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Is a weak dollar a good or bad thing?
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As I reviewed the improvement in most key economic numbers this morning, it occurred to me that the credit markets should be anticipating higher inflation. After all, we have pumping unprecedented amounts of liquidity into the system. That would mean that long-term rates should be rising. They clearly have risen when compared to short-term rates forming a positive yield curve. That alone would indicate some inflationary pressure. But shouldn't nominal rates be higher?
It must mean that the increase demand for credit sparked by this slow recovery is being met. There is no shortage of dollars. But it also must mean that the rest of the world sees no real reason to use the dollar as a safe haven--especially since US interest rates are low. So is all this good or bad?
On the positive side, there must be considerable improvement in the world economies. The dollar's rally a few months back due to a flight to safety has reversed. A cheap dollar, then, will spur US exports and add to our recovery.
On the negative side, someone needs to buy the enormous amount of public debt built up by the Bush and Obama Presidencies. Confidence in the greenback is critical. Unless we are in for a huge tax increase to pay for public spending, the world needs a stable, strong dollar.
The problem is the Fed is walking a thin tightrope. Tightening credit and keeping dollars in banks may cause rates to rise to quickly and strengthen the dollar. But tightening too fast or too much and we fall right back into a recession. It will be very tough going for Bernanke and company.
There is a solution which makes the weak dollar an asset--reduce public spending. Wean all of us from Federal Government care. In other words, apply a little supply-side economics and reduce the need to be dependent on the largess of the world largest foreign economies.
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