Friday, July 1, 2011

Dollar debasement?

One quick post before the long weekend. Sticking with the topics you'll likely hear this campaign season, we'll discuss the issue of a falling dollar. Many have complained about it lately (perhaps as part of a diatribe against the Fed's expansionary policies), but few really explain what it means in a coherent fashion. Look at this figure on Paul Krugman's blog. The slide of the dollar began in earnest in 2002, near the beginning of our country's ventures abroad. SO, not that I'm an Obama or Bernanke apologist, but the dollar's slide is old news. And it's actually a good thing for the economy.

Why is a devalued dollar good? Well, it makes our economy more competitive. Our exports are suddenly cheaper for other countries, which means they'll buy more of them (and prefer us to other exporters). Another effect of a weaker dollar is that our trade deficit is reduced. The trade deficit basically means we buy more as a country than we sell; this arrangement is not sustainable without the help of the Chinese, who help finance the trade deficit.

Sure, if you travel internationally and earn dollars, this situation isn't helping any. But, for the economy as a whole, it's a bonus. If you've watched what's happening in Greece at all, you'll have heard that one of their main problems is that they can't devalue their currency (because they use the Euro, which, of course, isn't just theirs) and make their economy more competitive relative to other countries. Thus one of their only ways to become competitive is to artificially try to hold down labor costs (e.g., wages) and, from the looks of the protests lately, that doesn't seem too sustainable. America is very fortunate to issue its own currency. It's one of the big differences between us and countries with pressing debt issues like Portugal, Ireland, and, Greece.

Now that we've discussed, keep an ear out for this on the campaign trail and accost accordingly.

Postscript: more on the "hard money" fallacy here.


  1. I am so excited about the weak dollar... now that I make the Euro! Outlet malls, here I come!

  2. Yeah, I can't wait until the dollar and peso are the same. Then we'll finally be as powerful as Mexico!