The chief reason for the slow economic growth of US is closely related to exports and the dollar. South Korea, Russia, and other emerging markets that went through severe crises earlier usually underwent a sharp depreciation in the inflation-adjusted value of the currency, making them hypercompetitive, at least for a while. This makes it easier to replace imports with domestic goods and services and much more attractive to export.
In contrast, the global financial crisis actually strengthened the U.S. dollar as it was seen as a haven, although the dollar has fallen somewhat from its recent peak against major trading partners.
It takes time for a big economy like the U.S. to export its way back to growth; exports were only 12 percent and 13 percent of gross domestic product in 2007 and 2008, respectively, while imports were 17 percent and 18 percent of GDP.
Yet the logic of today's economy is pushing the dollar down and exports up and, in turn, aiding the businesses that compete against imports. There are three forces at work.
First, the coming stand-off between the administration and Congress rightly worries investors. The Republicans have had a weak record on fiscal responsibility over the past 30 years, while the Democrats have failed to explain even to themselves how the fiscal stimulus prevented the biggest financial shock since 1929 from becoming another Great Depression.
US have a serious issue with the budget deficit but no prospect that this will be dealt with in the foreseeable future. American politics are increasingly seen as dysfunctional by international investors.
Second, with unemployment obstinately high and fiscal policy on ice, the Federal Reserve will continue to push down long-term interest rates. Further rounds of quantitative easing will tend to weaken the dollar.
Third, emerging-market economies are already booming again and demanding the kinds of upscale goods and services that the U.S. is capable of exporting. These emerging markets would like to resist currency appreciation; they prefer to keep their current accounts in surplus, following the Chinese model. This may work for a while, but in this case they will accumulate even more foreign-exchange holdings and, given the stance of U.S. policies, these governments will surely diversify more of their reserves out of dollars.
Global savings will increasingly be parked in Europe, so the key issue is European fiscal solvency. There are some potential bumps in that road, notably Ireland. But while Europe may not boom, it probably won't default on any sovereign debt.
The dollar is, therefore, likely to depreciate against all floating currencies. If this happens, the impact on U.S. interest rates will be minimal because the Fed will continue its easing. Inflation may rise slightly but high unemployment means the impact will be small, perhaps not even to the 2 percent annual rate that modern central banks quietly prefer.
