Sound dollar dynamics

Last month the U.S. government released another report that the value of foreign-owned assets in the United States exceeds the value of U.S.-owned foreign assets (by $2.5 trillion) and the dollar has dropped to record lows against the euro. Some politicians and media folk treated these news events as a national disaster. In fact, foreign investment in the United States is not a problem and does not mean the dollar will fall or rise in relation to any other currency, says Richard Rahn, chairman of the Institute for Global Economic Growth.

Foreign investment in the United States is not a problem and does not mean the dollar will fall or rise in relation to any other currency. The main reason is the economic system of the United States will continue to fuel investment, says Rahn:

Over the long run, the United States is likely to have higher growth rates than Europe because of more favourable demographics, and somewhat smaller tax and regulatory drags.

America is also likely to continue to be more politically stable and do a better job in protecting the rule of law and property rights than most other countries in the world.

In some years, we will make policy mistakes – such as increasing government spending too much or letting the Bush tax cuts expire, but over the long run, the United States is the safer bet.

America also has other economic advantages:

Unlike many other countries, America has most of its assets and liabilities in its own currency.

Countries get themselves in trouble when they have their assets in their own currency and many of their liabilities in another currency (like dollars).

Hence, it makes little difference whether a New Yorker or a Brit owns a Miami condo or a Texan or German owns stock in a Virginia high-tech company – because it is all in dollars.

Source: Richard Rahn, Sound dollar dynamics, Washington Times, July 23, 2007.

For text: http://www.washingtontimes.com/article/20070723/COMMENTARY/107230022/1012

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 31 July 2007