Doom and gloom announced as two countries announce that they are diversifying their reserves out of the US dollar. It\’s not so much the two countries (Qatar and Vietnam) as what that might mean for other larger ones.
However, as Dean Baker points out, this isn\’t a bad thing at all: it\’s actually an excellent one.
The dollar is declining for a simple reason — it was over-valued. The United States had a trade deficit that exceeded 6 percent of GDP at its peak. This was not sustainable, as just about all economists recognized. There are two ways to reduce a trade deficit: a recession or a fall in the dollar.
Unfortunately a falling currency doesn\’t immediately cut a trade deficit: there\’s something called J-curves which can have the effect of increasing it in the short term (prices are sticky, see). But with a high trade deficit yes, a falling $ is what we would actually like to see, not something to be feared (unless you are, like me, someone who gets paid in $ and spends in € but then the world economy isn\’t there to please me).