Monetary Policy

Earlier, I posted about German unemployment and, in passing, mentioned its connection to international economics. Reader Jack Mercer chimed in about it; I've been meaning to post a couple of related articles for about two weeks now, so this is as good an opportunity as any.

I've been to Europe on two occasions, once for a week and a half, the second time for two and a half months. The first time I went, the exchange rates were about £1 = $1.60 and E1 = $1.10. When I went back this Summer, the dollar had fallen to about £1 = $1.75 and E1 = $1.30.

Desmond Lachman has a good article over at Tech Central Station. Who does he blame?

Among the more fundamental reasons for the dollar's recent decline is the abysmal lack of US savings. In particular, a gaping US budget deficit and a record low US household savings rate. This is reflected in an external current account deficit that is presently by far the largest on historic record and that is now worrying Alan Greenspan as to how long we can expect foreigners to continue financing it.

It must be emphasized, however, that the large US budget deficit is not the only culprit for the dollar's weakness. Rather, also contributing to the dollar problem is the inability of either the Europeans or the Japanese to generate sufficient domestic demand to stimulate their economies. Instead, they choose to remain overly reliant on US growth to prop up their economies, which makes it exceedingly difficult for the US to export its way out of its external deficit problem.

Similarly, unhelpful to solving the US dollar problem is stubborn Asian resistance, particularly by Japan and China, to allow their currencies to strengthen. They do so in order to keep their exports cheap in international markets. However, by so doing, they unfairly place almost the entire burden of the dollar's adjustment on the Europeans, who at some point must also be expected to react by manipulating their own currency.

Right then, so the problem is that the Europeans are artificially inflating the value of their money, the Asians are artificially deflating their economy, and Americans A) aren't putting enough money into investments and savings and B) are doing too much deficit spending.

So the civilized, rational, moderate folks over at the BBC must agree, right?

The dollar has weakened sharply since September when it traded about $1.20, amid continuing worries over the levels of the US trade and budget deficits.

Meanwhile, France's finance minister has said the world faced "economic catastrophe" unless the US worked with Europe and Asia on currency controls.

Herve Gaymard said he would seek action on the issue at the next meeting of G7 countries in February.

Ministers from European and Asian governments have recently called on the US to strengthen the dollar, saying the excessively high value of the euro was starting to hurt their export-driven economies.

"It's absolutely essential that at the meeting of the G7 our American friends understand that we need coordinated management at the world level," said Mr Gaymard.

Translation: "As usual, it's America's fault."

Face it folks, the stifling economic policies of the increasingly socialist European nations are killing their economies, and the only way that they can keep things running, even if it's a temporary measure, is by artificially inflating their economy. Am I saying that American economic practices are foolproof and beyond reproach? Probably not; I seem to remember something about steel tariffs a while back that seemed to backfire on us.

I think, however, that our European "allies" are more and more jealous of our success. By all accounts, September of 2001 should have led to a massive decline in American economic strength. It was only the outstanding economic leadership of President Bush and his team of advisors that kept things fairly strong, and continue to do so to this day. On the other hand, the Europeans tax and penalize their citizens to the point of stifling economic growth.

And apparently, it's our fault. Go figure.