The issue is the dollar. Or, more specifically, how we talk about it. When its value goes up, we call it a ?strong dollar.? And a ?strong dollar? sounds great! It sounds like a strong America, like Old Glory waving in the breeze, like our soldiers planting the flag at Iwo Jima. As for the ?weak dollar,? well, yech. That?s American decline, compact cars, the Vietnam War. We might as well say ?awesome dollar? and ?America-hater dollar.?
But it?s unwise to apply emotionally loaded words to economically neutral concepts. Now every major economic policymaker in America pledges his or her fealty to a strong dollar with the same glassy-eyed obedience you see in coerced confessions. ?I believe deeply that it?s very important to the United States, to the economic health of the United States, that we maintain a strong dollar,? Treasury Secretary Tim Geithner said upon beginning his term. ?The Federal Reserve believes that a strong and stable dollar is both in American interests and in the interests of the global economy,? Fed Chairman Ben S. Bernanke promised at his first news conference.
Sometimes, of course, a strong dollar is in our best interest. And over the long run, a strong economy will produce a strong dollar. But there are moments when stronger isn?t better. Moments like, well, this one.
The dollar?s ?strength? or ?weakness? is relative. ?A strong dollar means that when you exchange it for another currency, you get a lot of that other currency for a single dollar,? says Josh Bivens, an economist at the Economic Policy Institute. A weak dollar, of course, implies the reverse.
That?s ... it. In practice, a strong dollar makes foreign goods cheaper and domestically produced goods more expensive. That?s a boon for American consumers, American travelers and countries that export to America. In fact, when you hear that China is manipulating its currency, that?s a reference to its efforts to keep the dollar strong and the yuan weak. As far as China is concerned, a strong dollar means a strong China.
A weak dollar, meanwhile, makes American-made goods cheaper on the world market and foreign-produced goods ? including commodities, like oil ? more expensive. That?s a boon for American manufacturers and people in other countries who want to buy American goods or come visit the country. The very crude way to put it is that, in the short term, a stronger dollar is good for buying stuff and a weaker dollar is good for making stuff.
What a temporarily weak dollar is particularly good for, however, is recovering from a deep recession. ?If domestic demand is weak,? says Barry Eichengreen, an economist at the University of California at Berkeley, ?the normal way an economy reacts to that is by substituting export demand, and a more competitive dollar is the way that happens.?
The same goes for deficit reduction, Eichengreen says. That?s because cutting government spending reduces domestic demand, and so you need to find new sources of demand to avoid a recession. The way countries customarily do that is to weaken their currencies to make their exports more competitive.
You can probably see where I?m going with this. We happen to be simultaneously trying to recover from a recession and reduce the deficit. But the value of the dollar, though low historically, is higher than you might expect: It shot up after the financial crisis, as anxious investors loaded up on Treasury bonds, and returned to its pre-crisis level only recently. But the economy is much weaker now than it was then, and America much more in need of an export boom.
The irony is that although in the long run, a healthy, productive economy will lead to a stronger dollar, getting there probably requires a temporarily weaker dollar. The Federal Reserve knows that. Bernanke talks a good strong-dollar game, but loose monetary policy is pushing the dollar down, at least by a bit. But Bivens says that the dollar?s main problem is Chinese policymakers, not U.S. policymakers. He hopes we can solve this by convincing the Chinese that their currency manipulation is bad for them. Success would mean a somewhat weaker dollar, at least for awhile. But it wouldn?t mean a weaker America.
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The first step toward change, of course, is coming up with alternatives. So if you know the terms that should replace ?strong dollar? and ?weak dollar,? leave them in comments. I?ll post the best ideas on Wednesday.
Source: http://feeds.washingtonpost.com/click.phdo?i=249fb196ad8360e22aaf467a51ffb219
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