Given current economic conditions, is a weak dollar a good or a bad thing?
There are strong opinions on this matter from both sides of the issue. Paul Krugman, an economics professor at Princeton and a columnist for The NY Times, makes a compelling case for a weakening U.S. dollar being good news.
“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.”
Weak Dollar with Inflation?
While we agree with Professor Krugman that a lower dollar can help to even out our trade balance, but if it falls too low, it could create unwelcome inflationary pressures. The Federal Reserve will look to prevent an inflationary event by tightening the monetary spigot. This includes raising interest rates. Krugman argues that this would be a disastrous policy move at this stage of the economic recovery. He was an ardent proponent of government intervention in the form of stimulus and believes that we didn’t do enough.