Arnold Kling  

The Tallest Pygmy

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Why is the U.S. dollar strengthening, given the crisis that is taking place here? I remember that Steve Roach once used the metaphor of the tallest pygmy to explain how the strength of the dollar. Maybe once again we are the tallest pygmy.

Dani Rodrik writes,


the financial crisis in the developing world has just started and there are indications that it will get a lot, a lot worse. What is different with this phase of the crisis is that it cannot be addressed by governments in the affected countries issuing their own fiscal guarantees and domestic currency.

...I have a feeling that this will be the make-it-or-break-it week for emerging markets. I hope the IMF will make an announcement in time to make a difference.

If emerging markets are catching pneumonia, then Europe will at least catch a cold. Ambrose Evans-Pritchard writes,

The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect.

They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom - a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles.

Tyler Cowen has been reminding us constantly that there was a general appetite for risk-taking that was not limited to U.S. mortgage securities. He has been reminding us to watch for shoes to drop in international credit markets.


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COMMENTS (2 to date)
Jared Buckner writes:

Why the tallest pygmy? The dollar isn't just buying more Euros or Pounds Sterling. It's buying more barrels of oil, more ounces of gold, more tons of coffee. It doesn't look like the dollar is merely the strongest in the Brotherhood of Weak Currencies. At the moment it seems to have some genuine oomph.

I've read recently that companies have been keeping extra cash on the books rather than spending it on equipment, hiring new hands, or investing it in development. That's a demand for dollars in preference to these other things. Companies aren't the only ones eschewing risk; individual investors have pulled money out for safekeeping. Many haven't figured out where to put that money yet. The value is sitting in an account somewhere, in dollars.

When there's a desire to spend these dollars, we'll see the power of the USD wane again. Until then, put on a gold watch, take a drive, and pick up some coffee from the local shop. Do it now while its a little less expensive.

Benjamin writes:

My economic understanding is weak, but it seems to me that the world supply of dollars has dropped drstically because of the crash of the value of financial assets, and because the credit crunch and bad loans limit the multiplier effect of money held by banks.
Is it wrong that the dollars is going up because supply dropped?

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