Reports of My Death Have Been Greatly Exaggerated. Signed, The Dollar
Sometimes, you see something that just sounds so well thought out and logical that you just have to tip your hat to the author.
So it was after I'd finished reading an article in the Times our of the UK called "The Friendless Dollar" wherein the schadenfreude was so thick you could cut it with a knife-and not a very sharp one, a common butter knife would have done.
(Parenthetically, just to save you the misery, the story was that because Jay Zee the rapper seems to have an affinity for euros and there's a story that was unconfirmed that a Brazilian model whose name escapes me wants to be paid in euros and the admission booth at the Taj Mahal now makes foreign tourists pay in rupees where they used to take dollars, all this signals the crash of Festung Amerika)
Well...that got me looking for good news and I didn't have to go far today.
There was this from the International Herald Tribune
And this from Reuters
And this from the Daily Times of Pakistan, for heaven's sake.
I remember having this discussion with a young colleague from Canada who opined that the USD now inhabited, as he called it, a 'turd filled toilet'. I reminded him that the Canadian and US economies were so intertwined that if the toilet overflowed, he'd likely have a good part of the mess all over his apartment floor in Toronto. The history of the dollar vs the loonie is all over the map in the last fifty years.
Comparing currency values these days in the popular press seems to be more "Looka here! My schlong's bigger than your schlong!" than it is about facts.
Currencies rise and fall, but as Professor Cowen notes, that is not necessarily connected to lack of economic vitality or, as some impute, an indicator of moral laxity.
There's an op ed piece in today's New York Times that hit the spot. Here it is with some strategic emphasis for people who are too lazy to read the entire thing.
At the risk of incurring the wrath of the Times, I'm reprinting it here because there are people who need to read this who probably won't read the New York Times.
And it's important.
The Dollar Is Falling, and That’s Good News
By TYLER COWEN
Published: December 2, 2007
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. A low dollar simply looks bad. We are, after all, used to judging ourselves against others — comparing our salaries with the earnings of our peers, and our homes with those of our neighbors. We’re used to thinking it is a big advantage to stand at the top of a numerical list.
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 an exaggerated sensitivity to the dollar’s fall because they spend more time in relatively expensive countries. A shopping trip to London will give an American tourist the feeling that all prices have doubled or even worse. A weekend vacation or conference in nearby Toronto or Montreal may no longer feel like a bargain.
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. Just as it costs more for an American to buy a fancy meal in Paris, so do French wines and German cars have a higher markup when they are sold in New York. 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. Furthermore many price increases from Europe come on luxury goods and thus they fall on wealthy American buyers, who can afford it most easily.
Wal-Mart serves a more working-class clientele and it is stocked with goods from Asia, where currency values have remained weaker against the dollar.
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. Dr. Brad Setser, a currency analyst at RGE Monitor, estimates that the Chinese hold about $1.2 trillion in dollar-denominated assets. 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, if only because China is a poorer country and has underdeveloped capital markets.
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. That would hurt; but on the other hand a low dollar would mean bargains for foreigners, thereby attracting investment and limiting the potential negative fallout from a dollar collapse.
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.
When it comes to market prices, people can always find reason to be unhappy. In the eurozone, for example, it is a common complaint that the euro is too strong and therefore it is too difficult for Europeans to export goods and services.
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.
Tyler Cowen is a professor of economics at George Mason University.