Arnold Kling

Bet on the Euro?

Arnold Kling, Great Questions of Economics
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Morgan Stanley's Joachim Fels minces no words in his claim that the dollar is overvalued (if you follow the link, scroll down on the page to find Fels' commentary).

In my view, the US dollar has entered the last stage of its multi-year bull-run. Like equities in early 2000, it is overvalued and everybody knows it. The key question is not if, but when the greenback bubble will burst...

Europe has almost all it takes to outdo growth expectations in the next few years...First, product market deregulation and reductions in personal and corporate income tax rates over the past few years have created the incentives and the leeway for more private and entrepreneurial activity in the next few years. Second, the rising share of temporary and part-time jobs has made Europe's labour markets less sclerotic...And third, Europe still has to close the technology gap with the US, which is likely to lead to higher investment spending in the years to come and, eventually, to a pickup in productivity growth.

I tend to agree with the view that the world's love affair with U.S. assets, which helps to drive up the value of our stock market and our currency, seems to be excessive. One can make a case that the U.S. is better suited to the information age than other countries, because of the fluidity of our society, which reduces our resistance to change. However, once the asset markets have taken this fact into account, there is no reason for our assets to continue to appreciate relative to those of other countries.

Discussion Question. What will happen to our wealth if world investors suddenly decide to shift out of U.S. assets?

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