David Malpass’s Lack of Understanding of Monetary Policy, Exchange Rates, and Net Exports

Paul Krugman links to an oldie but goodie from Barry Ritholtz as commented on some silliness from David Malpass. Malpass wrote:

Dollar weakness is neutralizing the positive effects of the Federal Reserve’s interest-rate cuts. As the dollar spirals downward, weakened by Washington’s indifference and market expectations of more rate cuts, liquidity drains from the U.S. into inflation hedges like gold and, in the case of entrepreneurship and risk-taking capital, to countries with strengthening currencies. This drain undercuts the growth impact of the Fed’s recent rate cuts, complicating the recovery from the August credit-market turbulence.

Barry responds:

No, no, no, no, no Its not the that Fed cuts are being neutalized by the weak dollar – its the Fed cuts are CAUSING THE WEAK DOLLLAR.

And the weaker dollar tends to raise net exports, which tends to increase the effect that monetary policy has on aggregate demand. It would seem Malpass is as clueless as Lawrence Kudlow.