In my opinion, both are. It is hard to imagine a “post-adjustment” world where there is not both a higher yuan and a
My answer: In theory yes, but the probability of achieving that decreases the longer we wait. Essentially, there are two ways to close the gap between income and spending – We can spend less or we can produce more. It is far more pleasant to do the latter – produce more – than it is to do the former but there is a big difference between them that matters a lot for adjustment. Producing more (and in this case especially producing more traded goods, either exports or import replacements) takes a lot longer to achieve than does spending less – which can be done fairly instantly, at least in political terms.
So that is our conundrum: If we want to produce more then we need to orient our spending toward productive ends rather than consumption and non-productive capital such as housing. If we don’t then whenever our various creditors get tired of gorging themselves on our paper we will see a very sharp adjustment wherein our exchange rate will tank, interest rates will spike, and spending on things which are sensitive to those two variables will be forcibly curtailed through much higher prices. Another name for this is a recession.
Is there a way to engineer a soft landing? Yes, and we have done it before. In the past when similar issues arose we joined with our major trading partners in the Plaza and Louvre accords to jointly and simultaneously make the unpleasant adjustments that would lead to a benign outcome compared to a go-it-alone-until-the-markets-rebel outcome. But those two agreements required two things which are currently in short supply: First is the willingness on the part of the US government to recognize the problem and lead by example in making the sacrifices and compromises necessary to bring the rest of the world along and second is a level of trust on the part of our partners that we will play fair and do our part.
On the first point I am completely pessimistic. The current Administration can’t even admit personal responsibility for anything much less national responsibility for economic adjustment. And on the second point, who would trust the Bush Administration now? They have a well established international record of mendacity, and even if they didn’t the divided government in
So the outcome is: steady as she goes, and trust to luck to sort things out. On the bright side, luck isn’t out of the question. There is a lot of inertia in our economic system and there are indeed self-correcting tendencies. But I would rather do what we can to help things along rather than just hope everything turns out OK. Meanwhile, my advice is to do what I have done: stay out of debt and buy euros.