THE FALLING DOLLAR
Here's a very interesting article: The Economist expects the dollar to fall. That's not exactly news. Economists (including those at The Economist) have been aware for a long time that America's huge trade deficits were unsustainable. Larry Summers, in Foreign Policy, and Niall Ferguson, in The New Republic, have both argued this within the past couple of months (unfortunately, no free access to either article), and the last chapter in Ferguson's book Colossus gives the thesis at more length. Generally, the fall of the dollar is seen as more or less an ominous development.

A typical story runs like this: the world runs on a dollar standard, and the US benefits from this because it enjoys the right to seigniorage, or (a little more intelligently) because it enjoys greater potential for running counter-cyclical monetary and fiscal policy. Then again, sometimes it is assumed quite naively that a "strong dollar," like a "strong military," must be a good thing.

Well, it depends. A strong dollar is good for customers. A weak dollar is good for workers. We're all both customers and workers. Do we care more about our interests as customers, or as workers? Probably as workers. We like having stuff, but we're more anxious about keeping our jobs. And yet, even when the dollar is weak, the trade deficit is huge, and growing. Will we eventually have to pay all that back? If so, will it be easy? Maybe-- our productivity is zooming upwards, and new markets can only help in that respect. Or maybe not-- it might just lower our standards of living.

Is the vaguely ominous future that Ferguson and Summers and The Economist hint at really so ominous? Or is it somehow just a myth, as I suspect? Or is it something in between, that we haven't thought of yet? The mystery of finance.