Thursday, March 31, 2005

Hard or soft?

There's been a lot of discussion in the blogosphere about whether the world economy will experience a hard or soft landing as currencies adjust to the US current account deficit. I recommend two particularly nice summaries of the soft and hard scenarios.

One point I think people may have missed is that whether there is a hard (disorderly or panic/crash/recession inducing) landing or a soft (gradual, Plaza Accord-like) landing, the dollar is set to decline substantially against many Asian currencies, and perhaps the Euro as well.

Here is a very nice comment on the soft scenario post I linked to above:

[Here’s how we worked our way out of the last current-account crisis (1984-88). The figures are what would be required in 2005, 2006 and 2007, to match the cumulative change in 1984-88.

Exports of Goods +9% p.a.
Export of Services +9.7% p.a.
Income Receipts –0.8% p.a.

Import of Goods +1.5% p.a.
Import of Services +3.7% p.a.
Income Payments +6.9% p.a.

Net Transfers –7.4% p.a.

Current Account Balance –9.4% p.a.
Nominal GDP Growth +3.9% p.a.

Net results: Current-Account Balance falls from 5.7% of GDP to 3.8% of GDP in 2007. Not quite as good (3.4%) as in 1988, but the Dubious Administration got us in a lot worse trouble this time around.

Other interesting things going on at the same (1984-88) time: The US dollar lost 60.7% of value against the Swiss Franc between 1984 and 1988, 51% against an artificial Euro, 85.5% against the Yen, and 38.5% against the Korean Won...]

See here, here and here for related comments and historical data.


Anonymous said...

This is as usual excellent. Notice the dramatic change in the value of the Yen from 1984 to 1988. I have long held that the Plaza Accord was the worst decision possible for Japan. Japan is still paying for the rise in Yen value, and this may be a reason for China to be very very very wary of letting the Yuan rise in value dramatically.


Anonymous said...

I have been reading as always, but awfully busy these several days. Now back to normal :)


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