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A Perverse Consequence of the Crisis

American financial institutions created the current crisis, aided by our political institutions. Yet now that the crisis is underway, investors are favoring the US because it is a “defensive” area of investment. Hence the dollar is doing a lot better, and the government can get very favorable terms for Treasury bonds — currently the most desired asset class aside from mattresses. In the medium term, many analysts believe that US equities will likely be the first to recover from the crisis, simply because the US economy has had more time to process its consequences.

In other words, the short-term result of the crisis that the US caused is for the comparative economic advantage of the US to increase.

November 13, 2008 - Posted by | economics

1 Comment

  1. I am puzzled by this phenomenon, the rising dollar. The Dollar is up about 30% against the Euro since last spring. Do you have a more analytic explanation than “defensive”? I would love to hear it.

    Also, does this really bring about a comparative advantage? It appears that the opposite is true: it makes the US-produced stuff more difficult to export.

    Here’s Dean Baker’s recent piece on this subject. I don’t find his explanation very satisfactory either.

    Comment by abb1 | November 14, 2008

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