In the short run the crisis in Europe may be good for America and the value of the dollar. Why could this counter-intuitive result occur? While it is more tradition than reality, the US Dollar is perceived as a safe haven for troubled times.
In Russia for example a lot of people keep their savings in dollars. On my first trip to that country several years ago, there were men who stood outside banks whose sole job was to exchange dollars for rubles, and visa versa, at a slightly better rate than you could get inside the bank. The government cracked down on these entrepreneurs and they are gone now.
But the desire to not rely on the ruble is deep seated. Oddly enough to compensate for this the rate you get for timed deposits in Russia is about 5%. This is highly competitive. If I was a currency speculator, the ruble would be on my short list of potential investments. 5% is pretty good in our current artificially low rate. Last time I checked the ruble was up versus the dollar.
For a period the Euro was preferred to the dollar in Russia. But with the current troubles in Europe I bet this has changed and the dollar is riding high again.
What I am saying is those that are predicting the demise of the dollar are premature by several years. As the old saving goes, in the land of the blind, the one-eyed man is king. America is that one eyed-man. But be careful as Obama has a sharp pointy stick.
This video below disagrees with my suggestion that austerity is needed. I guess from Krugman's perspective I am an austerian, a play on words for the Austrian School of economics.
What this video forgets is that government only has three sources of revenue. It can tax, driving money out of the economy. It can borrow, crowding out other borrowers. Or it can print money, potentially and eventually leading to inflation. None of these are good. Budget cutting needs to be a part of a total package.
A Young Paul KrugmanKrugman is at least honest about what he wants: he wants inflation, he wants money printing. He wants to have his cake and eat it too.
As Krugman's guru once famously said:
In the long run we are all dead. (Lord Maynard Keynes)
He was right about this. It is one of the few things he was correct about. Keynes is dead and we live in his long run.
In the short run I expect the dollar to go up in value. But this cannot last. At some point if current trends continue investors will refuse to buy new government debt or roll over maturing debt. When this happens it will not be pretty.