Wednesday, September 14, 2011

Weak dollar? Should the US prefer a weak anything?

I promise these posts will become less wonky and someday feature more exciting things, such as bears, but for now I'm trying to figure something out. So, the Republican line these days is to call for a stronger dollar. Sounds good, right? Stronger stuff is usually better, but not in terms of one's currency in times of domestic economic malaise. So, here's what we've got. When you convert your dollars into other currencies and buy stuff, a strong dollar obviously makes you very happy. Now, this doesn't just apply to people on vacation in Europe, it also applies to our buying things (such as cars, electronics, and widgets in general) from other countries that are consumed right here at home. Since a decent amount of the stuff we consume comes from abroad, a strong dollar seems to be beneficial.

But wait, the savvy Swiss have just taken drastic measures to weaken their currency, the Swiss Franc. Why? Their currency is seen as a safe haven and during the recent turmoil it has strengthened to the point where the central bank said that the massive overvaluation of the franc poses a threat to the development of the economy.” Because of this, the Swiss central bank subsequently expanded their money supply (explained here) and promised to keep the Euro above 1.20 Swiss Francs "with the utmost determination and is prepared to buy foreign currency in unlimited quantities." This announcement, incidentally, caused a 20 standard deviation event (not supposed to happen in the history of the universe) for the Franc, but that's worthy of later post. The basic lesson here though is that with a strong currency your exporters can't compete with those of other countries. See here for a description of how manufacturing in the US has recently been boosted by the weak dollar.

So, there's two sides of the coin. Our expense buying foreign goods and their expense buying ours. Why a weak dollar is a net positive now is because of weak domestic demand. Consumers in the US aren't really in a spending mood, and, as Ezra Klein put it, "in the short term, a stronger dollar is good for buying stuff and a weaker dollar is good for making stuff." A weak dollar now helps our economy substitute foreign demand for domestic demand. Since Europe seems to be on the brink, for the sake of our economy, let's hope someone out there has some money.


  1. Hey, do you listen to Planet Money? They are on NPR and do a great podcast on economics (mostly for laypeople like me...) Anyway, they just did a great show on the Swiss Franc and why it's tough to have a strong currency. Check it out

  2. Yeah, that's a great show. I've neglected it for a while, but need to look into it again. Thanks, Miss. Loved your comments about Buffett, btw.