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November 26, 2006

Today's Dollar-Falling Post - Dollar 40% Too High?

-- by Dave Johnson

Over at Brad DeLong's Semi-Daily Journal: Fair and Balanced Almost Every Day: The Dollar Looks 40% too High, and Long Treasury Yields Look 200 Basis Points too Low,

...Menzie Chinn worries about the possibility of a dollar crash:
One of the enduring oddities of the international economy is the willingness of foreign investors -- both private, official, and quasi-state -- to hold dollar assets despite the very low returns on such assets, even when comparing in common currency terms. It is this anomaly that Krugman disucusses in an academic paper asessening the possibility of a dollar crisis.
Concerns about a dollar crisis can be divided into two questions: Will there be a plunge in the dollar? Will this plunge have nasty macroeconomic consequences?
The message appears to be that the dollar's value is out-of-whack--too high--because nobody expects it to decline by a lot in the near future, and that expectation means that demand for dollar-denominated securities is high because U.S. interest rates are higher than interest rates in Japan and Europe. One again, it looks like there may well be lots of money left on the table.
OK, that was a complicated series of quoting someone who is quoting someone who is quoting someone, so go sort it out at the original... the point being that the dollar is still WAYYYY too high, and that there is the possibility of a recession coming (see 'Housing Bubble' posts). He's quoting from, Econobrowser, Will the Dollar Plunge? Would that Be So Bad?

Angry Bear on all this,

In other words, we can avoid a recession even as we move to fiscal restraint if we allow currencies to float.
When the dollar falls, it means that everything from other countries costs much more. This supposedly is great for American manufacturers because our goods will cost much less to others, and we can start exporting (and hiring) again. Possibly even heading off a recesion. But my question is, how much has our manufacturing infrastructure eroded? CAN WE start manufacturing for domestic and export to pick up the opportunity of a plunging dollar?

Posted by Dave Johnson at November 26, 2006 10:26 AM

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