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The Worst Words for the Economy


Paul Krugman on the politics of the dollar:

The truth is that the falling dollar is good news. For one thing, it’s mainly the result of rising confidence: The dollar rose at the height of the financial crisis as panicked investors sought safe haven in America, and it’s falling again now that the fear is subsiding. And a lower dollar is good for U.S. exporters, helping us make the transition away from huge trade deficits to a more sustainable international position.

But if you get your opinions from, say, the Wall Street Journal’s editorial page, you’re told that the falling dollar is a terrible thing, a sign that the world is losing faith in America (and especially, of course, in President Obama).

The easiest way to improve our economic policy would be to change the way we talk about the dollar. No more "strong" dollar and "weak" dollar. Instead, talk about "high" dollars and "low" dollars.

When people hear "weak" dollar, they think something bad is being done to the United States. It's terribly hard for a politician to advocate a "weak dollar" policy. It sounds like you're throwing Osama bin-Laden a birthday party.

In fact, a "weak" dollar is actually the one that builds America's manufacturing economy, as it makes our exports more competitive. A "strong" dollar, conversely, builds the production base of other countries, as it encourages Americans to import goods. My hunch is that most people who think they want a "strong" dollar wouldn't be too happy if they knew what a strong dollar meant. If we talked about a "high" and "low" dollars, the issue would be a bit less confused.

Photo credit: By Choi Bu-Seok -- Reuters

By Ezra Klein  |  October 12, 2009; 5:18 PM ET
Categories:  Economic Policy  
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"It's terribly hard for a politician to advocate a "weak dollar" policy. It sounds like you're throwing Osama bin-Laden a birthday party."


Posted by: eRobin1 | October 12, 2009 5:48 PM | Report abuse

As I remember, weak dollar was the Bush policy for eight years.

Posted by: bergenhbergen | October 12, 2009 5:57 PM | Report abuse

Even if one ignores Jim Rogers who is saying Dollar will tank further, there are plenty respectable Traders and Economists (not associated with Wall Street Journal) who point out that countries with weak currency generally do not have good long term Capital attraction and economy. Howard Simon on The Street Dot Com advocates that. Hot hand Bill Gross is not looking at any strong American Economy for many years to come, he calls it 'new normal' and I will be curious to know his Dollar views. Soros, the Bank of England breaker, is another guy we need to know. I heard his interview once and since he actively do currency trade, refused to tell his Dollar position.

I am not yet convinced that strong dollar is needed. My common sense tells me that weak dollar is good for jobs and essentially to devalue our enormous debt. But again I am not an economist, theory itself does not seem to be unanimous and Krugman has been wrong before (bank nationalization).

Again confused and bit unclear. As long as we do not have good Tax Reforms and Tax collections, our deficit will be large and no matter how much devaluation we talk; we will be under the gun. This Administration is on record saying that - 1 Trillion Dollar deficits for each of next 5 to 8 years!

Posted by: umesh409 | October 12, 2009 6:06 PM | Report abuse

If you really want to drive it home, maybe call it export-friendly dollar or import-friendly dollar.

Posted by: greg_sanders | October 12, 2009 7:42 PM | Report abuse

If I were advising some politician as far as talking points regarding the "strength" or "weakness" of the dollar, I'd advise them to just say the dollar is valued based on the market and leave it at this.

Nobody in Washington is really for a strong dollar, sort of teh same as nobody is really for cutting the size and scope of the federal government in any real way. Nobody other than Ron Paul, I suppose.

Posted by: zeppelin003 | October 12, 2009 8:08 PM | Report abuse

I'm very surprised that both you and Krugman would advocate a weak dollar policy, and rely on such simplistic analysis. With a highly intertwined global economy, a weak dollar means so much more than making exports more competitive, and most of the consequences of such a policy are highly negative.

Let's start with why it's called a "weak" dollar; that means the dollar has less purchasing power. Exports may become cheaper for overseas buyers, but imports become more expensive. Prices would increase for manufactured goods from China and Europe, and commodities including oil and base metals would become more expensive. The cost of overseas business operations would also increase, which would make us less competitive. Worse yet, a weaker dollar makes U.S. debt less attractive. Why invest in currencies with less value and less purchasing power? To increase the attractiveness of U.S. debt, interest rates would have to rise, which is another drag on the economy.

You don't need to be an economist to figure it out. The best way to achieve economic growth is to provide goods and services the world is ready to buy. The yuan is probably undervalued, but the Chinese economy continues double-digit growth. Australia maintains a strong currency and (relatively) high interest rates, but has mostly avoided the financial crisis. A weak currency can provide some short-term stimulus, but solid fundamentals work better in the long run.

Posted by: gateway_joe | October 13, 2009 12:22 AM | Report abuse

Fortunately for us, the pound is even weaker than the dollar, which means Britain is a lovely and cheap vacation spot for Americans these days.

Posted by: KathyF | October 13, 2009 2:51 AM | Report abuse

A weak dollar is good for manufacturing and exports, but it also means the end of what's amounted to easy credit for the American government.

At the moment, even with a zero interest rate, the US gov't is able to issue pretty massive quantities of debt. That's a good thing because borrowing while interest rates are low, and we need the money for a) stimulus and b) progressive policy priorities.

If the dollar drops, we'll see that bond buyers are *much* less eager to buy our debt. That's going to suck because deficit spending will all of a sudden be much more expensive and difficult.

Overall, I think this is probably a good thing. The current account deficit needs to be resolved, and easy credit is fine for entities that have a capacity to self-regulate their spending, and congress has shown no such discipline over the last 10 years.

Posted by: TWAndrews | October 13, 2009 7:53 AM | Report abuse

Other commenters have hit the nail on the head in terms of a "weak-dollar" NOT being a universal good. There are a few advantages to a weaker dollar, but the disadvantages clearly outweigh them. Ezra speaks as though he has never lived through high inflation. There is not much worse than that.

Posted by: lancediverson | October 13, 2009 9:50 AM | Report abuse

High inflation is a bad thing, but nothing we need to worry about for at least another 5 years. Deflation is more of a problem now, and with our debt burden 4% inflation would be just peachy.

To add to the risks of a "weak dollar" is that export growth takes a relatively long time to build and develop, as capital investments are made and industries align, but higher import prices are more of an immediate harm.

Posted by: etdean1 | October 13, 2009 4:33 PM | Report abuse

Another point. Low dollar was extremely good to the oil merchants during the run-up of prices 2008. They received many bags of dollars which I thought would gain value with a big dollar rebound by end of the year (2008), thereby making oil producers even more richer even than they are still, now, but, sadly, sub prime mortgages got in the way.

Posted by: bergenhbergen | October 13, 2009 9:26 PM | Report abuse

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