Understanding the Realities of a "Weak" Dollar

Tyler Cowen, George Mason University economics professor and prolific economics blogger (Marginal Revolution) wrote a great piece for the New York Times for today's edition. I too have been tired of hearing about how a "weak" dollar is a sign of troubled times. See below for what a weak dollar really entails.

"Should we be happy with the low U.S. dollar?

from Marginal Revolution by Tyler Cowen

Here is my latest column:

A low dollar simply looks bad. We are, after all, used to judging ourselves against others — comparing our salaries with the earnings of our peers, and our homes with those of our neighbors. We’re used to thinking it is a big advantage to stand at the top of a numerical list.

But when it comes to currencies, a higher value neither brings national success nor predicts future prosperity. The measure of a nation’s wealth is the goods and services it produces, not the relative standing of its currency. Take a look at 1985-88, when the dollar lost more ground than in the last few years. Those were good times, and the next decade was largely prosperous as well.

Most of the piece is standard economics, not far from recent writings by Krugman or DeLong. The more interesting question is which measures of a national economy we, for reasons of pride, inefficiently attach too much importance to.

A second interesting question is: if we should not be worried about a low dollar, what should we be worried about? I see two answers at the current time. First, if a negative shock hits China, or perhaps some other negative shock hits the U.S. or Europe, we have precious little room to maneuver. Second, there remains some chance of a cascading credit crunch."