23 October 2007

Americans living overseas see the front edge of the dollar collapse. Life in Europe seems to be twice as expensive as just a few years ago, as Euro-driven price-inflation meets the rapid drop in the value of the dollar against major currencies, like the Euro and the British Pound Sterling. Americans at home are facing higher food prices, higher fuel costs, and an overall slowdown in home-buying.

This is partly due to the US dollar's reduced ability to 'capture' wealth from abroad, via currency exchange, and by extension, via trade. As the dollar falls in value —losing 10% of its value against the Euro in just a few months, and roughly 41% of its value against the Euro since November 2000, when a Euro cost just $0.83—, it less likely that additional wealth will flow into the US economy by means other than the export of manufactured or agricultural goods. And, it is important to note that those exports need not increase in proportion to the dollar's decline.

For now, China has helped by aggressively promoting its exports to the United States, but should it feel able to free up some of that economic might for other pursuits —for instance, to double the EU market for Chinese exports—, the US could see the current economic bubble become suddenly very visible and very brittle.

We need a strong dollar; it is at once the foundation of and an expression of a healthy economy. The 1990s boom enjoyed a "strong-dollar policy", whereas current economic policy seems adjusted to take advantage of the temporary 'cover' to be had in increasing US exports via the weak dollar.

Indeed, EU ministers have complained the current weak-dollar policy is an attack on European manufacturing and foodstuffs, making it harder for Americans to pay for imports from Europe. But the fact that the long term effect is to weaken the buying power of US consumers and the lending power of banks means the weak dollar is undermining as-yet untapped potential for future economic growth, putting the US at a long-term disadvantage in a global economy that requires quick adaptation and elasticity.

We also have to face the very tough reality that volatility in the dollar means oil prices are less likely to stay low. We find that with the falling dollar, oil prices keep climbing, making the impact of the price rise double what it might otherwise be. Having not had reports of massive slowdown across the US economy as a result of escalating fuel prices only means the moment is on the horizon.

We need economic policies that contemplate: 1) a strong-dollar policy shows faith in the capacity of the American system to produce, to innovate and to compete, and that draws investment, which aids in all of these categories; 2) energy security requires not only more favorable pricing and a shift away from fossil fuels, but sweeping investments in renewable resources; 3) the new boom economy will be the overhaul of our energy economy, the dollar needs to be strong to drive this boom.

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