Mostly rational politics, with occasional rants about how a few crazy Republicans are ruining the country.
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Wednesday, December 15, 2004
Lots of talk about the dollar lately. Probably more people, especially in Europe, know about foreign exchange rates and their economic implications than ever before.
Here's a quick summary of how it works. As the dollar continues to slide, many believe it's a positive for American businesses - their products will seem cheaper to foreigners, and foreign products will be more expensive to us, thus our exports will go up, imports down, and the trade deficit (imports minus exports) will be reduced. Reducing that gap would be a good thing because it would require the U.S. to borrow less... ie. as we send our money overseas to foreign companies, and not as much comes back, the govt. has to borrow to make up the difference. On the order of $2bn a day currently. The more we borrow, the weaker our dollar gets, and the cycle continues. Interest rate increases and inflation generally accompany increased borrowing as well.
Well, since the dollar is down 55% since Feb 02 (man - I remember when a Euro cost $0.88. Now it's $1.34), the trade deficit should have shrunk in tandem. Not so. We are still consuming increasing amounts of foreign goods. The government's weak dollar policy hasn't worked.
As I learned in college, coordinated successful economic policy isn't easy. But the Bush Administration's spiraling budget deficits (combined with talk of adding $2 trillion to privatize social security) has reduced foreign confidence in investing in America. What we need is a balanced budget. But we won't get that until we elect a Democrat (strange, but true). For now, we should insist that every initiative Bush pushes from here on is revenue-neutral or revenue-additive.
Some economists believe that the administration, while publicly professing support for a strong dollar, actually prefers the decline in the greenback's value against other currencies as a way of dealing with the country's huge trade deficit.