The Conscience of a Liberal - Paul Krugman

Is This the Wile E. Coyote Moment?





Lots of buzz suddenly about the possibility of a sharp fall in the
dollar. The Canadian dollar is back at parity with the greenback; there
are rumors that the Saudis are planning to diversify into euros, and
maybe even that the Chinese might break the dollar peg. A nice summary
at Barry Ritholtz’s blog The Big Picture.
I could say that I saw this coming; the problem is that I’ve been
seeing it coming for several years, and it keeps not arriving (and I
don’t know if this is really it, even now.) The argument I and others
have made is that the U.S. trade deficit is, fundamentally, not
sustainable in the long run, which means that sooner or later the
dollar has to decline a lot. But international investors have been
buying U.S. bonds at real interest rates barely higher than those
offered in euros or yen — in effect, they’ve been betting that the
dollar won’t ever decline.
So, according to the story, one of these days there will be a Wile
E. Coyote moment for the dollar: the moment when the cartoon character,
who has run off a cliff, looks down and realizes that he’s standing on
thin air – and plunges. In this case, investors suddenly realize that Stein’s Law applies
— “If something cannot go on forever, it will stop” – and they realize
they need to get out of dollars, causing the currency to plunge. Maybe
the dollar’s Wile E. Coyote moment has arrived – although, again, I’ve
been wrong about this so far.
Much more about all this in a thoroughly incomprehensible paper I recently published in the European journal Economic Policy. Don’t bother clicking if you hate funny diagrams and Greek letters.