For his last op-ed column while he remains the sitting Economics Nobel Laureate, Paul Krugman takes aim at all the people wringing their hands over the plunging dollar. If you’re freaked out by the 1-to-1 inverse correlation between the dollar and the S&P, or the price of gold shooting to the moon, then you’re engaged in dangerous type of thinking that will send us back into the Second Great Depression, if it’s acted upon.
The truth is that the falling dollar is good news. For one thing, it’s mainly the result of rising confidence: the dollar rose at the height of the financial crisis as panicked investors sought safe haven in America, and it’s falling again now that the fear is subsiding. And a lower dollar is good for U.S. exporters, helping us make the transition away from huge trade deficits to a more sustainable international position.
But if you get your opinions from, say, The Wall Street Journal’s editorial page, you’re told that the falling dollar is a terrible thing, a sign that the world is losing faith in America (and especially, of course, in President Obama). Something, you believe, must be done to stop the dollar’s slide. And in practice the dollar’s decline has become a stick with which conservative members of Congress beat the Federal Reserve, pressuring the Fed to scale back its efforts to support the economy.
We can only hope that the Fed stands up to this pressure. But there are worrying signs of a misguided monetary mentality within the Federal Reserve system itself.
Krugman is certainly at least partially right. Some of the decline in the dollar was inevitabe as the crisis abated. And there’s a case to be made for a weaker dollar, and we shouldn’t confuse a strong dollar with being patriotic. But when you see every asset class, from gold, to stocks, to government bonds all moving higher, in lock-step with the weakening dollar, it looks less like confidence and more just like traditional Fed bubble-pumping. That’s what people are rightly freaked out about.