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Two
distinct themes have emerged throughout the business media's coverage of
the dollar's accelerating fall versus the Euro in recent weeks.
If we need someone to blame for the situation, we apparently have
him. He is John Snow, the
Treasury Secretary who dared to say in public that a weaker dollar might
be good for the
U.S.
economy.
But, then again, maybe we should thank Mr. Snow instead of
hanging him. For the second
theme coming across in the coverage is that the dollar's fall will
breathe life into the long-suffering
U.S.
manufacturing
economy.
Such simple statements are soothing, and may even be partially correct.
But anyone who studies the complexity of world currency markets
quickly gains an appreciation of their stubborn refusal to be hemmed in
by how the pundits -- or the policymakers -- think they should behave
and what results they should produce.
We will probably always harbor the notion that countries can make their
own currencies move at will. The
actual evidence on the question, however, is mixed at best.
Financial officials, of course, work hard to preserve the
appearance of control, but even the United States Treasury's resources
are
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dwarfed
by the volume of notes in circulation. No
nation has the capacity to counter adjustments to currency values that reflect
the aggregate market's assessment.
Clearly,
that assessment has pulled the dollar's value down since the late spring of
2002, when just over 85 cents bought the same Euro that goes for more than
$1.10 today. That easily understood
change, however, sets off a surprisingly complicated sequence of events, whose
ultimate impact on our welfare is ambiguous.
Of course, the weaker dollar makes the goods and services we sell abroad
cheaper. That seems good.
But it makes imported products more expensive, helping to feed
inflation, which is bad. Production
abroad thus can suffer, which can decrease demand for our exports.
Are you with me so far?
It's a non-trivial puzzle for
Indiana
businesses, many of
whom are in the business of selling production-related equipment to businesses
abroad. If slumping exports cause
the European Union economies to contract, businesses there aren't likely to
need much of the capital goods they would have otherwise bought from us.
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There
is another half of the equation as well.
A weaker dollar means that foreign investors earn a lower return
on capital they invest in the
U.S.
economy.
Given the low average savings rates by Americans, the prospect of
diminished levels of foreign investment cannot be taken lightly.
Many of us treat news on the dollar's value much as we would receive a
report on the weather. But,
as Ball State economist Gary Santoni reminds us, it is not enough to
know where the dollar is moving, but why it is going in that direction.
It is one thing to know that the temperature outside tomorrow
will be cooler. It is quite
another to know that the cooling is being produced by the shadow of a
renegade asteroid that has our planet in its path.
In the economy, the part of the renegade asteroid is being played by the
U.S. Congress. Fiscal
discipline has been abandoned by our legislature, and investors have
been paying attention. If
the dollar's fall reflects their diminished confidence in Congress's
ability to manage budgetary affairs, then perhaps we should put
celebrations over the currency's slide on hold.
Patrick M. Barkey
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