Dan Drezner points out that resurgent worries about the dollar's decline are mostly ridiculous, which they are. As long as our trade deficit remains large, the dollar is going to tend to slide in order to match inflows to outgoes. Moreover, the dollar has been propped up over the last year by a global "flight to quality", aka US treasury debt. We should be glad that the dollar is declining, not merely because it makes our exports more competitive, but because it represents a restoration of confidence in the global economy.*
Nor, as Dan notes, are we particularly likely to lose our status as the world's reserve currency, because the Euro isn't very good at being a reserve currency for a number of reasons, and most of the other currencies have too small an economic base to sustain those kinds of capital flows. To which I'd add that the joys of being the reserve currency are somewhat overmagnified in peoples' minds--it's valuable, to be sure, but if the day comes when we lost that status, the sun will continue to shine, the US will continue to be the world's biggest superpower, and consumer electronics will still be available at attractive prices from developing world manufacturers.But I must depart from Dan's theory of why people are getting obsessed with the dollar:
So, what's really going on here with the dollar obsession? I suspect that with the Dow Jones going back over 10,000, Republicans are looking for some other Very Simple Metric that shows Obama Stinks. The dollar looks like it's going to be declining for a while, so why not that? Never mind that the dollar was even weaker during the George W. Bush era -- they want people to focus on the here and now.
Believe me, people were obsessed with the dollar during the Bush era, too. Obsession with the value of the currency seems to be baked into the DNA of the right for some reason. If it's not the sliding dollar, it's gold buggery or petrodollars.
A large segment of the right ascribes almost magical properties to fixed currency, like the ability to keep the government from borrowing too much money. This is belied by the long history of government's on commodity or currency pegs borrowing a great deal of money, and then defaulting and/or revaluing. It is also belied by the fact that the government cannot actually borrow a ton of money in the expectation of inflating away the debt, because neither the bondholders nor the Fed are particularly likely to go along. But for a lot of the right, still, what is good for the US dollar is what is good for America--and what is good for the US dollar is simply being worth as much as possible relative to other currencies.
But whatever the reason, the dollar obsessives were in plentiful supply under Bush, and I suspect are coming out of their hidey holes now mostly because the dollar is again dropping dramatically. They may be using it as a club to beat the Obama administration with, though I haven't personally seen much of it, because I don't hang around those websites. But that's just an opportunistic bonus.
* Those of us who may have been planning to honeymoon in Europe may whine, but only softly, and to ourselves.
"Never mind that the dollar was even weaker during the George W. Bush era -- they want people to focus on the here and now."
What a pantload. Drezner's newfound sang froid vis a vis the dollar's fall is wholly attributable to his sympathy for the current occupant of the White House. Furthermore,even this chucklehead should be able to extrapolate forward the current trend, and the coming impact of the deluge of government borrowing, and see we are heading straight for the cliff.
Bart. You may want to check something called facts before you insult the author of this article. I realise facts are tough for many to understand in extremist politics today but they are true.
As for extrapolation, it doesn't work. It is a guess. Like meteorology.
btw. The govt borrowing started well before the current administration. Why have so many Americans forgotten how we got into this mess in the first place? It wasn't due to one persons less than a year in office.
I am not a huge fan of either administration but I have something called memory. Get a clue and stop watching extremist news for either side. Read a book. Go to the library. Check a fact!
Sorry, Rasta, but when you dismiss another commenter you may want to consider the nature of their criticism. The strength of the dollar relative to other currencies is a function of financial flows. The fact that borrowing has increased dramatically and is expected to do so bodes poorly for the dollar.
I think there is another reason why dollar obsession and gold enthusiasm flourish among many conservatives. Many of the people who support a strong dollar or the gold standard do so for cultural reasons. Listen to any of the gold commercials that clutter conservative talk radio. They all talk about how gold has 'real value' unlike paper money, or how gold is the only currency used for the last 6,000 years. Hmmmm...what else do some people think happened 6,000 years ago?
In many ways, social conservatives are not conservative on economic issues if economic conservatism is measured as support for neo-classical economic theory. At times, economic and social conservatives find agreement on an issue such as welfare reform that benefits both groups, but many social conservatives develop their ideas about markets from religiously tinged ideas about self-sufficiency and fairness. Sometimes it works, other times...
What did happen 6000 years ago?
http://creationmuseum.org/
Megan,
I can't tell you how exciting it is to hear that you're planning to honeymoon in Europe. Please, do let me know where you'll be staying, and I'll have Bitsy and Todd drop in for cocktails some evening.
Don't forget to tell us where you're registered!
Kiss, Kiss
Much more disturbing than the value of the dollar with respect to other currencies is the instability and direction of the dollar. I have a 401(k) worth several thousand dollars. But even if I have that money invested very conservatively, its real value is going down precipitously as the dollar continues to slide.
Sometimes people who look at this stuff every day get a little too close to the problem, I think, and lose focus on the big picture. Concern about the dollar is not irrational, and neither is it merely a political hobby horse.
If your 401K is invested in American stocks, its value in dollars will go up or down as the stocks go up or down, irrespective of the value of the dollar on the international market. If your stock is invested in a Euro denominated stock--lets call it Parmesan ITL, then it will be more valuable in dollars if the euro goes up. If the euro tanks, then your investment will go down with it.
The concern here, I think, is in terms of purchasing power. The most obvious consequence of the dollar slide has been the rise in the dollar price of oil. If you are dependent on driving 30 miles a day, then rising gasoline prices are a real problem. Your (dollar denominated) 401 k will be worth just as much, but it will buy you fewer gallons of gas. In that respect, the falling dollar is bad for you as an individual.
For people who believe in Adam Smith capitalism, though, what is bad for you in particular is good for the economy in general. Instead of driving to work you bicycle one day a week. Instead of driving to the 7-ll, you walk.
One place in which the logic of the market doesn't currently operate is in relationship with China, which has made a political decision to peg its currency to the dollar. So while your gas might be getting more expensive, your Christmas presents and clothes at Walmart are as cheap as ever. (The Chinese are communists, so they are under no obligation to subscribe to Adam Smith capitalism.)In effect, the Chinese have decided to absorb the cost of rising energy costs--i.e. buying oil in dollars--and pass the savings on to you, the American consumer. The Chinese do this for their own reasons, but the American consumer has not been the net loser. They send us products and we send them IOUs.
The underlying cognitive dissonance expressed in this post is that self-proclaimed capitalists (I'm attributing that to Ben) are not willing to accept the verdict of the market. We ran a trade deficit under Clinton which exploded under Bush, nearing 800 billion a year at its height. Economists such a Paul Krugman said this was not sustainable and when it proved not sustainable, then the markets started rebalancing--the value of the dollar went down relative to other currencies. The consumer in a capitalistic system is supposed to make rational decisions--buy domestic cheese and pass on the expensive imported brie.
In short, your real value is not going down against the domestic brand, only the foreign.