Dean Baker
guardian.co.uk
Friday 22 April 2011 20.30 BST
In the movie Philadelphia, the lawyer played by Denzel Washington is shown repeatedly telling his clients to explain their case to him as though he were a 9-year-old. This is a good rule to follow in explaining issues to economists and policy analysts, since they seem to get confused easily in discussing economics.
One of the lines frequently repeated by the deficit hysterics is that if we don't get the deficit under control, then there could be a run from the dollar. This is a great line for getting little boys and girls and reporters at elite news outlets very scared. After all, the prospect of the dollar becoming worthless is pretty scary.
One of the other lines pushed by this same crew is that we are borrowing hundreds of billions of dollars from foreigners, with the Chinese also being cited for special mention. The prospect of the Chinese holding trillions of dollars of US government debt is also scary to little boys and girls and reporters at elite news outlets.
The problem with these two scary stories is that they actually are in direct contradiction to each other. The only plausible way that we can stop borrowing hundreds of billions of dollars a year from those nasty Chinese is by having the dollar fall in value against the currencies of our trading partners. This decline probably would not take the form of a scary run that ends in the dollar being worthless, but more likely a substantial and sustained decline that makes US goods much more competitive in international markets.
(More here.)
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