the current global macro view

I'm rereading The Alchemy of Finance by George Soros in order to better understand the situation that the world economy is in right now. The analysis that I came up with follows below.



Since 2001, when the dollar weakened (-e), we've had a strengthening economy (+v). and low interest rates (-i) kept the dollar weak, leading to a huge trade deficit (-T).



+v & -i & -e = -T

We must make a observation about the dollar before continuing. The dollar is strong compared with countries that we have a trade deficit with. This includes Japan, China, most emerging markets, Saudi Arabia, Russia, the UAE, etc. On the other hand, the dollar is weak against most of the developed world: Europe, Great Britain, Australia, and Canada.

In order to sustain the deficit, foreign countries pegged their currencies against the dollar by buying dollar denominated bonds with nonspeculative currency inflows (+N). Nonspeculative money has continued to be greater than (>) any speculative outflows (for example, US purchases of foreign stocks).


-T = +N & -i = +v


This inflow enabled low rates which further stimulated the economy. So we can see that combined with our first observation, that this is a reflexive process.

+v & -i & -e = -T = +N & -i & +v

This is what we had up until pretty recently, and it still pretty much holds. However, there are a couple of reflexive processes working against it, mostly because it is internally unstable.

-T = -v (in the normal course of events, a trade deficit depresses the economy)

-e & -i = -S (low exchange rate plus low interest rate causes speculative outflow)

Adding this in, we currently have:

+N > -S = -i & +e & -T

As -S grows, the situation could reverse itself, giving us:

+N < -S = +i & -e & -T = -v & -e

However, we should not understimate the will of foreign central banks to keep their currency pegged below the dollar, despite inflation, losses on their reserves, political pressure, etc.