Falling Dollar Phobia
Paul Krugman
May 4, 2011, 12:04 pm
I continue to be amazed by the way Very Serious People find ways to worry about everything except devastating unemployment. They’ve now spent two years warning about the bond vigilantes about to pull the rug out from under us any day now; as of right now, the 10-year interest rate has fallen to 3.21 percent on weak economic data.
Now there’s suddenly vast alarm about the possibility of a drastic fall in the dollar.
OK, first, let’s have some perspective on what has happened so far. Here’s the real effective exchange rate of the dollar since 1979:
IMF
What’s got all the VSPs so worried is that little jog at the end, which has brought the dollar roughly back to its pre-crisis level.
Why has the dollar fallen lately? The main answer is that while the Fed wants to keep rates low to help fight unemployment, the ECB is signaling that it wants to raise rates, never mind 21 percent unemployment in Spain. This is a difference in economic philosophy, not the decline of empire.
And why, exactly, should we regard dollar decline as a problem? It helps exports — and export booms are the normal way countries emerge from financial crisis. Dollar declines haven’t brought woe in their wake in the past: neither the huge decline after 1985 nor the sustained decline during the Bush years — both of them dwarfing anything we’ve seen recently — brought catastrophe; in fact, both were associated with OK economic growth and mild inflation.
In some cases, currency declines have caused major balance sheet problems — but that’s because highly leverage players have large debts in foreign currency. US households are plenty indebted — but those debts are in dollars.
So where’s this dollar panic coming from? Well, like so many other things that have suddenly become big issues among the VSPs, it’s yet another reason not to do anything about unemployment.
Funny how that works.
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