Loon Toon Time on the Dollar at the NYT: Encouraging China to "Manipulate" the Value of Its Currency

[Hannah Bell]

There are many bad things that can be said about economists, but sometimes they don't even know which way is up, as seems to be the case on the oped page of the NYT today. The NYT has two columns, including one by the usually astute Nouriel Roubini, bemoaning the fact that the dollar is likely to fall in value and lose its status as the world's preeminent reserve currency.

Okay, let's start with the which way is up question. The official position of the Bush administration, the Obama administration, and the leadership of both parties in Congress is that the United States is unhappy with China's "manipulation" of its currency. The alleged manipulation is actually China's explicit policy of keeping a managed exchange rate, under which the value of China's currency is kept well below its market value relative to the dollar...A low value of the yuan means a high value of the dollar. So, the official position of the U.S. political leadership in this story is the high dollar is bad.

The reason why the high dollar is bad should be obvious. The high dollar is what gives us our trade deficit. The often-blamed budget deficit has nothing to do with the time of day when it comes to the trade deficit. People buy imported goods rather than domestically produced goods because the high dollar makes the imported goods cheaper. Let's say that again, the high dollar, makes foreign goods cheaper and therefore is the cause of the trade deficit: end of the story.

Okay, now we have two columns in the NYT warning us that the dollar is going to fall because the Chinese and others will no longer turn to it as the international reserve currency...If China's currency rises by 30 percent against the dollar, then this will provide the same benefit to U.S. manufacturers as imposing a 30 percent tariff on Chinese imports. In addition, the drop in the value of the dollar will also provide a boost to exports equivalent to a subsidy of 30 percent on all exports.

Tell us again why we are scared of the dollar losing its status as the world's leading reserve currency. Isn't the decline in the value of the dollar exactly what we want?

Roubini also commits the cardinal sin of implying that the U.S.draws any special benefit because most commodities are priced in dollars. Wrong!!!!. If the dollar falls against the euro and other currencies, then the market price of oil and other commodities increases in dollar terms. We are not able to get oil at a lower real price just because it's traded in dollars. Roubini knows better.

--Dean Baker

http://prospect.org/csnc/blogs/beat_the_press_archive?month=05&year=2009&base_name=loon_toon_time_on_the_dollar_a