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Irwin Kellner
Oct. 13, 2009, 12:01 a.m. EDT · Recommend (1) · Post:
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By Irwin Kellner, MarketWatch
Commentary: Policymakers are happy the dollar is falling, but will never admit it
PORT WASHINGTON, N.Y. (MarketWatch) -- Be careful what you wish for.
True or false? Policymakers here in the United States tell us that they are in favor of a strong dollar. After all, a muscular buck is in everyone's best interest, so they say.
Well, Virginia, if you believe these statements, I have a bridge I would like to sell you. Policymakers are actually happy that the dollar is falling, although they will never admit it.
You see, a weak dollar at this point in our business cycle is good for what ails us. And if they thought they could get away with it -- in other words, not trigger a round of competitive devaluations -- policymakers would push the dollar down even further.
Now before you accuse me of trying to grow this country by debasing its currency while ignoring the risk that foreign investors might lose faith in our currency and not buy U.S. debt, let me remind you that I don't make the rules, I just play the game.
And the game is this: a weak dollar helps exports while curbing imports. Besides reducing our trade deficit, a weak dollar gets people to buy less -- especially from other countries.
This has got to be good news for such industries as autos, whose firms have seen many of their customers abandon their products for cars made abroad. It is also tidings of comfort and joy for their many suppliers.
More good news comes from the fact that about half of American companies' earnings are generated abroad. The stronger other currencies are, the more dollars they translate into when they are totted up back home.
A weak dollar also reduces the need for U.S. firms to outsource, thus costing American jobs. Indeed, if the dollar gets weak enough, some jobs might actually be repatriated.
As for the reluctance of foreigners to hold dollars and dollar-denominated instruments, let's face it: Where else are they going to put their money? Weak or not, no other currency rivals the dollar when it comes to safety and ease of moving funds in and out.
Another byproduct of a weak dollar, of course, is inflation, as the cost of imports goes up giving some domestic companies cover to raise their tags. If the dollar gets weak enough long enough this could happen. But these are two big "ifs" that are unlikely to occur.
You see, trees don't grow to the sky, people don't live forever, and no item's price goes one way indefinitely. Recall the dot-com, tech, stock and housing bubbles, to name some recent examples -- not to mention such oldies as Tulipmania, the South Sea bubble, etc.
As they teach in Eco 101, the value of the dollar (or any other currency, for that matter) is determined by supply and demand.
Today, world financial markets are swimming in dollars because the Federal Reserve created tons of them to forestall deflation after last year's panic. But lately, the central bank has been making noises about taking some of these dollars back, once it thinks that the economy has regained its sea legs.
Does this suggest that the beleaguered buck is more likely to be stronger rather than weaker a year from now? You betcha.
As dollars become less plentiful, their value will rise as will foreign investors' willingness to hold them. The threat of inflation will diminish as well.
But a stronger dollar will in time reverse all the good things I noted above. It's hard to imagine today, but the dollar could even get too strong -- as happened in the mid 1980s. Remember 1985's Plaza Agreement to drive down the dollar?
Whatever the case, policymakers will soon get their wish -- like it or not.
Irwin Kellner is chief economist for MarketWatch, and is Distinguished Scholar of Economics at Dowling College in Oakdale, N.Y.
- FLVtaxman | 11:10pm 10/12/09
Toolmaker Black & Decker issued a stunning earnings outlook Monday, but much of its boost comes from a tax break. It seems the one thing that everyone needs, sales growth, still proves elusive.
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