The Dollar and their forecast!!!

Who's Afraid of a Falling Dollar?

By Mark Weisbrot, AlterNet
Posted on November 8, 2007, Printed on November 9, 2007
http://www.alternet.org/story/67307/

What do policy-makers in China, Japan, Argentina, Malaysia, Indonesia, the European Union and many other countries understand that ours don't? It seems they know that if the value of their currencies rises too much, it can hurt their economy. But for a number of reasons it hasn't quite sunk in here.

Which is too bad, because we've lost more than three million manufacturing jobs in the U.S. since 2001, and much if not most of this job loss is due to the dollar being overvalued. This is bad news not only for the people who lost those jobs, but for the tens of millions more whose wages are depressed by the displacement of these workers - and arguably for the nation as a whole, as America's manufacturing base continues its process of "hollowing out."

Perhaps most amazing is that now that the dollar is finally falling - it has dropped by 23 percent against a trade-weighted basket of currencies since February 2002 -- we hear warnings from prominent citizens and government officials that this is something we should be worried about. Just last week, former Treasury Secretary Robert Rubin, reacting to the dollar's recent fall, said that relying on a weaker dollar to boost growth isn't a "sound approach."

"Our objective ought to be to have a strong currency based on sound policy," he said.

On the same day U.S. Treasury Secretary Henry Paulson said, "I am strongly committed to a strong dollar."

Comments like these simply reinforce the popular misunderstanding that a "strong dollar" is good for the country. But an overvalued dollar makes imports artificially cheap, and prices US exports out of foreign markets. If the dollar is 25 percent overvalued, that's the same as putting a tariff of 25 percent on U.S exports, and at the same time giving a 20 percent subsidy to foreign manufacturers exporting to the U.S. market. This handicap has probably had as much impact on the loss of manufacturing jobs in the U.S. as trade agreements such as NAFTA, which were designed to facilitate the movement of US manufacturing to countries with cheap labor and lax environmental regulation.

It is because of many years of overvaluation that we have run up an enormous trade (and current account) deficit, borrowing from the rest of the world at an unsustainable pace. This borrowing will have to slow, and the way this will happen is through an adjustment in the dollar. This will reduce our imports and increase exports. In fact, it appears to be beginning already, as a result of the dollar's decline: Exports of goods rose by a 23 percent annual rate in the third quarter of this year, the fastest such jump since 1989.

That is the purpose of a flexible exchange rate: it adjusts to move your trade back towards balance. Our trade doesn't have to be balanced, but the deficits can't be so large as to pile up an explosive foreign debt.

The alternative to reducing the trade deficit through the dollar falling is to have a serious recession, which reduces spending on imports. This is a much uglier process, and one of the main reasons why the world long ago abandoned the gold standard.

Like most bad policy, there's a conflict of interest underlying the resistance to having the dollar move to a more competitive level. Robert Rubin is now Chairman of Citigroup. (Both Rubin and Paulson are former CEO's of Goldman-Sachs). The big bankers and the financial sector generally do not have much interest in promoting growth and high levels of employment in the domestic economy, and certainly not rising wages. For them, inflation is the only real enemy, since it erodes the value of financial assets. (Rising wages are viewed negatively by these people because wage increases are seen as increasing inflationary pressures).

If you read the business press you might have noticed that when unemployment goes up, the bond market generally rallies. That is a reflection of the financial sector's direct interest in lower inflation and lower wage growth even if it hurts the vast majority of the country. A high, even overvalued, dollar helps hold inflation in check by keeping import prices lower. On the flip side, as the dollar adjusts to a more sustainable level, at least some increase in inflation is inevitable as import prices increase.

Some of our big transnational corporations also like a high dollar because it makes everything they buy overseas - including other companies as well as labor - cheaper for them. And of course for those whose first priority is an affordable vacation in Europe - well they are out of luck when the Euro rises, as it has now, to $1.45.

But for the vast majority of the country, a "strong dollar" is more like a "strong influenza virus" - something to be avoided whenever possible.

Mark Weisbrot is Co-Director of the Center for Economic and Policy Research. He received his Ph.D. in economics from the University of Michigan. He is co-author, with Dean Baker, of Social Security: The Phony Crisis (University of Chicago Press, 2000), and has written numerous research papers on economic policy. He is also president of Just Foreign Policy.