Let’s talk about an important indictor most people don’t understand, and should: the current account balance.
This is the difference between what a country imports and exports. If a country imports more than it exports, a current account “deficit” occurs.
This matters because, historically, countries with current account deficits greater than 5 percent have seen their currencies collapse.
This fact has long been recognized by policymakers. When he was Secretary of the Treasury under President Bill Clinton, Larry Summers said that any country with a current account deficit greater than 5 percent is at risk.
Summers is now the director of the White House's National Economic Council for President Barack Obama, and the current account deficit of the United States has reached almost 7 percent of GDP.
Seven percent was the level reached by Iceland shortly before that country’s spectacular crash and near bankruptcy last year. The problem in Iceland, and for every other country that has suffered through the problem, is that such a huge deficit often means they can no longer attract new cash from foreign investors.
The U.S. now needs to attract about $2 trillion of capital to finance an ever-growing government deficit and to pay for our imported goods.
The recent increase in the dollar should make it easier to attract foreign investment. But that may also trigger the eventual crisis that has befallen every other country that reached this level.
A long overlooked study by academics in Poland finds that the trigger for the crisis occurs when the currency becomes overvalued.
While some welcome the recent strength in the dollar, its recovery may instead be signaling tougher times ahead. If history is any guide, the rising dollar could be the last step before an inflationary crisis and a dollar crash.
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