Asha Bangalore of Northern Trust makes an important observation: The common explanation for the dollar’s collapse–our ballooning national debt–is bunk.
Currency valuations are relative. Almost all of the countries whose currencies the dollar is losing value against have more debt than we do. Japan, for example, has WAY more debt than we do, and this hasn’t stopped the dollar from collapsing against the Yen.
So why is the dollar really collapsing?
Everyone’s feeling confident again.
When the whole world began to seize up two years ago, everyone fled to the dollar. Thus, the dollar spiked. For the past eight months, everyone has begun venturing out into the world of risk again. So the dollar has tanked.
But it’s still above its level of two years ago.
So if the dollar collapse is really just the unwinding of the low-risk trade, and if other countries are piling on debt and trying to stimulate inflation just as fast as we are, is continued dollar collapse really the lay-up that everyone thinks it is?
Here are Asha’s charts…
Yes, our debt-to-GDP is ballooning:
But other countries are still worse:
And that hasn’t stopped the dollar from collapsing against currencies whose countries have higher debt than we do–the Europ and Yen, for example:
So maybe it’s just the unwinding of the scared-to-death trade that began two years ago. After all, the dollar is still worth more than it was in late 2007.