Independently, capital flight from the US collapses the economy

The inflow of funds into the United States has the benefit of helping the U.S. government finance the policies needed to stimulate the economy, to the advantage of the entire world. On the other hand, the dollar appreciation is delaying the correction of the world macroeconomic imbalances that helped spawn the economic crisis in the first place. The dollar is appreciating against the currencies of most other countries, developed as well as developing. This means the appreciation is hurting U.S. agricultural exports by making them less price competitive compared to output produced not only by importing countries but also by export competitors, such as Canada, Australia, and Brazil.

In the longer term, there are two possible scenarios involving the dollar’s exchange rate. The first is that the dollar continues to appreciate against the Chinese Yuan and currencies of other countries with which the United States has large trade deficits. The trade surplus countries continue to invest the dollars they earn from their positive U.S. trade balance back into the United States. By keeping the dollar strong, this behavior would prevent market forces from eliminating the U.S. trade deficit through dollar depreciation. In this scenario, the world could rebound from the economic crisis, with the financial system strengthened, though with the same general patterns of growth and trade as before. U.S. agriculture would benefit from resumed world growth, unless or until another crisis hits, but not from the benefits that could come from dollar depreciation.

In this scenario, the macroeconomic imbalances between the United States and the trade surplus countries go uncorrected in both the long and short run. The scenario carries the risk of an equally or even more serious economic crisis in the future. The crisis would be sparked not by weaknesses within the world financial system, but rather by worries about the sustainability of the dollar’s value, which could trigger large-scale capital flight from the United States. The United States could have an economic crisis similar to that suffered by various emerging market economies during the last 15 years, such as Thailand and Indonesia in the late 1990s, which could pull the entire world economy down with it.