The Falling Dollar

Tyler Cowen, of Marginal Revolution, discusses the trade offs of the falling US dollar in a column in the New York Times:

A falling dollar does mean price inflation in the United States. But imports are only 16 percent of the American economy, and most foreign suppliers have been reluctant to risk their position in the American market by raising prices a great deal. Furthermore many price increases from Europe come on luxury goods and thus they fall on wealthy American buyers, who can afford it most easily. Wal-Mart serves a more working-class clientele and it is stocked with goods from Asia, where currency values have remained weaker against the dollar.

Of course the lower value of the dollar also makes American exports more competitive. Much of Middle America is booming because of its ability to sell tractors, food stuffs and other products abroad at favorable prices. Even after a serious real estate decline, the American economy is continuing to expand, and this is largely because of the strength of our export sector, as encouraged by a low value for the dollar.

So basically what we pay for in higher prices is mitigated by some amount of economic expansion from increased exports. The various directions of trickle may not reach everyone, but there is some thought that the export sector is already serving to buttress the economy in the face of the real estate burst.

One issue Cowan doesn't expand on is the dollar as global currency (or expand on enough). The Economist notes:

But now, with the euro as an alternative, the fear is of a sudden shift in the global monetary system, with investors switching quickly from one currency to the other. So far, this remains only a fear.

The concern is generally framed in the vast amounts of US dollars China holds (about 1.4 trillion dollars) and the brinksmanship that could result from a financial showdown.

And all this doesn't hit on doomsday scenarios and conspiracy theories.

• More from the Economist.