Monday, June 09, 2008

Weak Dollar

Judy Shelton has an important op-ed in the WSJ today about the consequences of a weak dollar. While domestically a weak dollar is associated primarily with inflation, there are consequences beyond our borders:

How disillusioning to discover that the leading proponents of open global trade – the ones who insist on a "level playing field" – think nothing of adopting policies that render our products overly expensive for their consumers, even as they proffer their goods around the world at inordinately discounted prices.

Now you know how members of the European Union feel these days.

As former New York Fed economist David King recently observed, the value of the U.S. dollar against the euro has fallen drastically in the last few years. In December 2002, one dollar was equal in value to one euro; today, it requires more than half again as many dollars to equal one euro. For American consumers, that means prices of imported European goods are more than half again higher than they would be had the dollar retained its value relative to the euro.

The weak dollar is also causing inflation outside the US in countries who have tied their currencies to the US dollar:

Ukraine is among the most besieged – and perhaps the most pivotal – of Europe's recent converts to democracy. The biggest threat to Ukraine's prospects for success, both politically and economically? Inflation, now soaring past 30%. Ukraine's hryvnia is pegged to the dollar; every cut in the U.S. fed-funds rate spawns huge dollar inflows that must be converted by Ukraine's central bank into the domestic currency, further exacerbating inflation.

Other countries are also importing US inflation. Many of the countries in the Middle East peg to the dollar. While China is the most prominent of dollar peggers in Asia, other countries are also tied to the sinking dollar.

Monetary policy is at the root of many of the economic problems we face. From wealth inequality to the housing bubble to the rising price of commodities, monetary policy has worked to exacerbate, if not directly cause, these problems. At a time when every politician seems to want to talk about reform, none (with the exception of Ron Paul) has even mentioned the one reform that would actually accomplish the goals we all share - monetary reform.

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