Implications of a Strong Dollar

This WSJ article started nicely:

The U.S. dollar marched higher again on Friday, continuing a development that could ease inflationary pressures but also could slow a U.S. export boom.

The implications of reduced export demand, however, we left for Dean Baker:

The over-valuation of the dollar has been of the economy’s most serious problems for the last decade. The high dollar led to an unsustainable trade deficit that peaked at almost 6 percent of GDP in 2006. By definition, a trade deficit means that domestic savings is less than domestic investment. This means that (barring an investment boom, which we have not seen) there must be either a large government deficit, low private savings, or a combination of the two. None of these situations are desirable or sustainable, at least over the long-term. While the trade deficit has consistently been far larger than the budget deficit over the last decade, it has received far less attention from the media. The only plausible way to bring the size of the deficit down to a manageable level is buy reducing the value of the dollar. A lower dollar is especially important in the wake of the collapse of the housing bubble. Without the improvement in the trade balance, the economy would have been shrinking over the last three quarters. Without a continued improvement in the trade balance, spurred by a falling dollar, there is little hope that the U.S. economy will escape a prolonged downturn. The media should be giving more attention to the recent rise in the dollar and pointing out the danger it poses to the economy. It should also be discussing the dollar in the context of the presidential campaign, since the next president’s policy on the value of the dollar is likely to have more impact on the near-term health of the economy than anything else he does in office.

We have noted that Lawrence Kudlow wants a stronger dollar. Fortunately, this National Review nitwit is not running for President. John McCain is and he also wants a stronger dollar. Someone should ask John McCain why he would endorse a policy that would reduce exports and increase imports.