Sunday, September 28, 2008

Dollar Obsessions

Megan McArdle:
One answer to my question "what do you mean by worse" is that the value of the dollar will fall. I'm not sure why I'm supposed to be so excited by this. Yes, I love my Panasonic television. But with 90% of our production bought and sold domestically, the value of the dollar is of limited relevance to the fate of the economy, or the living standards of most Americans. And some of our biggest trading partners seem pretty determined to stop the dollar from falling against their currency By Any Means Necessary. I am sad that I will not be able to vacation cheaply in Europe. But this does not seem like a good reason to urge a double-digit contraction in output.
I know a lot of people who get deeply concerned by the dropping value of the dollar, but when you ask them why, they usually can't explain. It certainly sounds bad to say "you dollar is worth less than before", but what that really means is relative to foreign currency. As McArdle points out, that makes foreign goods (including international travel, unfortunately) more expensive. What it also means is that American goods become cheaper in the international market, boosting American exports and travel to the US. Is this a bad thing?

The negative impact a falling dollar will have for most Americans is relatively slight and is offset by benefits that come along with it. Unfortunately, it sounds like something bad is going on and causes a great deal of unnecessary concern that politicians love to exploit.


thinking said...

A falling dollar not only impacts the price of Panasonic TV's, but also the price of oil, as we get most of our oil from foreign countries.

As to other goods we buy, walk into any Walmart and see how much stuff there is made in places like China.

We regularly run huge trade deficits, which means we import far more than we export.

So yes, a falling dollar matters a whole lot to American consumers.

Ultimately, a currency's strength in foreign markets is a sign of strength of that country's economy.

Think of all the third world countries...their currency is almost worthless vs other countries. Why is that? It's because their economy is very weak.

Utlimately, our dollar is devalued because our economy is hurting and other countries know that.

We in this country have a lot of work to do to repair the damage of the last 8 years. American credibility in the world has taken a beating and for good reasons.

thinking said...

As an aside, I'm amazed at some pundits who try to minimize our economic problems by defining success downward.

I've read how deficits no longer matter, how unemployment doesn't matter (as long as you are the one who is not unemployed), how the economy is "fundamentally sound", and now how a weakening currency doesn't matter.

What's "depression" is just a word? Of course according to Phil Gramm, it's all in our head anyway.

I mean we've seen all 5 major US investment banks go down, we've seen the largest bank failure in US history and may see more, the credit markets are basically frozen up, and yet some would tell us that everything is OK.

The housing market has tanked, and if you are unfortunate enough to make your living off of anything related to the housing or construction market, you're out of luck.

Sure, we'll survive and come back...we always do. But we overcome our problems by facing up to them, not by practicing denial. If we deny reality, then we really will slowly become a second rate country.

Brian Hollar said...

If we deny reality, we'll start thinking politicians have the ability to get us out of this mess instead of making it worse.

MPA_Blazer said...

I would have to disagree with Ms. McCardle's premise - while generally understanding her point. I think it has been shown over the past 10 years that wages have not inflated at the same rate with a typical basket of goods consumed by the marginal wage-earner. So, the biggest downside risk of significant inflation is that the standard of living is reduced for many people.