Gerald Baker, writing in the Times of London, puts the matter in proper perspective:
The pundits have finally run out of bad news to report from Iraq, where, unmolested by the morbid fascination of misery-seeking reporters, the locals actually seem to be belatedly enjoying the first fruits of their liberation. So attention has turned again, as it has tended to do from time to time these past 50 years, to the inevitable collapse of the American economy.
Much has been written about the eschatological symbolism of the dollar's fall and the financial problems that have accompanied it. The apparent consensus among commentators here in America and especially in Europe is that the US has become a kind of Third World country, awash in debt and sinking fast because of a collapsing housing market and a banking system in meltdown. And all this is supposed to reflect in turn a seismic shift in the balance of global economic power away from the US and towards Mighty Europe and Emerging Asia.
But such apocalyptic interpretations, however emotionally or politically gratifying, are not accurate. Instead,
prosaic facts such as differentials in countries' short-term interest rates, the rebalancing of temporary financial and economic imbalances and sudden changes in demand for and prices of commodities such as oil produced by particular countries...are far better explanations of what is happening in international currency markets.
What is more, this is nothing new:
Between 1985 and 1995, the dollar declined by 43 per cent against the world's big currencies — somewhat more than it has in the past six years. That period was also marked by dire proclamations of the end of US economic power. But it turned out that in those years the foundations were laid for the strongest period of US economic growth in the past 35 years.And what about those moralists who say that the US is running on borrowed time because of the [shudder] enormous debt run up by Bush? Baker provides a bit of perspective:
The first thing to be said is that the level of public sector borrowing in the US is very small. The fiscal deficit, at just over 1 per cent of national income, is smaller than in most major European countries. It's true that America faces a large long-term fiscal challenge from an aging population. But it's a smaller challenge than that faced by most of Europe, Japan or even China.And what about that enormous private debt run up by greedy Americans [about 5 trillion dollars since 2001]? If you look at it as investment rather than simple debt, it turns out to have been a wise decision:
The aggregate value of houses alone is up $8 trillion [since 2001]. The increase in the value of stocks held either directly or through pension funds and other investment instruments is higher by another $8 trillion. That's an increase in net wealth of American households of $11 trillion in less than six years. That's about $90,000 for every household in the country.Not bad as a rational economic decision!
Read it here.
And if you look at the supposed currency crisis from overseas, things are quite different.
Der Spiegel this week noted that the decline of the Dollar against the Euro is hurting European business and boosting unemployment there. It urges the European Central Bank to follow the example of the US Federal Reserve and cut interest rates [an unlikely prospect] or to negotiate a treaty granting an international agency like the World Monetary Fund power to coordinate currency rates [not bloody likely]. [here]
And then there's this:
Airbus signaled a significant cut in its research and development budget yesterday, as part of emergency measures to face the "life-threatening" effects of the weak U.S. dollar on its largely European production base.Read it here.
Tom Enders, chief executive of the European aircraft maker, raised the alarm over Airbus's future development plans in a hard-hitting speech to German unions detailing the consequences of the sharp decline in the dollar, which this week hit new lows against the euro.
So, the dollar has declined, but the American economy continues to hum quite nicely, and what adverse effects have ensued are mostly felt in Europe, not the U. S. [although the weak dollar does contribute to the runup in gas and oil prices]. There is an economic crisis looming, but it is on the European horizon, not on ours.
The point is simple and obvious: cheap moralism is a bad basis on which to construct economic, fiscal, or monetary policies, but it makes for effective politics, so expect the critics to keep up their drumbeat of misinformation, at least until a Democrat is in the Oval Office.
In the Telegraph Ambrose Evans-Pritchard notes that the weak dollar, combined with an excessively strong Euro, is devastating Europe's industrial core and fears that the political fallout will result in the destruction of the EU.
Read it here.
Megan McArdle links [here] to articles discussing the possibility that Italy will be the first country to abandon the euro. She suggests that when distinguished scholars begin to write learned articles proclaiming that the breakup of the EU is impossible, that is a good sign that such a breakup is possible. It is also clear from these articles that the major reason for maintaining the strength of the Euro, despite the policy's devastating effects, is simple chauvinism. Euro-elites take pride in the strength of their currency compared to the dollar, even if that pride is strangling them.