Is the Falling Dollar a Downer?

Should we stop worrying so much about the falling dollar? Here's Tyler Cowen:

The Dollar Is Falling, and That’s Good News, by Tyler Cowen, Economic View, NY Times: Anxiety about the dollar continues to spread. The falling greenback is often seen as a sign of an impending recession or the fall of the United States from global leadership. ...

But when it comes to currencies, a higher value neither brings national success nor predicts future prosperity. The measure of a nation’s wealth is the goods and services it produces, not the relative standing of its currency. Take a look at 1985-88, when the dollar lost more ground than in the last few years. Those were good times, and the next decade was largely prosperous as well.

Today’s lower value for the dollar reflects the success of other regions. Europe has shown it can make the European Union and its unified currency work, and thus the euro has become stronger. The Canadian union appears increasingly stable, and that means a higher value for the Canadian dollar. Over all, these geopolitical developments are good for America even if the dollar becomes weaker in relative terms.

Many observers have ... exaggerated ... the dollar’s fall... But from a broader perspective, the value of the dollar hasn’t fallen quite as much as it might seem. Since President Bush started his second term in January 2001, to Nov. 20 of this year, the dollar has dropped 19.8 percent — if we weight the dollar by how much America trades with individual countries. That is a noticeable decline, but it is hardly a radical economic event. There are still many bargains, travel and otherwise, in Asia and Latin America for people paying in dollars.

A falling dollar does mean price inflation in the United States. ... But imports are only 16 percent of the American economy, and most foreign suppliers have been reluctant to risk their position in the American market by raising prices a great deal. ...

Of course the lower value of the dollar also makes American exports more competitive. Much of Middle America is booming because of its ability to sell tractors, food stuffs and other products abroad at favorable prices. Even after a serious real estate decline, the American economy is continuing to expand, and this is largely because of the strength of our export sector, as encouraged by a low value for the dollar.

Another worry is that a falling dollar puts the United States at the mercy of China. ... China is likely to slowly diversify into other currencies, but Chinese leaders have no interest in encouraging a run on the dollar or a fire sale of dollar-denominated assets. China is in a more vulnerable position than the United States...

Still, it would be naïve to argue that a weak or falling dollar can never hurt the United States. Extreme volatility can increase general anxiety and discourage economic commitments. If the dollar went into a true free fall, it would damage the reputation of the United States as a desirable place for foreigners to invest. ...

So far the Federal Reserve and the Bush administration have shown little concern over the falling dollar. This isn’t because of neglect or lack of interest; trillions of dollars worth of currency are traded every day, so policy makers have only a limited ability to push around long-term exchange rates, even if they wanted to do so. ...

In the case of the dollar, we need to stop thinking of its value as a marker of economic success. The American economy has its problems, but so far the low value of the dollar has proved more a benefit than a cost.

Feel better now?

Comments

[DemandSide]

Imported manufactures are the least of the worries with regard to inflation and the falling dollar. Prices of imported commodities are more problematic. That's oil, natural gas, metals and the rest. These will lead all energy prices higher. (Presumably China and other export economies which depend on the American consumer will eat as much of their higher commodity prices as they can before adjusting their terms of trade.)

But prices go up on domestic products with export markets, particularly food products. Maybe nobody else remembers the great sale of wheat to Russia under Nixon, but I do. That inflation was not modest, and it had nothing to do with imports.

Inflation, even modest inflation, has one particular downside risk. The Fed. The Fed has declared that "over all but the shortest of terms, the policy of the Federal Reserve determines inflation." (November 8, Ben Bernanke testimony to the Joint Economic Committee) If the Fed begins another Paul Volcker war on inflation, the downturn ahead could get really ugly.

[esb]

Cowen writes " ... policy makers have only a limited ability to push around long-term exchange rates ... "

Bulls**t.

One makes a currency relatively more valuable by making it relatively more scarce.

Cease the the use of inflation as a centerpiece of policy and the currency problem dissolves.

[donna]

Shorter Tyler Cowen:

"Don't worry! Be happy!!"

Or perhaps:

"Remain calm! All is well!!"

Ah well, I needed firestarters for the winter anyway. Now then, where did I put that wheelbarrow? Hmm...

http://en.wikipedia.org/wiki/Image:Inflation-1923.jpg

[alphie]

"China is in a more vulnerable position than the United States..."

That's like saying a crack whore is better off than her pimp/dealer.

Is Cowen taken seriously outside the government-employed libertarian crowd an GMU?

[calmo]

Feel better now?Well, what part of the massage didn't you like?

Was it this bit:The measure of a nation’s wealth is the goods and services it produces, not the relative standing of its currency....skip those papery notions of debt/GDP and concentrate on Toyota and yen GM and $US.

Or this bit:Today’s lower value for the dollar reflects the success of other regions....and not foreign investors preferring other currencies, other investments in other foreign countries. The 20% drop since 2001 in $ is not as linear as Cowen leads us to believe, but to describe the $ plummet in the last 3 months --the period of the alarm...is not part of this therapy...which is patience with Tyler the Economist PhD (which I had to confirm...this piece being that provocative).

Or this bit: But imports are only 16 percent of the American economy,(same azitwas in 2001? azitwas in 2005? 2007? growing? resting? or declining --like the author?) and most foreign suppliers have been reluctant to risk their position in the American market by raising prices a great deal. Or is the major reason the trade balance is narrowing in the last few quarters because the US consumer has had less money to spend? I notice that the price of oil in 2001 is not mentioned "a great deal".

Or this bit:Much of Middle America is booming because of its ability to sell tractors, food stuffs and other products abroad at favorable prices.Caterpillar together with John Deere? Wait till I tell Rusty! The "value added" nature of whatever the (modest, people) exports (services more promising than goods last time I looked, yes?) are...is depressing...which is why Tyler is trying his damnest to make us feel better...not a good long term solution.

Huge miss for libertarian? Tyler: the sacking of the US wage earner as the dollar is abandoned with "loosening".

[Strickland]

Every time the interest rates are lowered, the dollar value drops, and Americans receive a reduction in pay as a resort of inflation. If you own you home, car, and property inflation will be of little consequence. Particularly if you have a garden, raise chickens, have a few acres of land, and retired. My circumstance is not the same as most people who work, are trying to rear children, and save something for the future. I am truly sorry for the state most young people find themselves. The best that the United States has to offer is in its past. The economy will continue to disintegrate. The politicians will continue to manipulate. The wealthy will continue to dominate, until this nation completely surrenders its soul. All that will be left will be a faded memory of Mayberry and Andy.
The small southern town I’ve known all my life will be gone along with many decent folk. I hope I’m wrong. Regardless my children and grandchildren will survive, I am certain the majority will not. Type away all you would be savers of the world. I find your comments interesting, but I see nothing that will stop the coming demise of the economy.

Strick

[esb]

Strickland ...

Are you a resident of Mount Airy?

Are you anticipating "social unrest" with a dramatic rise in crime and violence?

If your answers are yes and yes then fear not, you are far enough "out" to be (mostly) secure.

[Bruce Wilder]

Juxtapose
TC: "...when it comes to currencies, a higher value neither brings national success nor predicts future prosperity. The measure of a nation’s wealth is the goods and services it produces, not the relative standing of its currency."
TC: "Today’s lower value for the dollar reflects the success of other regions. Europe has shown it can make the European Union and its unified currency work, and thus the euro has become stronger. The Canadian union appears increasingly stable, and that means a higher value for the Canadian dollar."

So, a higher relative value of its currency doesn't reflect a country's success, but a country's success seems to support a higher value for its currency.

Tyler undermines his own thesis. It is hard to credit his peroratory, "In the case of the dollar, we need to stop thinking of its value as a marker of economic success" when he regards the value of the euro and loonie as markers of economic success.

It is an interesting contradiction.

Tyler, apparently, wants to deny that the falling dollar represents economic weakness and failure. But, on a deeper level, regardless of the effect on the foreign exchange value of the dollar, Tyler just wants to deny the economic weakness and failure.

[Robinia]

Mark Thoma sez: "Feel better now?"

Answer: No.

But, like all humans, inclined to look for a silver lining somewhere..... I think about my home, heated by solar gain and the trees I grow, and that, you see, makes me feel better... until I think of my friends and neighbors who heat with oil. Unlike Tyler Cowan, I can't just put on rose-colored glasses (complete with glaring internal contradiction, as pointed out by Bruce Wilder). Too honest and ethical, I 'spose.

[Noni Mausa]

Sitting here just north of the US / Canada border, what is most startling is how FAST this has all happened.

In 2004 you could get about 65 cents US for each Canadian dollar. Today, they are on par. From north of the border, it's like watching a nearby jet plane in the same flight path drop 10,000 feet and settle at a new level. Neither of us has crashed, but the US "jet" sure had some turbulence.

People who write about this sort of stuff, think that the USA is in the process of settling to a radically lower level of prosperity and world influence. This process may take decades, but it's well underway now I would say.

Noni

[calmo]

Strickland, man, such a sad post...you are not going to be the next Fed Head with an attitude like that.
Nope.
Are you trying to stunt the growth of this jolly little blog with lines like this:Regardless my children and grandchildren will survive, I am certain the majority will not. Type away all you would be savers of the world. I could only bring myself to cutanpaste 2 of your insufferable suffering sobbing...consider that your children must have had a slightly brighter outlook to have given you grandchildren...reconsider more cheerfully.
You must.
Are you familiar with Milne's character, Eeyore?
Ok, I'm passin that crown to you, anyhow.

[tyoung]

Isn't the real issue the dollar's status as the reserve currency of the world? For many decades the US has enjoyed the benefits of having the world's reserve currency. But surely the world's reserve currency must act as a reasonable store of value for THE REST OF THE WORLD.
I honestly think there's a "won't get fooled again" mentality taking hold abroad with regard to the dollar.

[Zephyr]

Tyler,

Thanks for the clear summary of the broader implications of the dollar decline. I agree with you.

The press gives us only the sensational aspects of these issues, and then mainly in sound bites with weak explanation. Unfortunately most people (nearly all in fact) get their economic “training” from the press. So they will not understand your broader evaluation – it is simply lost on them.

To the extent that your view does not match the popular limited understanding you will seem incorrect to these people.

It must be frustrating to get blasted by such people on your own blog.

[Zephyr]

Whoops... not Tyler's blog

[zero]

Noni - your point is things can change. But things can change in the other direction too. My point is don't get too smug.

[spencer]

Nixon tried to use a weak dollar as a policy tool. So why should we be surprised that Bush is again emulating Nixon as he repeatedly done before It does not matter that a weak dollar policy is inconsistent with their other policy tools or objectives. It is their way to try to stimulate the economy after their trickle-down fiscal policies have failed.

[hari]

I think you guys are missing the real point:

US economy is no longer able to monopolize the global markets because globalization has impacted international division of labour and thereby shifted manufacturing and other IT services to Asian markets.

And, as long as, unit-labour-cost remains competitive at Chinese and Indian levels, imports will render bottom of the US labour market redundant, and without re-training and education programs they will be unemployed.

This vicious cycle is working to benefit of Globalization under WTO and making a total mess of national control of unit labour cost. How can a sovereign state do that today?

International division of labour is also impacting service sector globally.

Fed/Treasury are unlikely to deal with international economic issues which impact relative competition - ie. redundancy in OECD cocuntries.

State intervention in how market mechanism works will more likely come from on-going work currently undertaken by EU Commission.

There're no text books on the subject; we've to workout how far globalization can be allowed to reverse the international division of labour and, in the process, de- stabilize the global trading system.

[mrrunangun]

Is there an example in history of a country which engaged in a policy mix of low-tax burden, high deficit expenditures, and low interest rates which did not eventually have to inflate itself out of its consequent debt situation? We did it in the seventies and are doing it now, but this may be our last such opportunity before our lenders insulate themselves from the dollar.

Our political system punishes candidates who tell us we might have to choose between having our cake and eating it. Our press does not encourage the citizenry to face and deal with, rather than deny, unpleasant facts. At the moment we are simultaneously fearful that a period of economic hard times may soon arrive and that we ought soon to embark on an expensive national health program. Back in the fifties and sixties when the US had the only intact industrial base, it seemed reasonable to believe that the sky was the limit for America and Americans. Now, 60 years after WWII, the rest of the world has caught up in terms of technology and industrialization. We have not adjusted psychologically to the change in our relative position in the world or addressed what that might mean in terms of practical political and economic adjustments. We refuse to believe that all is not possible.

[Lafayette]

TC: The measure of a nation’s wealth is the goods and services it produces, not the relative standing of its currency.

Hogwash.

Allowing a currency to descend so abruptly is tantamount to "beggar thy neighbor" politics.

Along with increasing a country's exports, there is also the fact the country is exporting its unemployment to the detriment of its trading partners. (Which means that we are doing to our trading partners, in high-tech industres, what China is doing to us in low-tech product segments.)

It is dangerous as hell to change abruptly terms-of-trade, and to do so blissfully unaware of the concerns of our trading partners. Cowen should know that before writing such evident hogwash.

International commerce is an intricate ballet of the elephants. And, presently, we are stepping on a great many toes. European toes, mainly.

The US is living beyond its means and exports represent a minor percentage of GDP. It is no solution for America's penchant for chronic trade deficits subsidized by T-notes held by the rest of the world. What the US exports will replace, in value, with great difficulty the massive volumes of what it imports. Those product sets are very different.

If trade were purely a barter arrangement, to pay for all the oil imported from Saudi Arabia this year, that country would have to buy all of Boeing's commercial aircraft production for the next five years.

[Real Person from the Real World]

Everyone likes to talk about how the US is "living beyond its means" and selling treasuries to do it. Certainly (at least in the past) the US provided a higher, safer rate of return then most if not all of these 3rs world countries for these 3rd world investors. Not sure that these will change that easily.

Also, another big target for complaints about the US.... oil: you can't eat it, you can't build with it directly, maybe you can make plasitc clothes or building materials, but the whole point is that the west uses the oil to move goods productively. Certainly oil countries should make a fair profit on it, but the complaints about the evil US conniving to get oil is over wrought hyperbole inspired by jealousy.

Frankly, cheap imports are encouraged by our big business. That way, they don't have to pay livable wages to the working class.

Ultimately, we need to put policies in place to encourage US companies to hire entry level, and we need UNIVERSAL health coverage.

[Zephyr]

Cheap imports are encouraged (actually demanded) by consumers who vote with their dollars for the cheaper goods in preference to the more expense domestic goods. Business responds to this consumer demand by bringing those good to the market. If local wages are too high to enable business to meet that consumer demand competitively with local labor, then business must look elsewhere. The comsumer is king, and business responds to its master.

[Zephyr]

A nation's wealth is the net accumulation of assets (physical, intellectual and cultural), including the capacity to produce more goods and services, resulting from the combination of its production and its trading. Accumualting wealth through trade may not be as sustainable as accumulating wealth through production.

says...

"Of course the lower value of the dollar also makes American exports more competitive. Much of Middle America is booming because of its ability to sell tractors, food stuffs and other products abroad at favorable prices. Even after a serious real estate decline, the American economy is continuing to expand, and this is largely because of the strength of our export sector, as encouraged by a low value for the dollar."

I don't agree with TC much...

However, TC appears to be saying that real economy is thriving and the bubble economy is sinking.

If this is what a falling dollar means, we need a lot more of it.

Call it the anti-Bush economy and the Democrats will love it. Probably many (sane) Democrats already do. In time a few Republicans might even see the light.

[Lafayette]

RPfRW: cheap imports are encouraged by our big business

It would help to get beyond the ill conceived anti-business rhetoric and to the basic reasons for cheap imports.

It's not because BigBusiness encourages cheap imports ... that's an idiocy.

It's because they make the dollar go further for a great many Americans. And, there ain't a helluva lot that a high-wage nation is going to do to change that fact.

So, let's accept it and move on to a solution that will bring the unemployed up the skills ladder, where they belong -- instead of wallowing about in fast-food outlets flipping hamburgers (or at WalMart on the minimum-wage flogging "cheap imports") for a life-time.

Jeesh, is this so difficult to understand? When you aren't up to playing the game, it's time to leave it.

We've been getting ourselves in this mess for decades ... and it's gonna take a least a decade to get out of it.