Saturday, November 13, 2004

Dollar falling

The Times has an editorial today criticizing the Bush administration for "letting the dollar slide." I think they are right when they say that
The only lasting remedy is to reduce the federal budget deficit. That, in turn, calls for specific policies, like - we may have mentioned this before - rolling back the Bush tax cuts. Letting the dollar weaken is a far less responsible approach, an unwieldy and risky attempt to reduce the trade imbalance without the political pain of deficit reduction.
But the editorial is too pessimistic about the effects of a gradual dollar decline. A depreciation of the dollar is exactly what the economy needs right now. As long as it is not too precipitous (and we must be careful about this) a depreciation will boost exports and provide a needed push out of the recovery period we are languishing in. It will also (and already has) begin to chip away at the massive trade debt we have accumulated.

A fiscal deficit reduction is necessary and the dollar decline should not be relied upon to reduce our deficit. But the mere fact that the dollar is falling need not instill fear in and of itself.

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