Daily Speculations

The Web Site of  Victor Niederhoffer & Laurel Kenner

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The Chairman
Victor Niederhoffer

1/12/05
The Current Account Deficit: Nobody Asked Me, But...

"It's guaranteed to happen that public will always believe the wrong thing."

Whenever I read a googol of stories about how the stock market and US economy are on brink of catastrophe because of the decline in the dollar, I wonder what would happen if the dollar were to rise, like it did last week, the second-largest weekly gain in history against the euro.

Throw aside the economic reasoning that the better the US looks to foreigners as an investment, the greater our current account deficit must be so that the foreigners will have dollars to invest here -- i.e., the long term capital balance surplus of the US must equal the current deficit balance . Of course both short term and long term must balance. And the two are determined simultaneously, and saying one is more catastrophic than the other is merely an example of the visible indirect effects of economic actions being deep.

And put aside that the countries with the strongest currencies have the worst economies like the Germans and the French.

And put aside that the more we specialize by letting others produce things cheaper for us, the greater the gains from division of labor and exchange, like what we do with our supermarket.

What is more relevant are two things. It's guaranteed to happen that the doomsayers would say that a weak dollar is to to be avoided and is terribly bearish for US stocks. But that's so wrong. There is such a strong relation between weakness of the dollar, big weakness and subsequent strength in US stocks. Like today. But it has to be tested.