Chapter 2.ppt of macroeconomics by mankiw 9th edition
Dollar Droops
1. Dollar Droops
By Mohit Satyanand
6 August 2009
Economy watchers across the globe looked out yesterday for the latest employment data from
the US for signals about the recession. The numbers were slightly worse than expected, and
equity markets dragged their feet.
It struck me as ironic, though - here I live in a nation of 1.2 billion people, and I need to look at
employment figures from a nation with one-quarter the number of souls. This singularly unoriginal
thought underlines how critical the US economy is to the world - it consumes about one-quarter of
what the world produces, and every American goes through roughly 40 times as many goods and
services as his Indian peer.
This is a strange imbalance, which has many roots, most of which lie in the quality
of Indian governance. At the same time, the US has consistently benefited from the low cost of
capital that is the fallout of its currency being the world's reserve currency.
The financial crisis of the last couple of years is going to change this, but the change will be slow
and protracted. Countries like China and Japan, with large portions of their reserves invested in
US assets will be careful not to rock the boat, while realising that such dependence on one
currency is not too wise. In fact, if there is another phase of risk-aversion in the next 12 months, it
could lead to the dollar surging again.
For the time being, though, the dollar continues to be under pressure, and yesterday slipped
further to a new low for 2009.
Long-term interest rates continued to edge higher, and it seems that all the cheap overnight
money is not automatically generating more liquidity in the system.