Tuesday, December 07, 2004

Devaluating the Dollar

While a falling dollar can help our trade gap in the short term, the way Bush wants to do it will be harmful for our economy in the long run and could pinch the pocket books of the middle class even further. Explaining the ramifications is the below article.

Don't Let the Dollar Take the Fall


New Haven — AS the dollar continues to sink against the euro, the yen and other currencies, the conventional wisdom is that there is little choice but to allow it to continue to fall.

America's trade imbalance can be corrected, the current reasoning goes, with a much cheaper dollar - perhaps 30 percent cheaper than it is today. The idea - supported by Treasury Secretary John Snow and Alan Greenspan, the Federal Reserve chairman - is that this would raise the price of imports for Americans, who would thus buy less from abroad. A cheaper dollar would also supposedly allow us to sell more to the world by making our exports less expensive.

Here is what's wrong with this analysis.

A falling dollar is unlikely to curtail imports as much as hoped. It is more likely instead to act as a consumption tax. About one-quarter of the United States import bill arises from oil purchases, which are priced in dollars. A rapidly depreciating dollar thus means lower earnings for OPEC producers. In response, the cartel might well raise prices. Goods from Asia, especially China, account for at least another 25 percent of our import bill. Because these computers, machine tools, TV's and toys are essential to our work and lifestyle, chances are that we will still buy them, even at higher prices.

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