Sunday, May 22, 2011

Strong Dollar / Weak Dollar: Kabuki Theater of Economics

Larry Summers, Ben Bernanke, Tim Geithner and Austen Goolsbee
In the Saturday New York Times, Christina Romer provides an uncharacteristically clear view of the strong dollar / weak dollar argument.  Though the Fed is supposedly charged with ensuring a "strong dollar," the reality is much more complex.

When asked by Larry Summers what the government policy is vis-a-vis dollar strength, Ms. Romer answered "The exchange rate is a price much like any other price, and is determined by market forces."
“Wrong!” Larry boomed. “The exchange rate is the purview of the Treasury. The United States is in favor of a strong dollar.”
This, of course, is the political answer.  The economic answer is much closer to what Ms. Romer said.
Fed policy is determined by inflation and unemployment in the United States. But if Mr. Bernanke could discuss the exchange rate openly, he would probably tell you that one way any monetary expansion helps a distressed economy is by weakening the dollar. That is taught in every introductory economics course, yet the Fed is asked to pretend it isn’t true.
Once again, we live in a Kabuki Theater of Economics.  Reality shall not be permitted to intrude on the controlling ideology.

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