NCPA - National Center for Policy Analysis


December 10, 2004

The recent fall of the dollar is not a surprise, says Stephen S. Roach, chief economist for Morgan Stanley. It is the logical outgrowth of an unbalanced world economy, and America's gaping current account deficit.

Roach argues that these global imbalances are a shared responsibility. America is guilty of excess consumption, whereas the rest of the world suffers from insufficient consumption:

  • Consumer demand in the United States grew at an average of 3.9 percent from 1995 to 2003, nearly double the 2.2 percent average elsewhere in the industrial world.
  • Meanwhile, Americans fail to save enough -- whereas the rest of the world saves too much.
  • The personal savings rate was just 0.2 percent of the disposable income in September -- down from 7.7 percent as recently as 1992 - while large federal budget deficits mean the government's savings rate is negative.

America's consumption binge has its mirror image in excess savings elsewhere in the world -- especially in Asia and Europe. For now, the United States draws freely on this reservoir, absorbing about 80 percent of the world's savings. This cannot continue indefinitely and thus, the dollar is beginning to fall.

Roach argues that as the dollar declines:

  • There will be a gradual rise in interest rates that will dampen spending on consumption and stimulate domestic savings rates.
  • Foreign imports will become less attractive to American consumers, forcing Asia and Europe to stimulate domestic demand to compensate.
  • As foreign imports decline, the trade deficit should narrow; that may temper protectionist popularity in the United States.

Source: Stephen S. Roach, "When Weakness Is a Strength," New York Times, November 26, 2004.

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