In spite of the growing concern regarding the possibility of a decline in the demand for US dollars capital has not ceased to flow into the . Such an appetite for US dollar-denominated liabilities has contributed to finance the swelling current account deficits at appreciably low interest rates. Resulting low US dollar interest rates have contributed to finance the housing boom in the , which in turn allowed for increased debt-financed spending by US households due to the resulting wealth effects. A similar process, albeit less significant for the global economy, can be traced for the . In 2005, despite the large current account and budget deficits, the US dollar strengthened and remained at fairly high levels. However, the present strength of the US dollar seems to result from a combination of temporary factors, namely: A relatively aggressive interest rate policy by the Fed, coupled with a passive interest rate policy by other central banks giving rise to an interest rate differential in favor of dollar assets. Higher growth rates in the than in other industrial economies, particularly Japan and , which gave rise to higher returns on investments in the . The demand for dollars resulting from the repatriation of profits fostered by the Homeland Investment Act. The dismal political performance of the EU, viz. the rejection of the European Constitution by France and The Netherlands and the protracted difficulties for the approval of the EU budget—all factors that have and discouraged US-dollar undermined investor’s confidence denominated investments from moving into the Euro. As pointed out by numerous financial analysts, current low interest rates are also unlikely to persist in the medium term. For sure, interest rates will rise if foreign investors fear the possibility US dollar devaluation and respond by reducing the rate of accumulation of dollar-denominated assets; or (even worse) if they react by cutting back their holdings of dollar-denominated assets. A dollar devaluation would itself entail domestic price increases in the , as the rise in the price of tradable goods impinges on domestic prices. The increase in domestic prices could in turn trigger a contractionary response by the Federal Reserve, which may decide to raise short-term interest rates. A rise in interest rates due to either of these causes (or most likely due to a combination of both) could prick the housing bubble reducing household consumption further thus worsening the contractionary impact of rising interest rates. Consumption growth in the may also prove to be be unsustainable at the current rate, for the following reasons:
In spite of the growing concern regarding the possibility of a decline in the demand for US dollars capital has not ceased to flow into the . Such an appetite for US dollar-denominated liabilities has contributed to finance the swelling current account deficits at appreciably low interest rates. Resulting low US dollar interest rates have contributed to finance the housing boom in the , which in turn allowed for increased debt-financed spending by US households due to the resulting wealth effects. A similar process, albeit less significant for the global economy, can be traced for the . In 2005, despite the large current account and budget deficits, the US dollar strengthened and remained at fairly high levels. However, the present strength of the US dollar seems to result from a combination of temporary factors, namely: A relatively aggressive interest rate policy by the Fed, coupled with a passive interest rate policy by other central banks giving rise to an interest rate differential in favor of dollar assets. Higher growth rates in the than in other industrial economies, particularly Japan and , which gave rise to higher returns on investments in the . The demand for dollars resulting from the repatriation of profits fostered by the Homeland Investment Act. The dismal political performance of the EU, viz. the rejection of the European Constitution by France and The Netherlands and the protracted difficulties for the approval of the EU budget—all factors that have undermined investor’s confidence and discouraged US-dollar denominated investments from moving into the Euro. As pointed out by numerous financial analysts, current low interest rates are also unlikely to persist in the medium term. For sure, interest rates will rise if foreign investors fear the possibility US dollar devaluation and respond by reducing the rate of accumulation of dollar-denominated assets; or (even worse) if they react by cutting back their holdings of dollar-denominated assets. A dollar devaluation would itself entail domestic price increases in the , as the rise in the price of tradable goods impinges on domestic prices. The increase in domestic prices could in turn trigger a contractionary response by the Federal Reserve, which may decide to raise short-term interest rates. A rise in interest rates due to either of these causes (or most likely due to a combination of both) could prick the housing bubble reducing household consumption further thus worsening the contractionary impact of rising interest rates. Consumption growth in the may also prove to be be unsustainable at the current rate, for the following reasons:
Abeles-1.docx