Monday, February 9, 2009
Lack of trust will kill the greenback
Financial Times: During the decade leading up to the crisis... there was a steady erosion in business ethics and moral standards in commerce and trade. Regulatory capture and corruption, from petty corruption to grand corruption to state capture, became commonplace. Truth-telling and trust became increasingly scarce commodities in politics and business life. The choice between telling the truth... and telling a deliberate lie or half-truth became a tactical option. Combined with increasing myopia, this meant that even reputational considerations no longer acted as a constraint on deliberate deception and the use of lies as a policy instrument...
This morality tale has important consequences for a government's ability to conduct effective countercyclical policy. For a fiscal stimulus (current tax cut of public spending increase) to boost demand, it is necessary that the markets and the public at large believe that sooner or later, measures will be taken to reverse the tax cut or spending increase in present value terms...
I believe that the anticipated future US Federal deficits and the growing contingent exposure of the US sovereign to its financial system... will cause the dollar in a couple of years to look more like an emerging market currency than like the US dollar of old... If the increased deficits undermine the credibility of the sustainability of the fiscal programme, then the effect on the currency could be negative immediately.
Image source here.