Are we headed for trouble?

• Author: Adams, Tucker Hart
• Position: The ECONOMIST

THE DUCHESS OF DOOM TITLE GETS OLD AFTER awhile. Except for pointing out the dangers of the housing/ debt bubble back in 2006 and correctly forecasting that it would lead to a recession by the end of 2007, I've been pretty upbeat about, the American economy over the years. But I'm starting to get worried again.

I think we face two intertwined and very dangerous issues. The first is the dollar exchange rate relative to other major currencies. The second is our unwillingness to address our long-term federal deficit/debt.

The dollar is at its lowest level against the currencies of our major trading partners, after adjusting for inflation and weighting for each country's share of foreign trade, since 1973. That's when the dollar's convertibility to gold was terminated, and it was allowed to float.

[ILLUSTRATION OMITTED]

I'm certainly not an advocate of returning to the gold standard, an artificial construct sprinkled with fairy dust if there ever was one. Currencies need to float freely to enhance trade and adjust misalignments. That's the source of the dollar's problem.

It boils down to basic supply and demand. Our huge trade deficit causes us to flood the world with dollars, which must be used to purchase local currencies. Many governments buy up these dollars to keep their currency from appreciating and then use them to purchase assets in the U.S. Recently these governments have reduced these purchases, swapping their dollars for other currencies so they can diversify their portfolios by purchasing assets in other countries. Everyone tries to get rid of dollars: the price (i.e., exchange rate) falls.

[GRAPHIC OMITTED]

This is occurring in the face of major uncertainties around the world, especially in northern Africa and the Middle East. In the past this would have triggered a huge flight to quality, which meant the dollar. It isn't happening this time around. This apparent loss of confidence in the outlook for the U.S. economy is extremely troubling.

That leads to my second concern - our unwillingness to address our huge federal deficit and soaring debt. I spent several clays in May at a large financial industry conference in Washington, D.C., where I had the opportunity to hear presentations by most of the senior...