In last week’s article, “The Advantages of Going Looney,” jumping to the conclusion that a weak dollar implies economic inferiority is egregious. The judgment of economic vitality should be measured using macroeconomic metrics of Gross Domestic Product (GDP) and unemployment data rather than exchange rates. A strikingly different conclusion emerges. A 13 trillion dollar economy, the United States’ GDP grew by 3.9 percent year over year in the third quarter of 2007, compared to 2.5 percent growth in Canada, whose 1.2 trillion dollar economy pales in comparison. Moreover, non-farm payroll, a measurement of employment, added 110,000 jobs in America in September and 166,000 in October.
Although the American economy has suffered from the recent credit crunch, fallout from the meltdown of the value of sub-prime mortgage-backed securities, the Federal Reserve has taken the necessary measures to balance the risks of economic downturn and inflationary pressure. Admittedly, many economists would even argue that a weakening dollar bodes well for the United States economy.
Readers should be aware of why exchange rates fluctuate in the first place. The interest rate differential, the difference between the rates in the United States and Canada, contributes mostly to the fluctuation in the value of the dollar. In the last two Federal Reserve meetings, the board has cut the target federal funds rate by 75 basis points to 4.5 percent. Through open market operations, the Federal Reserve purchases government bonds and injects liquidity via an increased money supply. As a result of lower interest rates, investors have less demand for dollar-denominated assets and seek higher returns elsewhere, but debt-laden American consumers receive relief from interest-bearing debt, mainly mortgages and unsecured credit.
Surprisingly, a weaker dollar has positive outcomes for the U.S. economy. The balance of trade, the difference between exports and imports, has worsened throughout the twenty-first century as the American consumer purchases more, cheaper goods from abroad, in part due to the artificial undervaluation of the Chinese currency. To the Secretary of the Treasury Hank Paulson’s delight, a weaker dollar eases the widening trade gap, noted by recent trade data, as consumers purchase less goods from abroad and foreigners import more American goods. Many multinational corporations, like Boeing and Microsoft, have benefited greatly from increased international demand.
Lastly, any current economic problems in the United States aren’t attributable to President Bush or Fed Chairman Bernanke. If anyone is to blame, Alan Greenspan bears some responsibility for overseeing loose monetary policy, allowing for easy credit to the least creditworthy borrowers. In all, it’s quite apparent that the United States remains the economic superpower, irrespective of a weak dollar. In my opinion, contributors to the Maroon-News should double-check that their commentary is “fit to print.”