Consequences of a Falling Dollar

The Center for Economic and Policy Research^*, or more accurately Mark Weisbrot, one of its founders has an interesting take on the falling dollar.

His take is that a "strong dollar" policy, which is more accurately described as an "overvalued dollar" policy, is a bad thing. It amounts to a subsidy one imports, and a tariff on imports.

Like most bad policy, there's a conflict of interest underlying the resistance to having the dollar move to a more competitive level. Robert Rubin is now Chairman of Citigroup. (Both Rubin and Paulson are former CEO's of Goldman-Sachs). The big bankers and the financial sector generally do not have much interest in promoting growth and high levels of employment in the domestic economy, and certainly not rising wages. For them, inflation is the only real enemy, since it erodes the value of financial assets. (Rising wages are viewed negatively by these people because wage increases are seen as increasing inflationary pressures).

If you read the business press you might have noticed that when unemployment goes up, the bond market generally rallies. That is a reflection of the financial sector's direct interest in lower inflation and lower wage growth even if it hurts the vast majority of the country. A high, even overvalued, dollar helps hold inflation in check by keeping import prices lower. On the flip side, as the dollar adjusts to a more sustainable level, at least some increase in inflation is inevitable as import prices increase.

Some of our big transnational corporations also like a high dollar because it makes everything they buy overseas - including other companies as well as labor - cheaper for them. And of course for those whose first priority is an affordable vacation in Europe - well they are out of luck when the Euro rises, as it has now, to $1.45.

But for the vast majority of the country, a "strong dollar" is more like a "strong influenza virus" - something to be avoided whenever possible.

I do wish that he had commented on China's "weak Yuan" policy, because it makes a good counterpoint. Their exports are burgeoning, but inflation is eating them alive right now.

I think that it is clear that a falling dollar will result in more goods and services being produced in the US, but we will also have high inflation, and high interest rates. At the end of the tunnel, the Average American will be better iff, but during the adjustment, when imports costs rise, and there is no domestic capacity to take up the slack, and house prices tank because of higher interest rates, it will be ugly.

^*They are a liberal economic think tank. Check out there about us page.