The trade deficit and the dollar

America has had persisting trade deficits, so some economists think the dollar is due for a big plunge. The magazine The Economist cites some commentators as suggesting a 40 percent decline against the Euro. Read the commentary of Brad DeLong, who resists making such a prediction himself. See Brad’s longer and more detailed discussion, where he raises the possibility that capital inflow into the U.S. will slow down and the dollar will plummet. He tells us that the whole process has gone on far longer than he would have expected, but again he stops short of offering his own prediction. He wonders when foreign investors will start worrying about the risk of a huge dollar depreciation.

I am more optimistic than the doomsayers (N.B.: I do not read Brad as belonging to this group, though perhaps he is flirting with the idea of joining), in part because I think that strong growth and productivity, which currently appear to be in the cards, can avoid or postpone a “day of reckoning” of this kind. America is simply a good place to invest, and will remain so for the foreseeable future. The dollar did decline by over 50 percent in the 1980s, against major currencies, but at that time high dollar values were more obviously a speculative bubble in the first place.