Yale Economist Warns of Looming Dollar Collapse
Peter Schiff has been warning about a looming dollar collapse. During an appearance on Fox Business in July, Peter said the dollar isn’t just going down, it’s going to crash.
“I think the dollar is going to keep drifting down until it collapses,” Peter said. “And this is going to usher in a real economic crisis in America, unlike something we’ve ever seen.
Peter is not alone. In a recent article published on SCMP.com, Yale economist Stephen Roach said he expects the dollar to plunge by as much as 35% next year.
Roach lists three factors he thinks will ultimately doom the dollar.
This reflects three considerations: the rapid deterioration in macroeconomic imbalances in the United States, the ascendancy of the euro and renminbi as alternatives, and the end of the aura of American exceptionalism that has given the dollar Teflon-like resilience for most of the post-World War II era.”
Roach called the confluence of an erosion in domestic savings and the current account deficit “nothing short of staggering.”
The national savings rate has entered negative territory for the first time since the 2008 financial crisis, coming in at -1% in the second quarter. According to Roach, a temporary surge in personal savings due to the pandemic and government stimulus checks has been more than outweighed by a record expansion in the federal budget deficit.
With the federal budget deficit exploding towards 16% of gross domestic product this financial year, according to the Congressional Budget Office, the savings plunge is only a hint of what lies ahead. This will trigger a collapse in the US current-account deficit. Lacking savings and wanting to invest and grow, the US must import surplus savings and run massive external deficits to attract foreign capital.”
A current account deficit occurs when the value of the goods and services a country imports exceeds the value of its exports. We’re already seeing signs of that the current-account deficit is widening. It came in at 3.5% of GDP in Q2 – the worst since the 4.3% deficit in the fourth quarter of 2008. Not only that, the quarter to quarter decline charted the largest deterioration since recordkeeping began in 1960.
Roach noted that the Federal Reserve will exacerbate the rapidly destabilizing savings and current-account imbalances with its zero percent interest rate policies and its “average 2% inflation” targeting. In simple terms, the Fed is committed to holding interest rates low, even if inflation gets hot.
This new bias towards monetary accommodation effectively closes off an important option – upwards adjustments to interest rates – that has long tempered currency declines in most economies. By default, that puts even more pressure on the falling dollar as the escape valve from America’s rapidly deteriorating macroeconomic imbalances. In short, the vice is tightening on a still-overvalued dollar. Domestic savings are plunging as never before, and the current-account balance is following suit. Don’t expect the Fed, focused more on supporting equity and bond markets than on leaning against inflation, to save the day. The dollar’s decline has only just begun.”