ASSIGNMENT NO. 1

Global economic imbalances and the future of the US dollar

Global economic imbalance, a result of capital flow, trade imbalance, monetary system

imbalance and unsuitable policies of some advanced countries, is fundamentally

caused by the north-south divide. The global imbalances are widely seen as a problem,

especially by the US government and US economists. Sometimes they are even seen

as a cause of the financial crisis. Yet such imbalances – i.e. current-account surpluses

and deficits – reflect international intertemporal trade, and there should be gains from

such trade as from ‘ordinary’ trade, on the basis of standard arguments for free trade.

Furthermore, an advantage of the present system is that an international general

equilibrium is established which yields a set of current-account imbalances that do not

require international central planning or coordination, but which respond to particular

circumstances in different countries. The system depends, of course, on a relatively free

international capital market.

Global imbalances are defined as “external positions of systematically important

economies that reflect distortions or entail risks for the global economy”

The World is concerned that the dollar cannot play the role of the main reserve currency

any longer after the financial crisis sparked by the collapse of the U.S. mortgage

market led to the worst global recession since the 1930s. The Government’s stimulus

packages, financial bailouts, the need to support liquidity in Treasuries, keeping

interest rates at the lowest level under the circumstances of low economic growth,

high unemployment and low tax collection make it print more dollars. This leads to a

high risk of substantial inflation, or hyperinflation in a long-run. Although there is still no

significant inflation data in the United States international stock and commodity markets

grew abnormally within the last eleven months. Analysts called it the “flight from the

dollar” or “diversifying risks.” There are many factors evidencing against the future of the

dollar as a global reserve currency. Due to the limited space, in the present article future

of dollar com pays attention just to several crucial points of analysis after conducting an

extensive research on the topic.

1. National Debt

In the middle of February

2010, President Obama signed into law the bill increasing

the public debt ceiling from $12.394 trillion to $14.294 trillion. This is a second increase

in the upper limit on the national debt in less than two months

“The Financial Management Services of the U.S. Treasury estimated that the total

obligations of the U.S. government exceeded $90 trillion,” David Ross from Radiant

Asset Management indicated in his research. They include hospital insurance,

supplementary medical insurance, and social security. The collected money (which

Treasury has borrowed and Congress spent) falls far short of what is required to fulfill

the long-term obligations of those programs, even if it had not already been spent.

Almost all of the $90 trillion are promised obligations with no established method of

payment.”

“Including unfunded obligations, the U.S. moves to 1st, well above Taiwan and

Zimbabwe, for the highest debt to GDP ratio... U.S. total debt plus unfunded obligations

total 625% of GDP.”

2. Unemployment

This past February, the economy lost 36,000 jobs after losing 26,000 jobs in January

and 109,000 jobs in December, and the unemployment rate held at 9.7%. In January,

the unemployment rate fell from 10.0 to 9.7% in January. According to Reuters “a

sharp increase in the number of people giving up looking for work helped to depress

the jobless rate. The number of 'discouraged job seekers' rose to 1.1 million in January

from 734,000 a year ago.” The number of discouraged workers rose to 1.2 million

in February. Gallup reported in the end of February 2010 that “19.9% of the U.S.

workforce was underemployed during the month of January, translating to close to 30

million Americans who are working less than their desired capacity.”

3. Budget deficit

The United States reached a record budget deficit of $1.415 trillion in fiscal year 2009

that ended in September. The deficit will probably again exceed one trillion dollars in the

current fiscal year as it is already over $651 billion.

The excess of spending over revenue in the U.S. was $220.9 billion in February 2010,

as opposed to a deficit of $193.9 billion in February 2009, the Treasury Department

announced in its monthly budget statement. It was the 17th straight month in which the

government posted a deficit, CNNMoney.com said.

In the beginning of February 2010 Obama transmitted a $3.8 trillion budget for 2011 to

the Congress with a record $1.6 trillion deficit. During the debate on the national debt

the Senate “rejected a proposed bipartisan commission to recommend ways to reduce

the U.S. budget deficit, Bloomberg reported. “The legislation would have required that

the panel’s recommendations be voted on by Congress without being amended. Instead

of the initial idea of the commission discussed by Congress, President Obama is trying

to establish a government-based deficit commission that would lack any requirement for

Congress to act on its advice. Specialists consider it a symbolic rather than a concrete

step.

4. China’s peg to the dollar: -

So far China is enjoying low yuan rate giving its exports competitive advantage in

relation to those countries with appreciating currencies against the U.S. dollar. As the

result China is actually “stealing” jobs from many countries since with appreciating

currencies their companies are not able to compete with Chinese producers. In relation

to the United States this means that the country should not count on sooner recovery.

China’s peg to the dollar makes imports into the U.S. cheaper. This supports high level

of unemployment in America. Unemployment prevents the growth of GDP and reduces

revenues.

CONCLUSION: -

Therefore, we came to a conclusion that, unfortunately, the U.S. economy and the dollar

are losing confidence. The U.S. government must work even harder now to restore

Although there is still no significant inflation data in the United States international stock

and commodity markets grew abnormally within the last eleven months. Analysts called

it the “flight from the dollar” or “diversifying risks.

SUBMITTED TO : - GURDEEPAK SIR

SUBMITTED BY : - GAGANDEEP SINGH

MBA 1(A)