The value of the dollar has fallen substantially over the last 18 months, and some predict that it may again approach an all-time low. One result is that U.S. imports have become more expensive, as well as travel abroad. Since we’re in the tail end of a global financial recession, many products remain extremely cheap: consumers are enjoying large discounts on items ranging from cars to flat-screen TVs to cellphones. The price of oil has inched up after reaching lows in the 40s at the beginning of the year, and this is certainly correlated with a weaker dollar (since oil exporters get paid in U.S. dollars). But overall, the effects of the weaker dollar haven’t been felt very much by U.S. consumers; for tourists traveling abroad, it’s been a different story.
On the other side of the ledger, the weaker dollar has led to significant increases in U.S. exports, which are expected to increase even further next year. This is great news for U.S. industry and should ultimately be a key driver of new jobs. The rise in exports has not yet led to a reduction in the trade deficit because imports have also risen, mostly due to the oil price increases of the last few months. But longer-term, a weaker dollar bodes well for the U.S. trade balance.
There are some who believe that the fall of the U.S. dollar is a cause for concern; they are misguided. While a weaker dollar will no doubt lead to price increases for U.S. imports, and have an inflationary impact, this should ultimately prove beneficial. The U.S. has been living beyond its means for a long time—consuming more than it produces—and this was never sustainable. We need to get things back in balance, and a slow and steady decline in the value of the dollar will help accomplish that. In addition, the inflationary impact of a weaker dollar, while not trivial, is not likely to be as severe as some suggest. The combination of technological innovation, rising productivity and global competition will keep prices for most goods on a downward trajectory. The inflation that may result from a weaker dollar will help ease our debt burden; we’ll be repaying our creditors with cheaper dollars than we borrowed in the first place.
What is most striking is that many of the same people who make the case for a stronger U.S. dollar insist that China’s currency is seriously undervalued and a threat to American prosperity. By most accounts the yuan is undervalued by at least 20%, making U.S. imports relatively expensive and exports relatively cheap. The Chinese government actively manipulates the world currency markets to maintain this undervaluation as a way to drive its export-led growth. Immediately prior to President Obama’s trip to Asia this week, China announced that it was considering letting the yuan appreciate, which was welcome news.
But a stronger yuan by definition means a weaker dollar. And that’s a good thing. As the yuan appreciates, the Chinese will be able to afford more American products and thus narrow the U.S.-China trade gap. Bottom line: it’s inconsistent to bemoan the weak U.S. dollar and at the same time harangue the Chinese for not allowing their currency to appreciate.
Economist of all stripes have long known that closing the U.S. trade gap had to happen sooner or later; the question was always how quickly and at what price. A precipitous crash in the dollar would have terrible consequences for global financial stability and U.S. standards of living; but a steady depreciation over time, matched with an expansion in U.S. exports, is exactly what is needed.
We should be happy that it appears that so far the latter situation is playing out.
Jason Scorse