Gambling Against the Dollar

If you’re wondering why people are worried about a potential US dollar devaluation, then perhaps you should check out this article in the New York Times (click the link above). The graphic of the US trade deficit says it all:

How are we going to pay for all this? What happens when China stops buying our dollars? At some point something is going to have to give. The key questions are how and when.

Below is an insightful quote from the article (it’s actually worth reading the whole thing…I send out a lot of articles that I find about dollar devaluation but this is one of the best):

“The big question now is how will the situation reverse itself. It could happen gradually, with other countries slowly reducing their purchase of dollars. This wouldn’t be horrible, as Americans discovered when the dollar dropped in the 1980s. But most of us would be worse off for the simple reason that foreign loans would no longer be letting us live beyond our means.

The other possibility is that an unexpected event — a spike in oil prices, say — could cause foreign investors to cut their dollar purchases sharply, bringing all sorts of economic havoc. Edwin M. Truman, an economist who spent a quarter-century at the Federal Reserve, compares the situation to a merry-go-round that is moving too fast for its underlying mechanics. It gradually loses speed, leaving its riders disappointed but unscathed, or it stops suddenly and throws some of them off their horses.”