Forex Queries

             By the early 1990s it was apparent that Japan would insulate itself from the U.S. depression by expanding into other markets, reducing its reliance on U.S. trade, and decreasing its holding of U.S. money instruments. These tactics, combined with Japan’s refusal to make a major commitment of funds to the Gulf War, served to insulate the Japanese economy from many of the U.S. economic woes, at least for the time being.

        Germany left itself open to the possibility of rampant inflation in its support of the East. By 1991, however, European economic unification-an event that would provide a considerable boost to the overall German economy-was only a year away. With unfettered access to markets throughout Western Europe, the German industrial state could count on continually rising demand until at least the middle of the decade. Far less dependent on the U.S. market than in previous decades, Germany might face a recession of its own; but in all likelihood it would be unrelated to the U.S. economy.

             It is possible that the international investment community, through foreign exchange, may succeed in imposing a discipline on U.S. government spending and asset management that we have failed to impose on ourselves. Ongoing deflation (the cause and perpetuator of any depression) will lead to ever-increasing defaults on debt, as the United States begins to pay for the speculative frenzy of the 1980s characterized by takeovers, excessive consumer spending, reckless investments by the banking community, and the escalation of commercial property speculation.

           The currencies of nations in which these excesses did not occur will become increasingly attractive to a more discriminating international investment community. If the perception ever arises that the U.S. government has fully abandoned its responsibility to the domestic economy, the traditional confidence in the dollar will become a thing of the past. The international investor will have little incentive to pay a premium for a currency that once represented security, liquidity, and stable government, if in fact all three of these “premium values” are put into question.