Falling Dollar

I have recently read news that the dollar is falling more quickly in relation to other currencies, particularly the Euro, and this because Japan and China are dumping dollars.

Certainly this country's balance of payment and budget deficits contribute to the dollar's fall, and there can be dangers in a rapidly falling dollar. But the dollar has strengths too, strengths that perhaps up till now have kept the dollar from falling even more rapidly.

Foreign investors do not just look for a currency that appreciates in value, or does not fall in value. They also want a currency that is backed by a strong, stable government, which reduces the risk that those investors will be stuck holding a currency that has become worthless because the government that backed it has fallen to revolution or war.

The dollar is backed by a constitutional government that has been in existance for about 200 years, and we have never had a revolution against that government during that time. It is also backed by a government in command of the strongest military power in the world. As a nation, we have never lost a war on our own soil.

Compare that with the Euro. It is backed not by a single powerful nation, but by a loose confederation of nations that just a few decades ago warred against each other in the greatest war the world has ever seen. The Euro itself has existed less than a decade. And the Euro is not backed by a strong military power, except the power of the United States itself as the ally of Europe. So while the Euro wins on the issue of balance of trade, the dollar wins on the strength of the government and nation that backs it. Foreign investors have to keep both of these factors in mind in their decisions, and they do.

I am also not sure that the falling dollar is bad for the United States. Our industrial base has been heavily damaged by foreign competition, and now with the Internet our white collar base is facing competion from lower-paid foreign workers. But a lower dollar helps alleviate that problem by making U.S. manufactured goods cheaper and therefore easier to sell and makes it harder for foreign manufacturers to sell their goods in this country. And it helps level the competition between American white collar workers with foreign workers (computer programmers come to mind).

I think on balance a falling dollar is good for the United States economy and helps employment, provided it falls gradually in a controlled way. What we do not want, and most foreign nations do not want, is a dollar that falls so rapidly that it disrupts worldwide commerce. That could trigger a world recession or worse.