Thursday, October 22, 2009

The Dollar: How Weak Is Too Weak?

Andrew Sullivan and friends think that concern about the weak dollar is a false issue that is being used to smear President Obama.

Sullivan links to a 2007 New York Times op-ed by Tyler Cowen, one of the leading economics writers in the blogosphere.

Cowen gives the standard international trade analysis of the value of the dollar, i.e., that a weak dollar makes it easier for American sellers to sell to foreign consumers, but makes it more expensive for American consumers to buy from foreign sellers. So, directly or indirectly, just about everyone will feel some good effects and some bad effects from a weak dollar.

Cowen mentions, but downplays, larger potential implications.

If the dollar were to lose its standing as the world's preeminent currency, that would have major implications. Our ability to borrow in dollars from foreign investors, such as the Chinese government, gives the U.S. a great degree of control over its debt situation. If push came to shove, America could print more dollars, and thereby avoid default on our debts. (Not that that's a viable long-term solution; if we did too much of that, we would hasten the downfall of the dollar.)

The fact that commodities such as oil are priced in dollars on international markets has a similar effect.

So far, the world continues to lend dollars to us, and the oil exporters have not switched to a different currency. But the concern cannot be dismissed as a red herring. In other words, saying that the weak dollar is a concern is not the same as saying that Obama was born in a place other than Hawaii.

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