"A More Competitive Dollar is Good for America"

Martin Feldstein continues to stay on message regarding the fall in the dollar:

A more competitive dollar is good for America, by Martin Feldstein, Commentary, Financial Times: The dollar has finally begun its long overdue correction. The dollar’s decline in recent weeks is just a prelude to the much more substantial fall needed to shrink the US current account deficit, running at a nearly $800bn annual rate, about 6 per cent of gross domestic product.

If the dollar remained at its current level, the US trade deficit would continue to expand because Americans respond to rising incomes by increasing imports more rapidly than foreign buyers raise their imports from the US. Although a faster growth rate in the rest of the world would raise US exports and reduce the US trade deficit, experience shows that even substantially faster foreign growth would have only a very small impact. A lower dollar has to do most of the work of reducing the global trade imbalance.

America’s trade deficit must be financed by a capital inflow from the rest of the world. ... The largest purchasers of this debt are foreign governments and their related investment funds. A big uncertainty hanging over the dollar is how long those governments will be willing to keep adding to their dollar holdings, knowing that they will eventually incur losses as the dollar falls. Even if governments are prepared to do so, private investors may drive the dollar down as they try to shift from dollars to euros and other currencies. ...

If foreign buyers do not want to keep acquiring US bonds at the current exchange rate, the dollar must fall enough to convince investors that it is unlikely to fall further or US interest rates must rise enough to compensate investors for the risk of holding dollar bonds.

The falling dollar should not be seen as a problem for the US economy. A more competitive dollar will raise net exports, reducing the probability that the current weakness will turn into an outright recession. Looking further ahead, as the US household saving rate rises from its current low of nearly zero to a more normal level, consumer spending will slow, driving down aggregate demand. A declining dollar will then help to maintain growth and employment by raising exports and causing American consumers to shift their spending from imports to domestically produced goods and services.

Nor should the falling dollar be a problem for our trading partners if they take the appropriate measures to offset the reduction in demand that will be caused by their declining exports and rising imports. ...

Since a falling dollar raises the cost of imports and increases the export demand for US products, a dollar decline by itself puts upwards pressure on the US inflation rate. But the overall inflation rate need not rise if the Federal Reserve sticks to its goal of price stability. ...

Markets must look beyond the slogan that a strong dollar is good for America to recognise that a more competitive dollar will help sustain US growth and is necessary to correct America’s trade deficit. ... With appropriate policies, the dollar’s decline will correct the imbalances that threaten the global economy without higher inflation in the US or decreased growth in the rest of the world.

PGL agrees.