Tuesday, March 11, 2008

Bush's greatest economic failure

Wongdoer undervalues the effect of the weak dollar on the economy and understates the effect of the Bush policies on the weak dollar. Simply stated, the weak dollar has been a disaster. Although desired by the Bush Administration as a vehicle for increasing exports and helping companies domestically, the weak dollar has led to preposterous price increases in oil, food, and precious metals. The Chinese have manipulated their currency to deprive the US of any benefit of weak dollar policy on international trade. And the US failure to rein in inflation while using questionable monetary methods in an effort to jumpstart the economy has only increased the damage.

David Malpass has written about this issue before. In today's WSJ he pounds the Bush Administration for its fecklessness regarding the dollar and discusses why a commitment to a strong dollar (which Clinton had, to his credit) is crucial for the US:

The dollar is now weaker than the loonie, the Canadian dollar, yet the same hollow 1990s phrases are being mouthed. If a strong dollar is in the "national interest," then the seven-year dollar collapse is clearly in need of a remedy. There's an equally deep logical flaw in claiming that the dollar should depend on economic "fundamentals." A strong, stable currency is itself one of a country's most valuable fundamentals, not a byproduct of other fundamentals. Our fundamentals haven't been nearly as bad as the dollar's seven-year slide. More likely, the weak dollar trend is itself a bad economic fundamental, masking health elsewhere.

The policy shift to a stronger dollar is as critical for national security as it is for economic health. Oil would cost less if the dollar were stronger, slowing the transfers to our antagonists in Venezuela, Iran and Russia. A stronger dollar would allow U.S. wealth to grow as fast as foreign wealth, adding to our strength and independence.

Though many economists still support the theory of unlimited free-floating exchange rates, no weak-currency country has had a healthy economy. Momentum takes over and pushes currencies to extremes that can't be hedged. Many also think current interest rates control currencies. But 1% more or less in annual interest won't make up for a country's longer term intentions for its currency. Markets have labeled the U.S. a weak-currency country. That's an albatross that the president should dump.

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