Strong dollar vs. weak dollar

“Strong” usually means good, and “weak” usually means bad.  Ezra Klein says that those positive or negative connotations shouldn’t necessarily apply to the dollar:

Sometimes, of course, a strong dollar is in our best interest. And over the long run, a strong economy will produce a strong dollar. But there are moments when stronger isn’t better. Moments like, well, this one.

The dollar’s “strength” or “weakness” is relative. “A strong dollar means that when you exchange it for another currency, you get a lot of that other currency for a single dollar,” says Josh Bivens, an economist at the Economic Policy Institute. A weak dollar, of course, implies the reverse.

That’s . . . it. In practice, a strong dollar makes foreign goods cheaper and domestically produced goods more expensive. That’s a boon for American consumers, American travelers and countries that export to America. In fact, when you hear that China is manipulating its currency, that’s a reference to its efforts to keep the dollar strong and the yuan weak. As far as China is concerned, a strong dollar means a strong China.

A weak dollar, meanwhile, makes American-made goods cheaper on the world market and foreign-produced goods — including commodities, like oil — more expensive. That’s a boon for American manufacturers and people in other countries who want to buy American goods or come visit the country. The very crude way to put it is that, in the short term, a stronger dollar is good for buying stuff and a weaker dollar is good for making stuff.

What a temporarily weak dollar is particularly good for, however, is recovering from a deep recession. “If domestic demand is weak,” says Barry Eichengreen, an economist at the University of California at Berkeley, “the normal way an economy reacts to that is by substituting export demand, and a more competitive dollar is the way that happens.”

The same goes for deficit reduction, Eichengreen says. That’s because cutting government spending reduces domestic demand, and so you need to find new sources of demand to avoid a recession. The way countries customarily do that is to weaken their currencies to make their exports more competitive.

You can probably see where I’m going with this. We happen to be simultaneously trying to recover from a recession and reduce the deficit. But the value of the dollar, though low historically, is higher than you might expect: It shot up after the financial crisis, as anxious investors loaded up on Treasury bonds, and returned to its pre-crisis level only recently. But the economy is much weaker now than it was then, and America much more in need of an export boom.

The irony is that although in the long run, a healthy, productive economy will lead to a stronger dollar, getting there probably requires a temporarily weaker dollar.

via ‘Strong dollar’ doesn’t make sense – The Washington Post.

Do you think this is a correct analysis?

The wealthy politician as rapist

The head of the International Monetary Fund, a likely Socialist candidate for the presidency of France, was yanked out of his first class cabin on a plane just before it was set to take off and was arrested for sexual assault.

Haggard and unshaven after a weekend in jail, the chief of the International Monetary Fund was denied release on bail Monday on charges of trying to rape a hotel maid as allegations of other, similar attacks by Dominique Strauss-Kahn began to emerge.

In France, a lawyer for a novelist said the writer is likely to file a criminal complaint accusing Strauss-Kahn of sexually assaulting her nine years ago. A French lawmaker accused him of attacking other maids in previous stays at the same luxury hotel. And in New York, prosecutors said they are working to verify reports of at least one other case, which they suggested was overseas.

Strauss-Kahn’s weekend arrest rocked the financial world as the IMF grapples with the European debt crisis, and upended French presidential politics. Strauss-Kahn, a member of France’s Socialist party, was widely considered the strongest potential challenger next year to President Nicolas Sarkozy.

Making his first appearance on the sex charges, a grim-looking Strauss-Kahn stood slumped before a judge in a dark raincoat and open-collared shirt. The 62-year-old, silver-haired Strauss-Kahn said nothing as a lawyer professed his innocence and strove in vain to get him released on bail.

The judge ruled against him after prosecutors warned that the wealthy banker might flee to France and put himself beyond the reach of U.S. law like the filmmaker Roman Polanski.

via IMF chief jailed without bail in NYC attempted-rape case; more allegations emerge – The Washington Post.

The story goes on to give the sordid details of the attack on the maid, an African immigrant, who went in to clean the $3000-per-night room and was attacked by the naked Strauss-Kahn.  This was no sexual harassment charge by “puritanical” Americans, as some Frenchmen are saying.  Rather, it was a brutal, violent attempted rape.

Maxed out

As of yesterday, the federal government is officially maxed out on the  great national credit card.  We reached our credit limit of $14.294 trillion.   Government accountants think they can keep the bills paid using accounting tricks until August 2.   In the meantime, Congress needs to raise the debt ceiling.  Otherwise, the government could go into default.

Usually, raising the debt ceiling was more or less automatic, like passing resolutions celebrating Flag Day, but this time fiscal conservatives in Congress are threatening to keep that from happening unless the current administration agrees to major expenditure cuts.

Should Congress up the limit?  If it doesn’t, a default would surely be devastating for the economy, sending the dollar, government bonds, and foreign investment into a nosedive.  Would it be worth that to make a statement about out-of-control budget deficits?

Trading places with China?

China is undergoing a labor shortage due to its one child policy with its forced abortions, which means that labor costs are climbing.  It may soon reach a point when American companies will do better to keep their manufacturing jobs here.   From Harold Meyerson:

The best news about the American economy isn’t coming from America. It’s coming from China.

The inexhaustible labor pool that has fueled China’s rise as the world’s dominant low-cost manufacturer is beginning to get exhausted. The nation’s decades-old one-child policy has collided with its decades-old industrial development policy to produce something hitherto unimaginable: a labor shortage. China’s labor force will begin to shrink in the next year or two, the Wall Street Journal reported on Monday.

The result, as the Journal documents, is steeply rising wages — during the past year, up 14 percent in Shanghai; 18 percent in Guandong (China’s industrial belt); and 28 percent in the inland province of Chongqing, a lower-wage region to which manufacturing has only begun to relocate.

The implications for the U.S. economy are potentially major. With labor costs soaring in China and the yuan slowly rising, while in the United States productivity soars and the dollar slowly declines, the economic advantages that American companies reap by offshoring production begin to dwindle. A Boston Consulting Group study released this month on the return of U.S. manufacturing concludes that “re-investment in the U.S. will accelerate” as a result of these trends.

via China’s bad economic news is not necessarily good for the U.S. – The Washington Post.

OK, it’s not quite so simple, as the column goes on to explain.  But still.  Maybe China and other countries will start outsourcing their manufacturing to us.  If China is becoming the new America economically, maybe America will become the new China.  Not that this would be altogether a good thing.

Sin tax for obesity

More creative taxation ideas, combined with the impulse for the government to make us better:

An Illinois lawmaker says parents who have obese children should lose their state tax deduction.

“It’s the parents’ responsibility that have obese kids,” said state Sen. Shane Cultra, R-Onarga. “Take the tax deduction away for parents that have obese kids.”

Cultra has not introduced legislation to deny parents the $2,000 standard tax deduction, but he floated the idea Tuesday, when lawmakers took a shot at solving the state’s obesity epidemic.

With one in five Illinois children classified as obese and 62 percent of the state’s adults considered overweight, health advocates are pushing a platter of diet solutions including trans fat bans and restricting junk food purchases on food stamps.

Today, the Senate Public Health Committee considered taxing sugary beverages at a penny-per-ounce, in effect applying the same theory to soda, juices and energy drinks that governs to liquor sales. Health advocates say a sin tax could discourage consumption, but lawmakers are reluctant to target an industry supports the jobs of more than 40,000 Illinoisans.

“It seems like we just, we go after the low-hanging fruit, where its easy to get,” said state Sen. Dave Syverson, R-Rockford. He said the state needs to form a comprehensive plan to address physical fitness and disease prevention, rather than taking aim at sugary drinks.

via Ill. lawmaker says raising obese kids should cost parents at tax time.

What do you think about extending the principle of the “sin tax”–currently levied at alcohol and tobacco–to “sugary” soft drinks?  (Is obesity, let alone smoking and drinking, an actual sin?)  Or to taxing parents for having overweight children?  Are the parents sinning and in need of punishment?  Should the tax code be used to police the behavior and choices of citizens?

Your thoughts for the penny

Ezra Klein highlights some proposals going around Washington that are not controversial and that everyone of any political party should be able to get behind.  Not me, when it comes to abolishing the penny!

In 2007, economist Austan Goolsbee wrote an op-ed article in which he asked, “How dumb do you have to be to mint money at a loss?” Goolsbee is now President Obama’s chief economic adviser, so it would be unwise for him to answer his own question. But I’ll do it for him: really, really dumb. And we’re doing it.

It now costs 1.7 cents to pound out a penny, which means we’d save billions of dollars by retiring the hardy coin.

And it’s time to get rid of it anyway. America has never kept a coin in circulation that’s worth as little as the penny is today. In 1867, when the half-cent coin was phased out, the penny was worth 26 cents at today’s rates. But today we’ve got a coin worth 25 cents. It’s time for the penny to enjoy a well-deserved rest.

via The No-Brainer awards – Ezra Klein – The Washington Post.

I disagree!  The virtue of having pennies is that our financial transactions can have exact precision.  We might as well get rid of the greenback dollar, since you can’t buy anything with that either.


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