Tuesday, November 13, 2007

Green(backs) With Envy

George W. Bush and Company seem content to let the U.S. dollar sink to record lows, hoping that cheaper American goods will become increasingly attractive to the international markets, and thereby boost corporate profits here at home. But one of the other consequences of the tumbling dollar is that many things imported into the United States--cars, clothes, foods, technological instruments--become more expensive for us. And psychologically, a weakened dollar increases the sense that this country is in trouble, as we didn’t feel was true during the Clinton boom of the 1990s. In this editorial from today’s paper, The New York Times captures the reasons why so many Americans are made uncomfortable by the administration’s market-force-driven monetary policies:
The dollar’s value is connected to Americans’ standard of living. In the United States, the quality of one’s economic life is determined largely by purchasing power. A weaker dollar could cut into purchasing power by raising the cost of imports for which, increasingly, there are no domestic substitutes. The dollar’s decline is already contributing to higher oil prices. For a variety of reasons, higher oil prices also tend to translate into higher food prices. The cost of oil and food are not counted when measuring “core inflation.” But the more they cost, the less Americans can afford of everything else.

A weaker dollar could also pressure consumers by driving up interest rates. If broad dollar-driven inflation threatened to take hold, the Federal Reserve would surely raise interest rates. But even in the absence of that, the buildup of debt during the Bush years virtually condemns the nation to borrowing for many years to come. An ongoing need to borrow in the face of a weakening dollar would push up interest rates, because creditors demand a higher return to invest in a depreciating currency.

A sharp decline in the currency would mean a sharp decline in living standards. A slower decline in the dollar would mean a slower decline in standards. The first would be a calamity. But the second is also unacceptable.
The full editorial can be found here.

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