The giant sucking sound you've been hearing for years now has been the sound ofAmerican consumers sucking in imports from the rest of the world. That's kept other economies humming. But it's also meant a huge trade deficit -- close to 5percent of our gross domestic product -- and a big price tag. To finance all these imports and keep the dollar high, foreigners have been investing or lending us about $500 billion a year. And the huge trade deficit has also been a drag on the US economy.
Well, those days may be ending. Foreigners are less enthusiastic about investing here when the US stock market is so bad, and they don't particularly want to lend us a lot of money when interest rates are lower here than in many other countries. So not surprisingly, the value of the American dollar -- which, after all, is based on supply and demand -- has been dropping relative to foreign currencies. There's no run on the dollar yet, but there could be.
There could be especially if US policymakers signal they're happy to let the dollar continue to slide. Recently, when he was being interviewed on national television, Treasury Secretary John Snow said that a lower dollar makes everything we export from the United States more competitive in global markets.
Well, this is obviously true. But when a Treasury Secretary says this, he's wittingly or unwittingly sending a powerful message to global currency traders.
What they heard John Snow say is this: The US won't try to prop up the value ofthe dollar because the Bush administration wants more exports. More exports will help the American economy rebound, especially during the 19 months leadingup to the next election. The White House isn't concerned that a lower dollar will make imports more expensive and thereby push prices up, because inflation isn't a problem here now -- last week the Fed warned about deflation, not inflation. Nor is the White House particularly concerned that a lower dollar will hurt other economies around the world as it raises the prices of all imports to America from Europe, Japan, and elsewhere. In this go-it-alone, America-first era, that's their problem, not ours.
But it may be our problem. The danger here is twofold. First, a lower dollar might push Europe and other struggling economies into recession, which is not especially good for us just when we're struggling to get out of one. The seconddanger is that the dollar might go into free fall, pushing up prices and interest rates here, just when American consumers are most vulnerable. You see,in economic policy as in foreign policy, the reality is the world is inter-dependent. America can't go it alone.
