The Dollar Is Falling, and That’s Good News

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By TYLER COWEN

... when it comes to currencies, a higher value neither brings national success nor predicts future prosperity. The measure of a nation’s wealth is the goods and services it produces, not the relative standing of its currency. Take a look at 1985-88, when the dollar lost more ground than in the last few years. Those were good times, and the next decade was largely prosperous as well.

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Many observers have an exaggerated sensitivity to the dollar’s fall because they spend more time in relatively expensive countries. A shopping trip to London will give an American tourist the feeling that all prices have doubled or even worse. A weekend vacation or conference in nearby Toronto or Montreal may no longer feel like a bargain.

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A falling dollar does mean price inflation in the United States. Just as it costs more for an American to buy a fancy meal in Paris, so do French wines and German cars have a higher markup when they are sold in New York. But imports are only 16 percent of the American economy, and most foreign suppliers have been reluctant to risk their position in the American market by raising prices a great deal. Furthermore many price increases from Europe come on luxury goods and thus they fall on wealthy American buyers, who can afford it most easily. Wal-Mart serves a more working-class clientele and it is stocked with goods from Asia, where currency values have remained weaker against the dollar.

Of course the lower value of the dollar also makes American exports more competitive. Much of Middle America is booming because of its ability to sell tractors, food stuffs and other products abroad at favorable prices. Even after a serious real estate decline, the American economy is continuing to expand, and this is largely because of the strength of our export sector, as encouraged by a low value for the dollar.

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... the Chinese hold about $1.2 trillion in dollar-denominated assets. China is likely to slowly diversify into other currencies, but Chinese leaders have no interest in encouraging a run on the dollar or a fire sale of dollar-denominated assets. China is in a more vulnerable position than the United States, if only because China is a poorer country and has underdeveloped capital markets.

Tyler Cowen is a professor of economics at George Mason University.

http://www.nytimes.com/2007/12/02/business/02view.html