IPcentral Weblog
  The DACA Blog

Monday, March 10, 2008

The Weak Dollar Delusion
(previous | next)

The weak dollar is roiling not only the U.S. economy but world markets as well, as this good page-one summary in The Wall Street Journal makes clear.

What's also interesting is that finally -- finally -- even straight news articles are making the connection that I wrote about in August 2006. Namely, that monetary policy and the weak dollar are the key drivers of high commodity prices, including oil. At the time, only a few like-minded economist friends shared the view. But slowly it has become common wisdom. Here's the Journal:

The weak dollar has played a role in the latest surge in commodity prices. Yesterday, it held relatively steady, though it was languishing near an all-time low it hit last week against the euro. This year, it has weakened 4.9% against the European common currency and 8.7% against the Japanese yen.

When the dollar weakens, commodities priced in dollars effectively become cheaper for buyers holding other currencies, spurring demand. At the same time, the producers of these commodities have an incentive to boost prices, since they are getting paid in less-valuable dollars.

But high oil prices aren't the only destructive byproduct of an over-easy monetary policy. As I forewarned 20 months ago:

It is these periods of transition, where the value of the currency is changing fast, but before price changes filter through all commerce and contracts, when financial and political disruptions often take place.

And since, financial disruptions are what we got.

This changing value of the crucial global unit of account -- the dollar -- is the primary cause not only of run-away inflation in dollar-linked nations, from South America to the Middle East to China, but also, of course, the subprime mess and the continuing credit crisis on Wall Street, where bonds and other securities aren't trading because parties disagree so violently about prices. Moreover, the constantly declining dollar is discouraging foreign investment in the U.S.

Many have said this is a liquidity crisis. Well, it is true certain asset classes aren't trading in normal volumes. So there is a lack of "liquidity" in some narrow markets. There is a dearth of credit between some banks and hedge funds. This is no trivial matter. But there is no broad lack of liquidity in the sense of overall money supply. Short real interest rates are negative. The Fed is hugely accommodative. Commercial and industrial loans are still flowing after recently hitting all-time highs. Most normal mortgage and consumer loans are being made, at very reasonable rates.

How can the Fed and Treasury ignore -- or even delight in -- the weak dollar amidst a slow Wall Street collapse? Because, as Steve Forbes explains in this pithy tutorial on the whole mess,

The Treasury Department bureaucracy has long believed in a weak dollar as a means of redressing the supposed problems of our trade imbalance. These bureaucrat-economists ignore copious evidence on the destructiveness of currency devaluation. Debasing your money may increase exports and reduce imports, but only for a time. Eventually costs rise, thereby reducing corporate profits. Prices are readjusted.

Although U.S. exports are up recently, we've had to import even larger amounts of expensive oil and other rising-price goods because of the weak dollar. So if the Fed and Treasury were hoping to alleviate the trade deficit, they've done just the opposite. They've exacerbated it. Now, as both domestic growth and foreign investment slow, we are indeed seeing a reduction in the meaningless trade deficit. Congratulations! Invite a recession and a Wall Street meltdown in order to "correct" a superficial, misleading, inconsequential accounting entry. Sounds like a good trade-off, don't you think?

The floating exchange rate regime and the monetary fine-tuning models, impulses, and actions of the Federal Reserve are proving, once again, to be huge failures.

The best way to begin a halt of the chaos on Wall Street and restore investment and growth would be for the Fed, Treasury, or President to say: We want a strong and stable dollar. No winks, no nods. We mean it this time, dammit.

UPDATE: See this, yet another in a long series of superb articles on the dollar by David Malpass of Bear Stearns. Malpass and I are obviously on the same page. Or, more accurately, I'm on his page.

posted by Bret Swanson @ 10:18 PM | Monetary Policy

Share |

Link to this Entry | Printer-Friendly

Post a Comment:

Blog Main
RSS Feed  
Recent Posts
  EFF-PFF Amicus Brief in Schwarzenegger v. EMA Supreme Court Videogame Violence Case
New OECD Study Finds That Improved IPR Protections Benefit Developing Countries
Hubris, Cowardice, File-sharing, and TechDirt
iPhones, DRM, and Doom-Mongers
"Rogue Archivist" Carl Malamud On How to Fix Gov2.0
Coping with Information Overload: Thoughts on Hamlet's BlackBerry by William Powers
How Many Times Has Michael "Dr. Doom" Copps Forecast an Internet Apocalypse?
Google / Verizon Proposal May Be Important Compromise, But Regulatory Trajectory Concerns Many
Two Schools of Internet Pessimism
GAO: Wireless Prices Plummeting; Public Knowledge: We Must Regulate!
Archives by Month
  September 2010
August 2010
July 2010
June 2010
  - (see all)
Archives by Topic
  - A La Carte
- Add category
- Advertising & Marketing
- Antitrust & Competition Policy
- Appleplectics
- Books & Book Reviews
- Broadband
- Cable
- Campaign Finance Law
- Capitalism
- Capitol Hill
- China
- Commons
- Communications
- Copyright
- Cutting the Video Cord
- Cyber-Security
- Digital Americas
- Digital Europe
- Digital Europe 2006
- Digital TV
- E-commerce
- e-Government & Transparency
- Economics
- Education
- Electricity
- Energy
- Events
- Exaflood
- Free Speech
- Gambling
- General
- Generic Rant
- Global Innovation
- Googlephobia
- Googlephobia
- Human Capital
- Innovation
- Intermediary Deputization & Section 230
- Internet
- Internet Governance
- Internet TV
- Interoperability
- IP
- Local Franchising
- Mass Media
- Media Regulation
- Monetary Policy
- Municipal Ownership
- Net Neutrality
- Neutrality
- Non-PFF Podcasts
- Ongoing Series
- Online Safety & Parental Controls
- Open Source
- PFF Podcasts
- Philosophy / Cyber-Libertarianism
- Privacy
- Privacy Solutions
- Regulation
- Search
- Security
- Software
- Space
- Spectrum
- Sports
- State Policy
- Supreme Court
- Taxes
- The FCC
- The FTC
- The News Frontier
- Think Tanks
- Trade
- Trademark
- Universal Service
- Video Games & Virtual Worlds
- VoIP
- What We're Reading
- Wireless
- Wireline
Archives by Author
PFF Blogosphere Archives
We welcome comments by email - look for a link to the author's email address in the byline of each post. Please let us know if we may publish your remarks.

The Progress & Freedom Foundation