Sunday with Eden | Nov 30,2019
July 2 , 2022
By Stephen S. Roach ( Stephen S. Roach is a faculty member at Yale University and author of "Unbalanced: The Codependency of America and China." )
I should have listened to Alan Greenspan – at least when it comes to currency forecasting. The former chair of the Federal Reserve once told me it was a fool’s game, with the odds of getting currency calls right worse than a successful bet on a coin toss. Two years ago, I ignored the maestro’s advice and went out on a limb, predicting that the US dollar would crash by 35pc.
After a tantalising nine percent decline in the second half of 2020, the broad dollar index – the real effective exchange rate as calculated by the Bank for International Settlements – has gone the other way, soaring by 12.3pc from January 2021 through May 2022. That puts the dollar 2.3pc above its level in May 2020, around the time I made this seemingly foolish call.
How did I get it so wrong?
Three factors shaped my thinking: America’s current-account deficit, Federal Reserve policy, and TINA (“there is no alternative”). I argued that the external deficit was headed for big trouble and that a passive Fed would do little to arrest the problem – effectively forcing the bulk of the current-account adjustment to be concentrated in a weakening currency rather than in rising interest rates. I also took a swipe at the TINA defence of the dollar and tried to make the case for euro and renminbi appreciation.
Basically, the Fed saved the dollar – aided and abetted by Russian President Vladimir Putin. The US current-account deficit, the crux of my fundamental case against the dollar, has in fact deteriorated dramatically over the past two years. The broadest measure of America’s international balance went from negative two percent of GDP in the first quarter of 2020 to -4.8pc in the first quarter of 2022, with the just-reported data for early 2022 revealing the second-sharpest quarterly deterioration since 1960. America’s current-account deficit has not been this large since mid-2008 in the depths of the global financial crisis.
My dollar-crash narrative hinged importantly on the possibility of an increasingly unstable post-pandemic current-account dynamic, with outsize federal budget deficits leading to a sharp compression of already-depressed domestic saving. The theory – actually, the national income-accounting identity – stresses that saving-short economies must import surplus saving in order to keep growing, and then run large current-account deficits in order to attract foreign capital. In the face of exploding budget deficits, the theory worked as expected: the net domestic saving rate plunged to zero in the middle two quarters of 2020.
Surprisingly, domestic saving has since rebounded, with the net national saving rate averaging 3.25pc in 2021 and moving up further to 4.2pc in early 2022. Over the post-pandemic period starting in the second quarter of 2020, however, the net domestic saving rate has averaged just 2.6pc of national income, a dramatic shortfall from the longer-term 45-year average of seven percent from 1960 to 2005. This matches up reasonably well with the sharp recent widening of the US current-account deficit.
History demonstrates that sharply deteriorating current-account balances are not a sustainable outcome for countries lacking domestic saving. Foreign creditors will demand concessions for lending their surpluses: higher returns (interest rates), cheaper financing (the currency conversion), or both. If one option is closed off, then the other channel bears the brunt of the current-account adjustment.
This is where the Fed saved the dollar. It certainly did not seem that way in 2020 and early 2021. During that period, the Fed was steadfast in maintaining its overly accommodative policy stance, even in the face of an emerging inflationary shock that it initially misdiagnosed as “transitory.” I viewed this intransigence as a good reason to believe that interest rates would remain uncomfortably low. As a result, the US current-account adjustment would be increasingly concentrated in the sharp depreciation of an overvalued dollar. My call for a 35pc correction in the dollar was in line with the 30pc average of three earlier large cyclical drops that had occurred in the 1970s, 1980s, and in the early 2000s.
When the Fed belatedly pivoted in late 2021, I should have done the same thing with my dollar call. Forward-looking financial markets correctly sensed that something had to give and moved well in anticipation of the Fed’s about-face; roughly half of the dollar’s 12.3pc appreciation since January 2021 occurred prior to the Fed’s conversion the following December. Putin’s saber-rattling and subsequent military aggression in Ukraine added a significant safe-haven bid to the dollar. The euro and even the renminbi fell, instead of rising, as I had predicted, and the Japanese yen collapsed, as the Bank of Japan was more than willing to accommodate an inflation surprise as an antidote to its third “lost decade.”
There are plenty of lessons to take from this episode. First, and most obviously, do not fight the Fed. The US central bank ultimately did the right thing; it has plenty more to do but now seems more willing to do it. Second, financial markets could not care less about theory. US monetary tightening is viewed less as a current-account funding concession by a saving-short US economy and more as a desperate effort to catch up with the yield curve. Third, the dollar’s exorbitant privilege as the world’s reserve currency is never clearer than during times of war. With the world in turmoil thanks to Putin, TINA is more seductive than ever.
Ultimately, of course, it all boils down to how much of this has already been discounted by forward-looking financial markets. I suspect that the Fed’s call and the TINA factor are already in the price of an overvalued dollar. I do not believe the same can be said about the dire US balance-of-payments prognosis. I know – that is what I said two years ago.
PUBLISHED ON Jul 02,2022 [ VOL 23 , NO 1157]
Sunday with Eden | Nov 30,2019
My Opinion | Aug 14,2021
View From Arada | Mar 30,2019
Fortune News | Jun 01,2019
Editorial | Jan 29,2022
Commentaries | Sep 21,2019
View From Arada | Oct 09,2021
Commentaries | Apr 20,2019
Viewpoints | Jul 18,2020
View From Arada | Sep 26,2021
Photo Gallery | 54291 Views | May 06,2019
Fortune News | 46870 Views | Jul 18,2020
Photo Gallery | 46104 Views | Apr 26,2019
Fortune News | 45857 Views | Sep 01,2021
Commentaries | Aug 06,2022
Life Matters | Aug 06,2022
My Opinion | Aug 06,2022
Sunday with Eden | Aug 06,2022
Agenda | Aug 06,2022
Editorial | Aug 06,2022
July 2 , 2022 . By RUTH TAYE
On a rainy afternoon last week, a coffee processing facility in the capital's Akaki-Qality District was abuzz with activ...
November 27 , 2021
Against my will, I have witnessed the most terrible defeat of reason and the most sa...
November 13 , 2021
Plans and reality do not always gel. They rarely do in a fast-moving world. Every act...
October 16 , 2021 . By HAWI DADHI
Residing in a country with no capital market, an organised marketplace for trading se...
Leaders of the National Election Board are in a charm offensive mood, of a sort. Last week, they organised a rare tour for members of the me...
When the country’s most senior diplomats and envoys return back to their posts after two-week debriefings, they leave behind a point or tw...
August 6 , 2022
Few initiatives by the administration of Prime Minister Abiy Ahmed (PhD) have been pu...
July 30 , 2022
Ethiopia’s banking industry is not merely underdeveloped. It has historically regre...
July 23 , 2022
The flip side of a government spending plan is financing. Behind the campaign promise...
July 17 , 2022
Messrs Ahmed Shide and Eyob Tekalegn (PhD), minister and state minister for Finance,...
PM Abiy Ahmed (PhD) at a Gala Dinner Called for the Awarding of the Félix Houphouët-Boigny Peace Prize
May 6 , 2019
As the rainy season gets wetter, accompanied by heavier rain showers, it is not unusual to see folks with umbrellas. Little do they know tha...
August 6 , 2022
Champagne popped and poured; and a cake was cut to celebrate another milestone for Ethio telecom, still the only active operator in the coun...
August 6 , 2022 . By RAHEL BOGALE
The hospitality industry has entered the list of economic sectors that enjoy tax exemptions and incentive...
August 6 , 2022 . By RAHEL BOGALE
Federal authorities are contemplating the reversal of a decade-long ban on maize export. A team of expert...
August 6 , 2022 . By RUTH TAYE
Yodahe Zemichael seems determined to push the national ID project past the pilot stage, onboarding up to...
Or see contact page