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Port Washington, N.Y.— What this economy needs is a drop in the value of the dollar.
Foreign trade was the second-largest contributor to growth in the fourth quarter, right behind consumer spending, which bulks much larger in the economy. However, manufacturing stalled in January, suggesting that a decline in the foreign-exchange value of the dollar might be helpful at this time.
Say what you want, a cheaper buck has its benefits. In one fell swoop, it gooses growth, while at the same time it boosts the rate of inflation. These are the top two needs of the economy today.
The need for growth is obvious. It provides a needed lift to business, while at the same time increasing the chances that firms might look to add to their staff. And the more business sells and labor earns, the more tax revenues flow into the government’s coffers.
As for inflation, while I personally think there is more out there than meets the eye, I will defer to those at the Fed who think that the rate of inflation is too low and thus puts the economy at risk for deflation.
By making imports more expensive, a cheaper dollar enables domestic companies to boost their selling prices without fear of losing business to lower-cost foreign competitors. A relative scarcity of domestically made goods generated by a declining dollar would give U.S. firms more leverage in setting prices.
Another benefit of a declining dollar is that it increases the value of overseas earnings when translated from foreign currencies back into dollars. In turn, this lifts corporate profits — something else that is sorely needed in view of the plunge in stock prices so far this year.
The dollar does not have to decline against the currencies of all its trading partners, just those against which it is too strong.
According to the Economist Magazine’s "Big Mac Index," the dollar is overvalued against the currencies of Japan, China, Russia and India, to name four. A drop against these currencies would go a long way towards boosting demand for U.S. goods and services.
Needless to say, any decline in the value of the dollar would not be without its side-effects. The most important one is that such a decline would make it more difficult for Washington to finance its debt. This is because foreign investors might be reluctant to exchange their currencies to buy dollar-denominated instruments if their value figures go lower right from the get-go.
Of course, since interest rates would be rising as a by-product of more inflation and faster growth that comes from a drop in the buck, some of that reluctance might soon evaporate.
Since the deficit is falling and interest rates are about as low as they can go, isn’t it time to take a look at the benefits of a lower dollar?
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