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Monday, December 04, 2006

The Fall in the Dollar and the 2008 Election

Robert Reich on the implications of the fall in the dollar for the 2008 election:

How the Dropping Dollar Affects 2008, by Robert Reich: The dollar is weakening and Hank Paulson couldn’t be happier. Remember, Paulson was hired as Treasury Secretary essentially to do one thing – convince the Chinese to revalue the yuan, in order to increase American exports, revive American manufacturing, and save the industrial heartland ... for the Republicans. Paulson had worked with the Chinese for years as an investment banker ..., but as Treasury Secretary he has had no luck getting China to cooperate because he has had absolutely nothing to offer them.

Yet with interest rates relatively low in America relative to Europe, and the American economy slowing ..., global investors are taking their money out of dollars and putting them into euros, British pounds, and Japanese yen. Presto: The dollar is dropping. As a result, the Chinese – who hold more dollars than almost anyone else – are losing lots of money. Hence, it will make more and more sense for them to stop buying dollars, start selling them, and allow their currency to rise relative to the dollar.

In other words, international currency markets are doing for Paulson what Paulson was supposed to do for the American economy and for Republicans in 2008. That’s okay so long as global investors, as well as China and OPEC ..., don’t get carried away... [I]f the dollar drops too far too fast, everything America buys from the rest of the world begins costing a lot more... That pushes inflation. Meanwhile, the only way we can continue to finance our budget deficit and consumer buying spree is by yanking up our own interest rates. Result: stagflation – inflation combined with no or negative growth. Wall Street goes into a tailspin. Paulson leaves office as the Treasury Secretary who caused the crisis. And Republicans are unceremoniously kicked out of the White House in 2008.

It's starting to become a familiar story: Even though the global economy is taking decisions out of the hands of American officials, the public still credits or blames them for what happens.

There's a lot of time between now and the election. Seeing Republicans "unceremoniously kicked out of the White House" has its attractions, but let's hope Democrats can take the White House in 2008 through good politics and good policy rather than from a crash on Wall Street and a stagnating economy. But if economic difficulties are unavoidable, a Democrat in the White House would be a positive externality.

    Posted by on Monday, December 4, 2006 at 12:09 AM in Economics, International Finance, Politics | Permalink  TrackBack (0)  Comments (21)


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