Oooh, Krugman and Garofalo on the same day – be still my nerdy heart…

Paul Krugman is taking some time off from his journalistic duties to promote some new economics textbooks to make the subject more palatable for college students, but he did give a nifty interview to Reuters yesterday.

Paul’s talking about the same thing I’ve been scaring my coworkers and friends with on a daily basis for the past few weeks – the US Dollar taking a plunge as part of a very misguided finance strategy on the part of the Bush Administration.

See, the way it works is that if you’ve got an enormous trade deficit, which the US most certainly does, one of the ways to make it look like it’s shrinking is to depress the value of your currency, thus making your domestically manufactured products more attractive to overseas buyers. It’s an insane strategy though because it will ultimately bite you on the ass by causing foreign banks to lose interest in financing your debt.

Paul puts it better:

“The break can come either from the Reserve Bank of China deciding it has enough dollars, thank you, or from private investors saying ‘I’m going to take a speculative bet on a dollar plunge,’ which then ends up being a self-fulfilling prophecy,” Krugman opined. “Both scenarios are pretty unnerving.”

Another point that Krugman makes is that the US is rapidly starting to economically resemble Argentina:

“If you go back and you look at the sources of the blow-up of Argentine debt during the 1990s, one little-appreciated thing is that social security privatization was a important source of that expansion of debt,” said Krugman.In 2001, Argentina finally defaulted on an estimated $100 billion in debt, the largest such event in modern economic history.

Nice, huh?

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