The Hole is So Deep

Lamenting the US trade deficit, the Baltimore Sun Editorial, "Trade Trouble" December 28, 2008, presents two paths for the US to get out of the deep hole we're in:

The U.S. must either get its economic house in order, by reducing debt-financed consumption and rebuilding savings, or learn to live with a decline in American buying power and its influence.

It is certain that we are heading for Option 2. Obama has promised a stimulus package as big, or bigger than, the $700 billion financial industry bailout that's been added to the US debt. Option 1 would spell a depression, so as cathartic and healthy as that might be in the long run, "There are no atheists in fox holes, and no Libertarians in charge of managing an economic crises."

You might look to the Plaza Accord of 1985 as a possible "third way." The Accord, signed by five major nations, agreed to depreciate the US dollar in relation to the Japanese yen and German Deutsche Mark by intervening in currency markets. The intent was to balance US trade deficits with Germany and Japan, but it didn't work. Prepare for less buying power and less influence.

Psssst... Do Something

• Contact the Broadcast Media
  
• Contact the Newspapers
  
• Contact the US Senate
  
• Contact the House of Representatives

Sources:

Another Plaza Accord?

On September 22, 1985 the Plaza Accord was signed by 5 nations - France, West Germany, Japan, the United States and the United Kingdom. The agreement, named for the Plaza Hotel in New York City in which it was signed, was intended to depreciate the US dollar in relation to the Japanese yen and German Deutsche Mark by intervening in currency markets.

The exchange rate value of the dollar versus the yen declined 51% over the two years following the agreement, and prices of Japanese goods increased by 51% over that time... price inflation. The intent was to stimulate US production for export by making US products cheaper for the Japanese and German markets in the face of the lingering economic down turn of the early 1980s. The US imbalance of trade didn't significantly re-balance due to this accord, and in 1987, The Louvre Accord was signed in Paris to halt the continuing decline of the US Dollar.

A friend says that another Plaza Accord might be in the wings. Word is that devaluation of the dollar, orderly or disorderly, is inevitable. Whether or not other nations collaborate with the US to seek an orderly devaluation remains to be seen. The message is that inflation is on the way.

I'm thinking of taking out a loan at a modest interest, and having it inflate away over the next few years. We'll see if I act on that.

Related: A war for the future of "free trade" is raging. Obama is tied to Schumer and Lindsy Graham, who have been beating the drum for protectionism for two years.

Update: Weaker Dollar Worries Japan, Germany , Wall Street Journal, December 29, 2008.

Sources:

NationMaster.com Encyclopedia, Plaza Accord.