For months I have been waiting for a respected economist to write the truth: The decline of the dollar may inconvenience me along with other Americans traveling abroad but it makes sense to a country with a chronic negative trade balance. So, some of stay home and more foreigners come here. The result? A needed shot in the arms for our tourist industry.

We owe money. So what can suit us better than having the opportunity to repay the debt with devalued dollars? But wouldn’t our lenders stop lending us the money? Yes, if they can find alternative venues to their savings. Luckily, the stock market tanked as has the real estate market, so not even our lower value dollars look good in comparison.

As I am not an economist, I dared not commit my thoughts to print. So I am happy to share Harvard economist Martin Feldstein verdict that The dollar is falling at the right time:

 

The recent decline of the dollar has led many people to talk about the current “weakness” of the dollar, encouraging intervention to stop the dollar’s further decline. This confuses recent declines with fundamental weakness. The very large US trade deficit shows that the value of the dollar is not weak but is actually very strong. Because of the dollar’s strength, prices of US goods in global markets make them inadequately competitive.The dollar’s decline over the past five years stimulated exports and helped to shrink the trade deficit. Real US exports are up 17 per cent in the past two years and the trade deficit has come down 11 per cent from its peak in 2006. But the trade deficit last year was still more than $700bn or 5.1 per cent of gross domestic product. Since US imports are still nearly twice as large as US exports, it takes a very large fall of the dollar to shrink the net deficit. . . .

The falling dollar reflects an unwillingness of private and public portfolio investors around the world to hold the current amounts of dollar securities at the existing interest rate and exchange rate. To induce them to do so, and to increase their holdings by the roughly $700bn needed to fund this year’s US current account deficit, requires either a lower value of the dollar (so there is less risk of further dollar decline) or a higher rate of interest (to compensate them for any further fall of the dollar).

A lower dollar has the favourable ef­fect of stimulating US net exports and therefore of raising the US growth rate at a time of general economic weak­ness. In contrast, higher interest rates would reduce aggregate investment and other aspects of aggregate de­mand. The US has therefore been for­tunate that the adjustment to the fall in world demand for US securities has taken the form of a lower dollar rather than of a rise in the level of US interest rates.

Conclusion? Let the dollars continue falling and pay no more attention to the global whining than China paid attention to American and European complains that the artificially low value of their currency is killing our industry. I am sorry Saudi Arabia is not hurting more. It surely deserves it as a major part of the high price of oil is caused by oil producers determination to make the most of a commodity the West desperately wants to learn to do without.

Yes, Europe may pay the highest price but it could have avoided a major part of it had it not waited until it was too late to join US demands that China permit its currency to float as it’s trading partners. In this as in Middle Eastern troubles, Europe is paying for its failure to realize yet again that in a world in which freedom is under attack by Islamists and autocrats, it should cooperate, not compete, with the US. Ironically, this is a repeat scenario. The same dynamic led the US to abandon the gold standard in the 70s. The good news is that just as it did during the 80s, Europe is beginning to see the light and the world economy, let us hope, will successfully rebalance itself. The US may no longer be in the position to be the sole growth engine but it need not be any longer. India and China are there to help it along.

For more, see Deja vu, my History News Network blog

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