Postings and assignments for students in Econ 3334 at UH
Thursday, March 27, 2008
Falling Dollar
Martin Feldstein (really smart economist) has a commentary on the fall in value of the U.S. dollar. You can frame his argument in terms of the real vs. nominal exchange rates, and then think about how this relates to our large trade deficit.
Behind the problems of the dollar lies the huge and growing US trade deficit, and the large Federal budget deficit. A fall in the greenback could hit Asian countries whose governments hold huge foreign currency reserves in dollars. That deficit is now heading above $800bn for 2006, or 7% of the US economy, and shows no signs of diminishing. At the same time, tax cuts and the war in Iraq have led to a US budget deficit of several hundred billion dollars despite the booming economy. In the first place, a rapid fall in the dollar, if it accelerates, could cause short-term problems for the US economy. The higher price of imported goods could lead to a hike in domestic inflation, and it could take several years before consumers switch back to buying more US goods. High inflation, combined with the stronger-than-expected growth of the US economy, could force the US central bank, the Federal Reserve, to keep raising interest rates U.S. consumers and the federal government are borrowing and spending aggressively, consuming more than they produce... But the fears of inflation are also likely to affect the interest rates on long-term bonds, which determine mortgage rates. The rising mortgage rates, while they may eventually dampen the housing boom, will also give a further boost to inflationary pressures. The dollar's fall will result in painful adjustments for the U.S. economy. But hopefully it won’t collapse.
The Financial Times article, “The dollar is falling at the right time” reports that the dollar dropped below 100 Japanese yen for the first time since November 1995. As a result the dollar has fallen more than twenty percent since 2002. Japanese leaders quickly cautioned against instability in currency markets, but made no mention of any intervention to stem the dollar's slide. The yen's strength is bad news for Japan's economy, which has been showing signs of weakening, because it makes exporters' products more expensive abroad and erodes the value of their overseas earnings.
In comparison the current exchange rate with the 100 yen per dollar in 1995 is misleading because of the differences in the United States and Japanese inflation. While the United States’ consumer prices stayed the same, Japans’ consumer prices rose thirty seven percent between 1995 and 2007. A dollar buys substantially less today in the US than it did in 1995. While in Japan, 100 yen buys the same amount in Japan as it did then. The latest blow is that we always hear that the value of the dollar has declined, but when compared to the Japanese yen, you really start to understand the true meaning. The value of the dollar fluctuates from year to year. Over long periods of time the dollar’s real value has changed very little.
Nonetheless, the real inflation-adjust the value of the dollar against other currencies has declined only seven percent over the past twenty years. Because of the dollar’s decline over the past five years the trade deficit has declined as well. The real United States exports are up seventeen percent in the past two years, and the trade deficit has come down eleven percent from 2006. Even though the value of the dollar has declined, America’s trading partners still have an excess of large trades. Japan’s trade surplus exceeds one hundred billion dollars. In the grand scheme of things the value of the dollar is not causing problems for America’s trading partners. The decline of the dollar reflects the unwillingness of private and public portfolio investors around the world to hold the current amounts of dollar securities at the existing interest and exchange rate. An initial lower dollar rate has the favorable effect of stimulating US net exports and increasing the growth rate during an economic weakness.
Changes in exchange rates can greatly impact various parts of the economy. A fall in the exchange rates will cause foreigners to buy more of our goods and us to buy less foreign goods. So theory tells us that when the value of the U.S. Dollar falls relative to other currencies, the U.S. should enjoy a trade surplus, or at least a smaller trade deficit. The United States has a few key trading partners such as Canada, Mexico and Japan. If we look at the exchange rates between the United States and these countries, perhaps we would have a better idea of why the United States continues to have a large trade deficit, in addition to a rapidly declining dollar. We should examine American trade with our major trading partners and see if those trading relationships can explain the trade deficit
The dollar declined to 100 in the yen-dollar rate. This is the lowest it’s been since 1995. Nevertheless, inflation makes comparing the 1995 rate to today's impossible. Japan's inflation rate has been minimal while in the United States it has remained in constant increase. The fluctuation of the dollar is a common phenomenon. The changes are basically nominal. The real value remains roughly the same. Evidence of the strength of the U.S. dollar is in the world markets. The U.S. products find it hard tom compete in the global markets because of its comparative strength. The trade deficit of the United States has decreased by 11% since 2006. The declining U.S. dollar is an obvious cause of this. The biggest trade partners of the U.S. continue to remain unaffected, seeing as how they all still run trade surpluses. The main reason why the dollar is losing strength is because national and international investors are looking for investments in alternate currencies. This is most probably because investors feel uncomfortable and unpleased by the current exchange rate of the dollar and interest rate in the U.S. The U.S. should consider itself lucky that the result of this has been a weaker dollar and not a rise in the national Interest Rate; which considering the economy currently, would hurt much more. If the exchange rate were to be tampered with successfully, it would eventually hurt the U.S. economy because America needs to remain competitive in the world markets. If there are any deals made with other countries to adjust their currencies than this would violate free markets. Personally I agree with the author because no one likes to see its currency to fall. People don't want higher interest rates because mortgages are rising also and millions of people are losing their homes. I believe what the authors says that it is only a cycle of the economy but hope that it won't collapse.
This article from Financial Times talks about the falling dollar and how it’s not as bad as many experts say it to be. The dollar buys about the same number of yen it bought in 1995 (roughly 100 yen per US dollar) even though inflation in the US has been 37% since 1995 but almost zero in Japan. To account for all this inflation, the US dollar should be buying a lot less yen today. Moreover, “inflation-adjusted… the dollar… has declined only 7 per cent over the past 20 years) Mr. Feldstein argues that because the dollar is so strong, that US-made goods are uncompetitive globally. Mr. Feldstein continues “Real US exports have increased 17% in the past two years, and the trade deficit has come down 11% from its peak in 2006” Due to the US having such a large trade deficit, the dollar has actually to go a lot lower than it is today to make the trade deficit smaller. He then cites recent trading surplus figures from creditor nation countries, such as Japan, Russia, China, Saudi Arabia and others. Mr. Feldstein is against any exchange intervention to cease the decline in the dollar, and says that it would be counterproductive. Also, he stated that a lower US dollar would make the US more competitive with other countries. Also, if US authorities would intervene, it would make other countries that have intervened in the FX market (like Japan) more willingly to continue that policy. My personal opinion is that a falling US dollar is bad for the US. This devaluation policy can be summarized in selling what you make for less money and buying stuff from other countries more expensive. Moreover, a lot of goods that are used in the manufacture of US goods comes from abroad (like most of our energy products that we use, the US imports close to 70% of its energy needs from abroad) it would make the US less competitive. This can be demonstrated in the value of oil in euro terms. Also, what he fails to see is that interest rates have remained low thanks to countries such as China and Japan that are willing to buy securities and thus finance the current account deficit. Should the value of the US dollar continue to decline and since the US is the largest debtor nation in the world, we would see interest rates skyrocket should these countries stop buying US securities Moreover, a supposedly “strong dollar” is not the cause of the trade deficit, but it’s the other way around. Germany, even though the euro has strengthened quite a lot against the US dollar have had their trade surplus increased in the last several years. The same applies to Brazil, which their exports have reached record levels every year, even though the Brazilian real has been among the top performing currencies I think the correlation between having a trade surplus and savings rate is great (Japan, Germany, China have the highest savings rate in the world) If a lower domestic currency value were the answer to a trade deficit, then Zimbabwe should have the largest trade surplus in the world. To conclude, simply making the US dollar worth less will not take care of the trade deficit. I think what needs to change is Americans’ saving and spending habits.
The main focus of this article is the current decline value of the dollar. The article discusses the current value of the dollar from what it used to be back in 1995. It also compares both of those values to the value of the yen at both times. The value of the dollar in 1995 was stronger than when it currently is today. The current value of the yen compared to its 1995 value is virtually unchanged. The article then connects the dots and states that the dollar would be equal to “$1.37 for each 100 yen in 1995.” This root cause cited in the article is “investors unwillingness to increase the interest rate.” This shows that the dollar exchange rate is a flexible one. The exchange rate being the device used to measure this value. A flexible exchange rate can be used to bend around many more different factors such as an interest rate or the money supply. A flexible exchange rate is as its name implies one that can go up and down. The opposite of a flexible exchange rate is a fixed one. In the fixed exchange rate any shocks or markets change bend around the fixed exchange rate
The article takes a look at other countries reactions to the continuing drop in the exchange rate. The author of the article, Martin Feldstein, thinks that by making the exchange rate go down it will allow for more competition. The article then cites many different developed countries that are still buying exports strong to help back this claim.
I do not have a job currently but if I was to have one I would have no problems with spending a little more here. It seems that even with these changes in the exchange rate, as a college student, I don’t consciously feel any difference in the money I spend just like I don’t feel the Earth move beneath me as I stand. I’m not saying that it is useless. What I am saying, is that there is too much of a panic for even the smallest change.
The article discusses how the dollar has depreciated and fallen in value and the effects and consequences from a falling dollar. As a control the article compares it to the Japanese Yen, indicating how American prices have risen while Japanese prices have remained constant. These effects allow us to draw the conclusion that the value of the dollar has changed very little over time.
A big source of confusion is the concept of a "weak dollar". A weak dollar is not necessarily a bad thing, in fact, a weak dollar leads to more competitiveness in the global market. The article concludes that right now the dollar is actually very strong, which is causing the U.S. to lose out in business overseas. The U.S. imports much more than it exports, creating a large trade deficit which is difficult to overcome if the dollar is not "weak".
The article proceeds to argue that of the two options available, the best path is to lower the value of the dollar, or make it weaker, rather than the other option of high interest rates. High interest rates would cause a shift in the aggregate demand curve which would reduce overall output. Lowering the value of the dollar prevents these negative economic outcomes and stabilizes total output. The article concludes that any kind of intervention to strengthen the dollar would be counterproductive and only lead to more economic woes rather than fixing the problem.
Most of this is fairly basic economics. The U.S. runs a negative balance in trade, where net exports is negative, which adversely effects the U.S. GDP. A stronger dollar would only magnify the effect that this negative trade balance has. The article is correct in its assertion that to compete better globally the value of the dollar should actually be weakened further, not strengthened.
This article begins by stating that just recently the dollar has fallen to a yen-dollar rate of 100. This is the lowest rate the dollar has been against the yen since 1995. Although this may not sound too good for the dollar, it could provide the “increased US competitiveness” needed. The article goes on to say that comparing the current exchange rate with the 100 yen per dollar exchange rate of 1995 can be seriously misleading. The reason is because of the different levels and amounts of inflation experienced by both the United States and Japan. Since 1995, prices in the United States have risen nearly 37 percent while prices in Japan have remained practically unchanged. This means that the dollar today buys much less in the United States than it did in 1995 while the yen buys about the same in Japan now as it did in 1995.
It is difficult to pinpoint the actual value of the dollar as it fluctuates frequently. However, in the long run, the dollar has managed to change very little. Over a twenty-year period, the real inflation-adjusted value of the dollar has only declined about seven percent when compared to a basket of other currencies. Many people feel that the dollar is week right now, but the large trade deficit illustrates “that the value of the dollar is not weak but is actually very strong.” The prices of US goods are still quite competitive on the global markets. In fact, the decline of the dollar has actually helped the United States decrease the trade deficit and has helped the amount of US exports rise over the last few years. “The US has therefore been for¬tunate that the adjustment to the fall in world demand for US securities has taken the form of a lower dollar rather than of a rise in the level of US interest rates.” The lower exchange rate is making it easier for other countries to buy goods and products from the United States. It seems as if the decline in the dollar has actually allowed the United States to increase exports. Now that more countries want US goods, the United States the ability to work on reducing back the trade deficit.
I feel that the United States needs to take advantage of this opportunity and do what we can to minimize our deficit. I feel that Americans need not worry about the dollar because, as the article stated, the dollar is still very strong. I know that the dollar is bound to fall more but I believe in my country and I know that the dollar will rebound at the right moment.
The author takes the side of what seems to be a rather counter intuitive argument. That in this time of economic downfall we want a weaker dollar. Most people upon hearing this would be aghast, since most people want a strong, mighty U.S dollar to reign supreme so that we may continue to consume foreign goods at cheap prices and so that we may continue to enjoy vacations in these foreign countries. Fortunately since economic students, certainly do not fit in the category of “most people” we are able to evaluate Martin Feldstein’s argument with out and biases.
In some ways it is really simple, the weaker the dollar the less foreign goods it will buy and the more foreigners can buy American goods. This is a very important issue, especially right now with the huge trade deficit looming over the United States economy. The strength of the dollar is counter productive in that it is too strong. United States goods are just not attractive to other countries, because we cannot compete with them on equal playing fields. For the same general reason, this is why the Chinese government on purposely keeps that currency undervalued, so that Chinese goods are more competitive in foreign markets. The author argues against government intervention in the strengthening of the dollar saying that it will only hurt our economy more and increase the trade deficit. Also all the work that the United States has done with countries like China, trying to get them to allow their currency to float freely, will be ruined.
The author seems very focused on the positive impacts of a weak dollar, but he seems to ignore the negative. A weakening dollar will hurt the consumers and scare the consumers out of any confidence they have left. It will also worry countries like China and Japan who have brought up huge amounts of dollars to keep the dollar strong. What we need to do, I think, is to find some kind of balance. We can’t have the dollar to strong, but at the same time we can not have the dollar too weak. A weak dollar may be useful now but who knows in five or ten years.
“The dollar is falling at the right time” by Martin Feldstein is an article that deals the dollar becoming less valuable. This is bad for the United States as we can buy less foreign things. It is good for people trying to buy goods from the United States as their currency now goes further. This is coming at a good time. It will help reduce our national debt. With the recession, the timing could not have been better. One possible reason for the decline in the dollars’ value is from Fed increasing the money supply to lower the interest rate. They are hoping that they can spark the economy with low rates to encourage people to invest. This does have its downside and we are seeing that with the dollars’ drop in value. You cannot have it both ways. Something must be scarified. With U.S. not being able to buy much foreign goods our trade deficit should shrink. This is a good thing. It currently is a really large negative number. As our imports get smaller so does the deficit. We could even end up running a trade surplus. This would be great for the economy. I see this as a good thing. It will help the economy out. In the long run I am sure that the dollar will rise in value again as we come out of the recession. Natural business cycles are full of ups and downs. We are just experiencing the downs currently.
The article specifically outlines the falling dollar as it plummets to the lowest it has been since 1995 with a notable 20 percent decrease since 2002. With the Japanese yen remaining pretty unchanged, the 1995 100 yen to the dollar ratio becomes somewhat convoluted in the dollar’s decrease as it requires more US currency to buy the same goods now in Japan than it did in 1995, yet ironically the yen would have to mark up to 73 per dollar to actively compare the differences in the economies’ inflations.
There are two sides to the story here, with the positive gain for the strength of American products in the world market. It forces competition as the value of the dollar decreases, so consumers can purchase American goods at lower rates. The flip side is the increase of costs in imported materials.
In reference to the American economy, it bolsters positive trends in exports, which may make it strange to desire a weak dollar, as the dollar drops 35 percent against the euro and 24 percent against the yen, but some companies at home are coming out ahead. The competitiveness is forced to increase, and the cheaper dollar helps to trade at higher prices. The downside, importing on the currency exchange makes foreign items steep.
This could force Americans to start buying at home though. The economic shift of the dollar will force the consumer to buy homegrown varieties over foreign imports, and drive foreign markets to purchase American goods because they become the cheaper alternative, possibly opening up our economy to more major trading partners. Though there is a trading deficit, it does seem plausible that upswing in exports could surge to mark down the deficit potential and rally the dollar back upward in coming years.
The article specifically outlines the falling dollar as it plummets to the lowest it has been since 1995 with a notable 20 percent decrease since 2002. With the Japanese yen remaining pretty unchanged, the 1995 100 yen to the dollar ratio becomes somewhat convoluted in the dollar’s decrease as it requires more US currency to buy the same goods now in Japan than it did in 1995, yet ironically the yen would have to mark up to 73 per dollar to actively compare the differences in the economies’ inflations.
There are two sides to the story here, with the positive gain for the strength of American products in the world market. It forces competition as the value of the dollar decreases, so consumers can purchase American goods at lower rates. The flip side is the increase of costs in imported materials.
In reference to the American economy, it bolsters positive trends in exports, which may make it strange to desire a weak dollar, as the dollar drops 35 percent against the euro and 24 percent against the yen, but some companies at home are coming out ahead. The competitiveness is forced to increase, and the cheaper dollar helps to trade at higher prices. The downside, importing on the currency exchange makes foreign items steep.
This could force Americans to start buying at home though. The economic shift of the dollar will force the consumer to buy homegrown varieties over foreign imports, and drive foreign markets to purchase American goods because they become the cheaper alternative, possibly opening up our economy to more major trading partners. Though there is a trading deficit, it does seem plausible that upswing in exports could surge to mark down the deficit potential and rally the dollar back upward in coming years.
11 comments:
Behind the problems of the dollar lies the huge and growing US trade deficit, and the large Federal budget deficit. A fall in the greenback could hit Asian countries whose governments hold huge foreign currency reserves in dollars. That deficit is now heading above $800bn for 2006, or 7% of the US economy, and shows no signs of diminishing. At the same time, tax cuts and the war in Iraq have led to a US budget deficit of several hundred billion dollars despite the booming economy. In the first place, a rapid fall in the dollar, if it accelerates, could cause short-term problems for the US economy. The higher price of imported goods could lead to a hike in domestic inflation, and it could take several years before consumers switch back to buying more US goods. High inflation, combined with the stronger-than-expected growth of the US economy, could force the US central bank, the Federal Reserve, to keep raising interest rates U.S. consumers and the federal government are borrowing and spending aggressively, consuming more than they produce... But the fears of inflation are also likely to affect the interest rates on long-term bonds, which determine mortgage rates. The rising mortgage rates, while they may eventually dampen the housing boom, will also give a further boost to inflationary pressures. The dollar's fall will result in painful adjustments for the U.S. economy. But hopefully it won’t collapse.
The Financial Times article, “The dollar is falling at the right time” reports that the dollar dropped below 100 Japanese yen for the first time since November 1995. As a result the dollar has fallen more than twenty percent since 2002. Japanese leaders quickly cautioned against instability in currency markets, but made no mention of any intervention to stem the dollar's slide. The yen's strength is bad news for Japan's economy, which has been showing signs of weakening, because it makes exporters' products more expensive abroad and erodes the value of their overseas earnings.
In comparison the current exchange rate with the 100 yen per dollar in 1995 is misleading because of the differences in the United States and Japanese inflation. While the United States’ consumer prices stayed the same, Japans’ consumer prices rose thirty seven percent between 1995 and 2007. A dollar buys substantially less today in the US than it did in 1995. While in Japan, 100 yen buys the same amount in Japan as it did then. The latest blow is that we always hear that the value of the dollar has declined, but when compared to the Japanese yen, you really start to understand the true meaning. The value of the dollar fluctuates from year to year. Over long periods of time the dollar’s real value has changed very little.
Nonetheless, the real inflation-adjust the value of the dollar against other currencies has declined only seven percent over the past twenty years. Because of the dollar’s decline over the past five years the trade deficit has declined as well. The real United States exports are up seventeen percent in the past two years, and the trade deficit has come down eleven percent from 2006. Even though the value of the dollar has declined, America’s trading partners still have an excess of large trades. Japan’s trade surplus exceeds one hundred billion dollars. In the grand scheme of things the value of the dollar is not causing problems for America’s trading partners. The decline of the dollar reflects the unwillingness of private and public portfolio investors around the world to hold the current amounts of dollar securities at the existing interest and exchange rate. An initial lower dollar rate has the favorable effect of stimulating US net exports and increasing the growth rate during an economic weakness.
Changes in exchange rates can greatly impact various parts of the economy. A fall in the exchange rates will cause foreigners to buy more of our goods and us to buy less foreign goods. So theory tells us that when the value of the U.S. Dollar falls relative to other currencies, the U.S. should enjoy a trade surplus, or at least a smaller trade deficit. The United States has a few key trading partners such as Canada, Mexico and Japan. If we look at the exchange rates between the United States and these countries, perhaps we would have a better idea of why the United States continues to have a large trade deficit, in addition to a rapidly declining dollar. We should examine American trade with our major trading partners and see if those trading relationships can explain the trade deficit
The dollar declined to 100 in the yen-dollar rate. This is the lowest it’s been since 1995. Nevertheless, inflation makes comparing the 1995 rate to today's impossible. Japan's inflation rate has been minimal while in the United States it has remained in constant increase. The fluctuation of the dollar is a common phenomenon. The changes are basically nominal. The real value remains roughly the same. Evidence of the strength of the U.S. dollar is in the world markets. The U.S. products find it hard tom compete in the global markets because of its comparative strength.
The trade deficit of the United States has decreased by 11% since 2006. The declining U.S. dollar is an obvious cause of this.
The biggest trade partners of the U.S. continue to remain unaffected, seeing as how they all still run trade surpluses.
The main reason why the dollar is losing strength is because national and international investors are looking for investments in alternate currencies. This is most probably because investors feel uncomfortable and unpleased by the current exchange rate of the dollar and interest rate in the U.S.
The U.S. should consider itself lucky that the result of this has been a weaker dollar and not a rise in the national Interest Rate; which considering the economy currently, would hurt much more.
If the exchange rate were to be tampered with successfully, it would eventually hurt the U.S. economy because America needs to remain competitive in the world markets. If there are any deals made with other countries to adjust their currencies than this would violate free markets.
Personally I agree with the author because no one likes to see its currency to fall. People don't want higher interest rates because mortgages are rising also and millions of people are losing their homes. I believe what the authors says that it is only a cycle of the economy but hope that it won't collapse.
This article from Financial Times talks about the falling dollar and how it’s not as bad as many experts say it to be. The dollar buys about the same number of yen it bought in 1995 (roughly 100 yen per US dollar) even though inflation in the US has been 37% since 1995 but almost zero in Japan. To account for all this inflation, the US dollar should be buying a lot less yen today. Moreover, “inflation-adjusted… the dollar… has declined only 7 per cent over the past 20 years)
Mr. Feldstein argues that because the dollar is so strong, that US-made goods are uncompetitive globally. Mr. Feldstein continues “Real US exports have increased 17% in the past two years, and the trade deficit has come down 11% from its peak in 2006” Due to the US having such a large trade deficit, the dollar has actually to go a lot lower than it is today to make the trade deficit smaller. He then cites recent trading surplus figures from creditor nation countries, such as Japan, Russia, China, Saudi Arabia and others.
Mr. Feldstein is against any exchange intervention to cease the decline in the dollar, and says that it would be counterproductive. Also, he stated that a lower US dollar would make the US more competitive with other countries. Also, if US authorities would intervene, it would make other countries that have intervened in the FX market (like Japan) more willingly to continue that policy.
My personal opinion is that a falling US dollar is bad for the US. This devaluation policy can be summarized in selling what you make for less money and buying stuff from other countries more expensive. Moreover, a lot of goods that are used in the manufacture of US goods comes from abroad (like most of our energy products that we use, the US imports close to 70% of its energy needs from abroad) it would make the US less competitive. This can be demonstrated in the value of oil in euro terms.
Also, what he fails to see is that interest rates have remained low thanks to countries such as China and Japan that are willing to buy securities and thus finance the current account deficit. Should the value of the US dollar continue to decline and since the US is the largest debtor nation in the world, we would see interest rates skyrocket should these countries stop buying US securities
Moreover, a supposedly “strong dollar” is not the cause of the trade deficit, but it’s the other way around. Germany, even though the euro has strengthened quite a lot against the US dollar have had their trade surplus increased in the last several years. The same applies to Brazil, which their exports have reached record levels every year, even though the Brazilian real has been among the top performing currencies I think the correlation between having a trade surplus and savings rate is great (Japan, Germany, China have the highest savings rate in the world)
If a lower domestic currency value were the answer to a trade deficit, then Zimbabwe should have the largest trade surplus in the world. To conclude, simply making the US dollar worth less will not take care of the trade deficit. I think what needs to change is Americans’ saving and spending habits.
The main focus of this article is the current decline value of the dollar. The article discusses the current value of the dollar from what it used to be back in 1995. It also compares both of those values to the value of the yen at both times. The value of the dollar in 1995 was stronger than when it currently is today. The current value of the yen compared to its 1995 value is virtually unchanged. The article then connects the dots and states that the dollar would be equal to “$1.37 for each 100 yen in 1995.” This root cause cited in the article is “investors unwillingness to increase the interest rate.” This shows that the dollar exchange rate is a flexible one. The exchange rate being the device used to measure this value. A flexible exchange rate can be used to bend around many more different factors such as an interest rate or the money supply. A flexible exchange rate is as its name implies one that can go up and down. The opposite of a flexible exchange rate is a fixed one. In the fixed exchange rate any shocks or markets change bend around the fixed exchange rate
The article takes a look at other countries reactions to the continuing drop in the exchange rate. The author of the article, Martin Feldstein, thinks that by making the exchange rate go down it will allow for more competition. The article then cites many different developed countries that are still buying exports strong to help back this claim.
I do not have a job currently but if I was to have one I would have no problems with spending a little more here. It seems that even with these changes in the exchange rate, as a college student, I don’t consciously feel any difference in the money I spend just like I don’t feel the Earth move beneath me as I stand. I’m not saying that it is useless. What I am saying, is that there is too much of a panic for even the smallest change.
The article discusses how the dollar has depreciated and fallen in value and the effects and consequences from a falling dollar. As a control the article compares it to the Japanese Yen, indicating how American prices have risen while Japanese prices have remained constant. These effects allow us to draw the conclusion that the value of the dollar has changed very little over time.
A big source of confusion is the concept of a "weak dollar". A weak dollar is not necessarily a bad thing, in fact, a weak dollar leads to more competitiveness in the global market. The article concludes that right now the dollar is actually very strong, which is causing the U.S. to lose out in business overseas. The U.S. imports much more than it exports, creating a large trade deficit which is difficult to overcome if the dollar is not "weak".
The article proceeds to argue that of the two options available, the best path is to lower the value of the dollar, or make it weaker, rather than the other option of high interest rates. High interest rates would cause a shift in the aggregate demand curve which would reduce overall output. Lowering the value of the dollar prevents these negative economic outcomes and stabilizes total output. The article concludes that any kind of intervention to strengthen the dollar would be counterproductive and only lead to more economic woes rather than fixing the problem.
Most of this is fairly basic economics. The U.S. runs a negative balance in trade, where net exports is negative, which adversely effects the U.S. GDP. A stronger dollar would only magnify the effect that this negative trade balance has. The article is correct in its assertion that to compete better globally the value of the dollar should actually be weakened further, not strengthened.
- Joseph Kelley
This article begins by stating that just recently the dollar has fallen to a yen-dollar rate of 100. This is the lowest rate the dollar has been against the yen since 1995. Although this may not sound too good for the dollar, it could provide the “increased US competitiveness” needed. The article goes on to say that comparing the current exchange rate with the 100 yen per dollar exchange rate of 1995 can be seriously misleading. The reason is because of the different levels and amounts of inflation experienced by both the United States and Japan. Since 1995, prices in the United States have risen nearly 37 percent while prices in Japan have remained practically unchanged. This means that the dollar today buys much less in the United States than it did in 1995 while the yen buys about the same in Japan now as it did in 1995.
It is difficult to pinpoint the actual value of the dollar as it fluctuates frequently. However, in the long run, the dollar has managed to change very little. Over a twenty-year period, the real inflation-adjusted value of the dollar has only declined about seven percent when compared to a basket of other currencies. Many people feel that the dollar is week right now, but the large trade deficit illustrates “that the value of the dollar is not weak but is actually very strong.” The prices of US goods are still quite competitive on the global markets. In fact, the decline of the dollar has actually helped the United States decrease the trade deficit and has helped the amount of US exports rise over the last few years. “The US has therefore been for¬tunate that the adjustment to the fall in world demand for US securities has taken the form of a lower dollar rather than of a rise in the level of US interest rates.” The lower exchange rate is making it easier for other countries to buy goods and products from the United States. It seems as if the decline in the dollar has actually allowed the United States to increase exports. Now that more countries want US goods, the United States the ability to work on reducing back the trade deficit.
I feel that the United States needs to take advantage of this opportunity and do what we can to minimize our deficit. I feel that Americans need not worry about the dollar because, as the article stated, the dollar is still very strong. I know that the dollar is bound to fall more but I believe in my country and I know that the dollar will rebound at the right moment.
The author takes the side of what seems to be a rather counter intuitive argument. That in this time of economic downfall we want a weaker dollar. Most people upon hearing this would be aghast, since most people want a strong, mighty U.S dollar to reign supreme so that we may continue to consume foreign goods at cheap prices and so that we may continue to enjoy vacations in these foreign countries. Fortunately since economic students, certainly do not fit in the category of “most people” we are able to evaluate Martin Feldstein’s argument with out and biases.
In some ways it is really simple, the weaker the dollar the less foreign goods it will buy and the more foreigners can buy American goods. This is a very important issue, especially right now with the huge trade deficit looming over the United States economy. The strength of the dollar is counter productive in that it is too strong. United States goods are just not attractive to other countries, because we cannot compete with them on equal playing fields. For the same general reason, this is why the Chinese government on purposely keeps that currency undervalued, so that Chinese goods are more competitive in foreign markets. The author argues against government intervention in the strengthening of the dollar saying that it will only hurt our economy more and increase the trade deficit. Also all the work that the United States has done with countries like China, trying to get them to allow their currency to float freely, will be ruined.
The author seems very focused on the positive impacts of a weak dollar, but he seems to ignore the negative. A weakening dollar will hurt the consumers and scare the consumers out of any confidence they have left. It will also worry countries like China and Japan who have brought up huge amounts of dollars to keep the dollar strong. What we need to do, I think, is to find some kind of balance. We can’t have the dollar to strong, but at the same time we can not have the dollar too weak. A weak dollar may be useful now but who knows in five or ten years.
James Walsh T-Th 1 to 2:30
“The dollar is falling at the right time” by Martin Feldstein is an article that deals the dollar becoming less valuable. This is bad for the United States as we can buy less foreign things. It is good for people trying to buy goods from the United States as their currency now goes further. This is coming at a good time. It will help reduce our national debt. With the recession, the timing could not have been better.
One possible reason for the decline in the dollars’ value is from Fed increasing the money supply to lower the interest rate. They are hoping that they can spark the economy with low rates to encourage people to invest. This does have its downside and we are seeing that with the dollars’ drop in value. You cannot have it both ways. Something must be scarified.
With U.S. not being able to buy much foreign goods our trade deficit should shrink. This is a good thing. It currently is a really large negative number. As our imports get smaller so does the deficit. We could even end up running a trade surplus. This would be great for the economy.
I see this as a good thing. It will help the economy out. In the long run I am sure that the dollar will rise in value again as we come out of the recession. Natural business cycles are full of ups and downs. We are just experiencing the downs currently.
The article specifically outlines the falling dollar as it plummets to the lowest it has been since 1995 with a notable 20 percent decrease since 2002. With the Japanese yen remaining pretty unchanged, the 1995 100 yen to the dollar ratio becomes somewhat convoluted in the dollar’s decrease as it requires more US currency to buy the same goods now in Japan than it did in 1995, yet ironically the yen would have to mark up to 73 per dollar to actively compare the differences in the economies’ inflations.
There are two sides to the story here, with the positive gain for the strength of American products in the world market. It forces competition as the value of the dollar decreases, so consumers can purchase American goods at lower rates. The flip side is the increase of costs in imported materials.
In reference to the American economy, it bolsters positive trends in exports, which may make it strange to desire a weak dollar, as the dollar drops 35 percent against the euro and 24 percent against the yen, but some companies at home are coming out ahead. The competitiveness is forced to increase, and the cheaper dollar helps to trade at higher prices. The downside, importing on the currency exchange makes foreign items steep.
This could force Americans to start buying at home though. The economic shift of the dollar will force the consumer to buy homegrown varieties over foreign imports, and drive foreign markets to purchase American goods because they become the cheaper alternative, possibly opening up our economy to more major trading partners. Though there is a trading deficit, it does seem plausible that upswing in exports could surge to mark down the deficit potential and rally the dollar back upward in coming years.
The article specifically outlines the falling dollar as it plummets to the lowest it has been since 1995 with a notable 20 percent decrease since 2002. With the Japanese yen remaining pretty unchanged, the 1995 100 yen to the dollar ratio becomes somewhat convoluted in the dollar’s decrease as it requires more US currency to buy the same goods now in Japan than it did in 1995, yet ironically the yen would have to mark up to 73 per dollar to actively compare the differences in the economies’ inflations.
There are two sides to the story here, with the positive gain for the strength of American products in the world market. It forces competition as the value of the dollar decreases, so consumers can purchase American goods at lower rates. The flip side is the increase of costs in imported materials.
In reference to the American economy, it bolsters positive trends in exports, which may make it strange to desire a weak dollar, as the dollar drops 35 percent against the euro and 24 percent against the yen, but some companies at home are coming out ahead. The competitiveness is forced to increase, and the cheaper dollar helps to trade at higher prices. The downside, importing on the currency exchange makes foreign items steep.
This could force Americans to start buying at home though. The economic shift of the dollar will force the consumer to buy homegrown varieties over foreign imports, and drive foreign markets to purchase American goods because they become the cheaper alternative, possibly opening up our economy to more major trading partners. Though there is a trading deficit, it does seem plausible that upswing in exports could surge to mark down the deficit potential and rally the dollar back upward in coming years.
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