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European Central Bank calls for a fixed exchange-rate system
Howard Richman, 10/15/2010

For several reasons, the dollar is falling rapidly against foreign currencies at the moment. This will be good for the American economy. It will make American exports less expensive and foreign imports more expensive. I predict improved U.S. economic growth in the first quarter next year.

The European Central Bank is not happy. Although the U.S. trade imbalance will improve, the euro zone's trade balances will worsen. It called for a fixed exchange-rate system so that it will be justified when it intervenes to keep the dollar up relative to the euro. Here is a selection from a Reuters story:

European Central Bank policymaker Juergen Stark was reported as saying countries must avoid a 'fatal' race to devalue and instead coordinate better to smooth out currency swings.

This idea will be on the agenda when finance ministers and the G-20 meet in the coming months. At that point, finance ministers may think that the only alternative is a dollar collapse.

Last time the dollar was falling like this (U.S. Dollar Now Testing $1.50 per euro), I discussed the possibility of dollar collapse. I wrote:

The world entered the recession because the American consumer could no longer borrow enough money to support the expanding exports of the trade surplus countries. There were three possible solutions:

  • 1. Chinese Action. China could have gotten the world out of the recession by stimulating its consumption of imports, but the Chinese government instead expanded their export subsidies and increased their protectionism.
  • 2. US Action. The United States could have gotten out of the Great Recession by balancing trade through import certificates that tied our imports to our exports, but Obama's incompetent advisors opted instead for a stimulus plan that would destabilize the dollar.
  • 3. Economic forces. The forces of economic nature could balance trade through a dollar collapse.

We may be about to see the third option in action. It won't be pretty. There would be a huge cut in U.S. living standards. Imports would become extremely expensive. U.S. interest rates would skyrocket. Even though American manufacturing would come roaring back, the Democrats would be dead meat for the next decade.

The world's policy makers will continue to try to postpone the inevitable dollar crash, but they won't be able to prevent it unless they solve the underlying problem, America's huge trade deficits.

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Comment by observer, 12/16/2010:

Howard - maybe you should read the Reuters story again... nothing about a fixed exchange-rate system...

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