Friday, December 01, 2006

Weak Dollar is Good News!

At least, the weak dollar is good news if you're one of those that thinks the trade deficit is a terrible thing:

The dollar suffered sharp falls on Thursday, hit by reports of weak US business activity and a benign inflation picture.

The euro rose 0.7 per cent against the dollar to $1.3247 by late afternoon in New York after data from Chicago purchasing managers indicated that business activity in the Midwest unexpectedly fell last month.

Sterling rose to its highest level against the dollar since its ejection from the European Exchange Rate Mechanism in September 1992 as UK house prices continued to show rapid growth. The pound rose to $1.9699 before edging back to $1.9658, almost 1 per cent up on the day. The yen also gained, up 0.5 per cent against the dollar to Y115.77.

At its root, the trade deficit means that Americans are consuming more than we produce. We're borrowing from abroad in order to enhance consumption now. Eventually the bill has to get paid. And a weak dollar is one way that happens. It makes imports more expensive and exports cheaper. So Americans can no longer afford the cars, and toys, and electronics items, and vacations abroad that we have enjoyed during the period of a strong dollar.

Personally, I don't particularly think that's a good thing. I think that such periods are unfortunate. This is especially true because they have a disproportionate impact on the poor, who devote a large portion of their income to necessities and not luxuries. But the weakening dollar is clearly something that Democrats and their labor union allies like.

It's clear that trade is not a topic either well understood or clearly portrayed in the media. With unemployment at historic lows, people still seem to believe that a significant trade deficit is costing a tremendous number of jobs. Not only is this untrue, but it makes no sense.

We'd be well-served by better reporting on international trade.

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