Pursuit of Truthiness

my gut tells me I know economics

Archive for August 2011

The Strong Dollar

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I have heard many people say that the Keynesian counter-recession policies of easy money from the Fed and deficits from Washington have been rendering the dollar worthless.  I know inflation has actually been below-trend (so the dollar’s purchasing power remains strong domestically), but today I finally got around to looking up the international strength of the dollar:That’s right, the dollar has barely declined since the beginning of the recession, despite the big increases in deficits and the monetary base.  It is much stronger than we would predict from the pre-recession trend.  People “know” that the dollar must be weaker because of what the Fed and Obama are doing; it seems so obvious that they don’t feel the need to look up the numbers, which show otherwise.

Of course, a strong dollar is not necessarily good; I believe the main reason people think it is a good thing is because it has the word “strong” attached.  Sometimes a strong dollar is about as desirable as a case of strong influenza.  Given our apparent aggregate demand shortfall, this seems to be one of those times.  Since I am not doing much importing, exporting, or international travel, I don’t have much of a personal dog in the fight; but it seems the country could do with an even weaker dollar.

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Written by James Bailey

August 19, 2011 at 9:54 am