NCPA - National Center for Policy Analysis

Weak Dollar Can Strengthen Economy

August 31, 2011

Gov. Rick Perry's complaint against the Federal Reserve is that loose monetary policy has weakened the value of the dollar.  Bob McTeer, a distinguished fellow with the National Center for Policy Analysis and former president of the Dallas Federal Reserve Bank, understands but says a weak dollar helps U.S. exports, one of the few strengths in the economy.

The value of the dollar matters most in the cost of living for Americans.  Pushing too much money into the economy inflates prices.  If there's too little currency in circulation, it can cause deflation, or falling prices.

  • Between November and July, when the Federal Reserve was buying $600 billion in Treasury bonds -- in effect, printing more money -- the growth rate in the nation's money supply was "right around 5 percent," McTeer said, "which is very moderate, given a 9 percent unemployment rate."
  • Bernanke and other Federal Reserve bankers explained last year that the economy showed signs of slipping into deflation.
  • It's been a different story this year -- through July, the Bureau of Labor Statistics found prices over the last 12 months were up 4.2 percent in the Dallas-Fort Worth area.

The dollar's value also matters -- greatly -- in its exchange value with other currencies.  When the dollar weakens against the currencies of the nation's trading partners, imports become more expensive.  At the same time, U.S. exports become less expensive for foreign buyers.

  • Buoyed in part by a weak dollar, U.S. exports have risen 17 percent in the last year.
  • Imports, however, have increased even more.
  • The United States was running a trade deficit of more than $565 billion at the end of June.
  • That's largely because of oil and Chinese goods.
  • For many years, the Chinese have pegged the value of their currency to the dollar and invested more than $1 trillion of their trade surplus in U.S. bonds.
  • That has distorted trade flows by keeping Chinese goods cheap, when they should be getting more expensive.

Source: Jim Landers, "Weak Dollar Can Strengthen Economy in Other Ways," Dallas Morning News, August 29, 2011.

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