Palin vs Krugman On The Dollar -- Who Is Right?

The other day I wrote about how the dollar is falling [1] - but not against the Chinese Yuan. A falling, or "weak" dollar is great for American manufacturers, and therefore American jobs, because it makes American goods cost less everywhere else. This means our exports should rise, reducing our trade deficit and helping us pay off the huge amounts decades of conservative budget policies forced us to borrow from other countries.

Conservatives, though, are trying to use the complexities of the relative value of the dollar in currency markets as an anti-Obama political issue. They must have polling that shows people reacting to way the words "strong" and "weak" are used. This misunderstanding of "strong" and "weak" reminds me of how I used to be confused by "debit" and "credit" when I learned double-entry accounting. (Sorry, I probably shouldn't mix corporate finance humor with blog posts.)

For example, earlier this month Sarah Palin (or someone) wrote on her Facebook page [2] that a falling dollar makes us "vulnerable." This is a brilliant play on the "weak" theme, and is used to further scare people. (Republicans like to scare people - remember how Iraq was going to spread smallpox?) She earns her Exxon check, writing that we need to "Drill, baby, drill" for energy independence to solve this. She writes nothing about conservation, alternative energy sources like wind or solar, or about smart grids, or developing a 21st century economy -- Exxon wouldn't like that.

Palin's ghostwriter confuses several issues at the same time. This is brilliant agitprop but terrible, terrible policy.

Paul Krugman, America's other master economist, writes in the NY Times today [3] that the problem is China, not Obama. China "pegs" their currency to the dollar so when the dollar drops the Yuan drops along with it. This keeps goods made in China at a nice, low price relative to everyone else, reducing any advantage we might gain from market forces. Krugman writes,

If supply and demand had been allowed to prevail, the value of China’s currency would have risen sharply. But Chinese authorities didn’t let it rise. They kept it down by selling vast quantities of the currency, acquiring in return an enormous hoard of foreign assets, mostly in dollars, currently worth about $2.1 trillion.

Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.

Krugman says it is no time to be timid. We have to confront China on this manipulation.

The thing is, right now this caution makes little sense. Suppose the Chinese were to do what Wall Street and Washington seem to fear and start selling some of their dollar hoard. Under current conditions, this would actually help the U.S. economy by making our exports more competitive.

A a Bloomberg today story demonstrates why we need to bring the dollar down relative to the Yuan [4],

“The stable yuan helped us increase sales by about 20 percent this year,” Cody Hu, a sales manager at the Yongkang- based company, said at the China Sourcing Fair in Hong Kong.

. . . “Competitors in China are doing good,” said Suresh Sranavasan, a distribution manager at the company. “They have pricing advantages from the government’s stable yuan policy.”

I'm with Paul, not Palin. A lower dollar means JOBS.