Reply To: US Balance of Payments and Current Crisis Outcomes


I understand what you said Professor Herbener, but my question is this. I apologize if I wasn’t clear above.

If foreigners decided tomorrow to say “You know what, we are not going to finance US current account deficits by recycling the dollars back into Treasuries but we are going to sell the dollars on the market from now on”, wouldn’t that immediately put upward massive pressure on interest rates in the US and immediately lead to the collapse I’m talking about?

What I mean is, aren’t we too reliant on foreign nations who sell us goods, which we then pay for with US dollars, which they then recycle into US treasuries? If they decided to no longer recycle our dollars into treasuries then wouldn’t we immediately have a currency crisis because with us running $50B a month trade deficits, that’s alot of dollars that foreign countries like China, Japan, South Korea and Saudi Arabia would be selling onto the foreign exchange market and would immediately cause the dollar to plunge on foreign exchange markets and cause the cost of living in the United States to rise dramatically?

Whereas if we were not running trade deficits then there would be no dollars to sell on the open market because foreign central banks wouldn’t have accumulated such a large amount of dollars because we would have paid for exports with exports.

And what I’m saying is under a gold standard, we would have never gotten into this position because the classical gold standard was responsible for keeping trade and current account deficits in check, vs the system we have today which seems completely unsustainable and it makes me think the adjustment process for us to repair our balance of payments (saving more, investing in capital and manufacturing alot more, deleveraging, etc) is going to be an extremely long and painful process.