A Falling Dollar, After All
By Robert P. Murphy
Posted on 8/13/2007

For some time I have been trying to defuse the hysteria over the US current account deficit.  Using economic arguments and (I hoped) funny analogies, I tried to show that there is nothing necessarily bad about foreigners selling us more final goods and services than we sell to them. My refrain was always that yes, a massive trade deficit could be a sign of American profligacy and a day of reckoning down the road, but it could also be a sign of superior financial institutions and investment climate. Logic alone couldn't tell one situation from the other, and so you would need more information than merely the size of the trade deficit to decide.

Well, I must now report that after wading hip-deep into the numbers for a consulting project, I have acquired "more information" and now agree with the alarmists this time around: I now believe that at present, the US current account deficit is indeed unsustainable, and I expect the dollar to fall (perhaps sharply) against other major currencies over the next few years.

For the present article, I want to go over a particular chart that best crystallizes my new pessimism, but also shows why the typical writings on the trade deficit are so often deficient in economic theory.

This only an intro.  The entire article is here: http://www.mises.org/story/2656