A Weak Dollar is Bad Policy

A Weak Dollar is Bad Policy

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Let’s see if I’ve got this right. If the United States weakens its currency, its goods and services become cheaper for foreigners to buy and foreign goods and services become more expensive for Americans to buy. At least that’s how it’s supposed to work in theory. The folks running our government certainly appear to subscribe to this theory. After all, they have embarked on what appears to be a strategy of destroying the dollar’s value. On that score, they certainly are succeeding.

Over the past two months alone, the dollar has lost significant ground against major currencies. In mid-August one euro cost less than $1.30. Today, it costs close to $1.41. Two months ago, one dollar bought 86 yen. Now it buys about 81. The dollar has also lost value against the currencies of Singapore, Australia, Switzerland, the United Kingdom, and Canada, to name just a few. The soaring price of gold is perhaps the best indicator of the extent of the dollar’s destruction.

So you would think that with all this dollar weakness, exports would surge and imports would decline. Unfortunately, the latest trade figures are not consistent with this weak dollar theory. According to the Department of Commerce, exports in August grew by a very tepid $300 million. Imports, however, surged by $4.1 billion. In other words, despite the weaker dollar, the trade deficit got $3.1 billion larger.

Not long ago, any increase in international trade would have been welcomed. The global economy was thought to be moving in the right direction if both exports and imports went higher, as these latest trade figures indicate. Today, that’s not good enough for the Federal Reserve. These days, the Fed is focused more on U.S. employment—or more correctly—the lack thereof. It seems that members of the Federal Reserve don’t mind a rise in imports just as long as exports rise even faster. After all, they reason, more exports should result in more jobs for American workers. These officials have somehow convinced themselves that job creation is best achieved by making our dollar weaker.

The evidence, however, suggests that this strategy isn’t working. Imports keep outpacing exports even as the dollar gets cheaper. To be fair, we should wait for trade and employment figures for September and October before casting final judgment. Yet, so far anyway, instead of creating jobs, the Fed’s strategy is merely destroying our money.

Perhaps a better way to create jobs is to provide employers with the right incentives to hire more workers. Instead of trying to manipulate exchange rates by driving already low interest rates even lower, we should focus on tax breaks for corporations. However, when it comes to fiscal policy, the Fed plays no role. Witness how Chairman Ben Bernanke always manages to dance around the question whenever he is asked about taxes. At the very least, Congress should give American businesses the certainty they need to make proper long-term investment decisions. This is what it will take to get these companies hiring again.

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