Wednesday, October 14, 2009

Who gives a crap about the dollar?

Abstract: Not me!

People, the dollar is "weak". The dollar has fallen from around 1.32 to the Euro in March to around 1.48 today and from around 100 Yen to the dollar in April to around 89 Yen to the dollar today. In some quarters, this is cause for hand wringing and hysteria.

You know what? I don't care. In fact, I am kind of happy. We dealing with the end of a huge recession, with unemployment still rising. A cheaper dollar will encourage exports and help GDP growth. Plus, there are extremely liquid and thick forward and futures markets for the dollar. If fluctuations threaten your business, you can easily insure against them.

We were faced with a financial crisis and potential meltdown that many thought would rival the Great Depression. Unlike the Fed of the 1930s, the Bernanke Fed (eventually) responded with a battery of unprecedented policy actions that, to my mind, actually helped avert catastrophe. With vanishingly low interest rates here in the States, it is not really a surprise that the dollar is weak.

To those who lament the potential loss of status as an international reserve currency, I say "who cares"?  Suppose the world's governments decided to hold Euros as reserves instead of dollars. The dollar would fall further in the short run and we would lose some seignorage revenues, but the world as we know it would not come to an end. 

There are certainly reasons to be concerned about our growing national debt and what it might do to inflation down the road, especially given that the Bernanke Fed actually crossed into third world territory with its purchases of government debt during the crisis, but "what will it do the special international standing of the dollar" is not one of the reasons for concern in my book at least.


Anonymous said...

One of the worst commentaries i've seen on this sight. I suppose you're one of those anti-deflationists. Your right to not care about the dollars international image but you are WRONG about thinking things are over. The FDIC is broke, the stimulus failed, banks continue to fail...You are just falling in with those same economists who were calling for non-stop growth in the housing market in 2006. Now they say the recession is over using the same flawed indicators. Inflation will become a serious problem sooner than later. I'd like to here Munger's take on this, certainly he doesn't agree with this crap?

Angus said...

Ah, the old anonymous ass-reaming.

Thank you sir.

If indeed, things are still going to get worse (which I put about a .25 probability on happening), that is even less reason to care about the dollar.

I am at a loss to see how you can be predicting both more negative economic outcomes AND inflation at the same time.

I also fail to see where in my post I claimed that the fiscal stimulus worked.

Oh, and if you care, yours is one of the worst comments I've seen on this site!

And yes, I certainly am opposed to deflation.

Anonymous said...

Hmm I guess inflation necessarily implies economic recovery then. Actually it implies more misallocated capital. I fail to see how inflation and recession are incompatible (still using that discredited Keynesian logic?). Who spends new money first?
I wasn't suggesting you said the stimulus worked; simply that its failure adds to the improbability of the recovery. Suppose its easier to put words in my mouth. I guess we can try to mask the impending recession with another bubble but those will only work so often before the entire currency fails. I don't really have time to educate you on how wrong you are so I suggest reading:
"Mystery of Banking" by Murray Rothbard. Its a good start. Also "Money, Bank Credit, and Economic Cycles" by JH Desoto should help. Do you still believe Friedman was right? The same guy that said gold would fall to its commodity value (~6$) after the fiat was in place. Inflationary policy adds to the unlimited government spending that has increased War and these ridiculous government welfare programs.

-Sean (if that helps)

Chris said...

Angus, is there any academic macro literature on the importance of the reserve currency? I ask because, despite being in a Ph.D. program in economics (although not a macroeconomist), I have literally never heard anyone worry about it.

As far as I can tell, there's a whole cottage industry of people writing about international "macro" issues (exchange rates seem vastly more discussed in business newspapers than by macroeconomists, for example), but what they think is important seems totally detached from academics, who, despite what some might say, do know a thing or two about the economy.

Anonymous said...

Wow. Why so much acrimony Mr Sean? From one anon to anon, I am guessing that if we started with your academic accomplishments and added Angus' we would have, well, approximately Angus'. I find it dubious that he needs to be educated on these issues. Certainly, Austrian "boom-bust" theory presents a cute little analogy to the current financial crisis. I think, speaking out of line for mainstream economists here, most accept a degree of logical elegance to Austrian analysis. But until Austrian theory produces an extensive set of testable implications that stand up to years of empirical scrutiny, it will be difficult to find its way into mainstream thinking. Additionally, I think the primary purpose of this post, if I am may now put words into Angus' mouth, is to point out the illogical fear over the dollar losing its international reserve currency status. After all, the UK seems to be doing fine these days. It might also be true that the levels of welfare may be arbitrarily similar in comparing a steady state where the US dollar is the international reserve currency, with a steady state where currency X is. However, the transition path between these two steady states may be associated with a painful adjustment, both through higher interest rates, and ultimately, inflation.

John (if that helps)

John Thacker said...

Indeed Angus, I don't see how you approved of the fiscal stimulus. I would say that the fiscal stimulus is driving our currency lower, and is not stimulating our economy, according to the Mundell-Fleming model, if I understand it correctly.

Angus said...

Umm JT, not sure if you are joking or not, but let's be clear that I did NOT and HAVE NOT approved of the fiscal stimulus (aka porkulus). Not sure I would bet the farm on the predictions of the Mundell-Fleming model though.

Unit said...

"the Bernanke Fed (eventually) responded with a battery of unprecedented policy actions that, to my mind, actually helped avert catastrophe."

So you think TARP has worked? Was there a cheaper way to avert armageddon?

ZombieHero said...

Wasn't the who cares arguement also used by Leahman, Bear etc when they were looking at risk?
"Who cares if housing prices go down 50%, we are making a lot of money now!!"
I think your failing into that trap Angus.
Where's Admiral Akbar when you need him?!?
I care less about economic performance now than I do about econ performance later. Meaning, I want a stronger economy for my kids than what I have. Most of the thinking, which indecently I think is a boomer generational thing, is all about the now and the me.

I say boomer generational thing only because it really started to hit in the 70s and 80s, then as the boomers had kids (Gen X), they too became even more infatuated with the now over the future. Now we have the new generation that hardly ever thinks of the future, because their parents (Gen X) and their grandparents (Boomers) taught them not to.

Angus said...

I am certainly prone to "failing into traps", especially on the golf course, but I don't think that fluctuations in the price of the dollar or having the dollar be the dominant international reserve currency are fundamentally important to the future of our society or our childrens' well being. I am against high inflation, but, so far at least, that is a different kettle of fish.