extent a weaker dollar is symptomatic of an exploding current-account deficit, look for a sharp widening of America’s trade deficit. Protectionist pressures on the largest piece of the country’s multilateral shortfall with 102 nations—namely the Chinese bilateral imbalance—will backfire and divert trade to other, higher-cost, producers, effectively taxing beleaguered U.S. consumers.
Finally, in the face of Washington’s poorly timed wish for financial decoupling from China, who will fund the saving deficit of a nation that has finally lost its exorbitant privilege? And what terms—namely interest rates—will that funding now require?
Like Covid-19 and racial turmoil, the fall of the almighty dollar will cast global economic leadership of a saving-short U.S. economy in a very harsh light. Exorbitant privilege needs to be earned, not taken for granted.
This article was provided by Bloomberg News.