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Is the U.S. Dollar Headed for a Mighty Crash? Part I

The news of the demise of the dollar is greatly exaggerated.

The cause and consequence of the trade deficit (and need for its external funding) are interrelated. If China/nations with a net surplus did not fund the US, they would not run a surplus in the first place (at least until the US share of global trade drops dramatically and cross-trade between these nations and/or their domestic consumption increases) and secondly, the US will have to fund its fiscal deficits domestically. The question is: is there an alternative to the dollar for these nations?

It is likely that all fiat currencies may become weaker as nations race to the bottom to protect their share of global trade. In other words, a global inflationary environment. However, to look for the signs in rising commodities prices would be dangerous. Yes, China is stockpiling commodities. But unless it changes the export-oriented nature of its economy drastically, to whom will it sell its products (for which it is stockpiling the raw materials)? To the possesors of a devalued $, who will suddenly find themselves living a more frugal life and decide they can buying a lot fewer Chinese-made appliances and clothes funneled through the Walmart sales outlets?

The fiscal deficit run by the US is indeed concerning -- not so much for the impact on the value of the dollar, but for its potential to crowd out private investment. Public borrowing is taking up an increasing share of savings (domestic or foreign). It might be a band-aid to the current crisis but it is going to slow growth (or worse, if the financial lubricants to the economy get zombified) over the long run. Furthermore, these are promises that need to be paid back out of future consumption (which is constrained by this slower growth trajectory to begin with). That to me is the real danger.