Wednesday, November 24, 2004

Let the Dollar Fall

Letting the dollar fall as good policy: A quick study of monetary, tax and fiscal policy all working together.

Faced with a recession and then 9/11, the US Fed dropped interest rates and cut taxes. Guess what? It worked. Short recession.

Now the Fed is raising interest rates, which brings about a whole new set of challenges to prevent the economy from stalling.

One important way is to weaken the dollar. This a) increases foreign demand for US goods and b) reduces the trade deficit by reducing US demand for foreign goods. Its a shot into the arm of the US economy.

It's also designed to strike hard at a recalcitrant China. China has maintained an artificially low currency vs. the dollar. That's what fuels Chinese factories, at the expense of US production. The administration's theory is that by dropping the value of the dollar, it will become truly painful for the Chinese to continue to chase the US dollar downward. They will relent and float their currency...and then Chinese goods will rise in price by 50%.

And that helps the US.