Via Paul Krugman, this graph may help put some of the recent dollar panic in perspective:
Krugman observes that the dollar is more valuable now than it was in early 2008, but at that time the financial press was not freaking out about it the way we've seen recently. You could argue that our current economic situation makes a cheaper dollar more problematic, but Krugman notes that the opposite is in fact true. Here's what would happen in the supposed worst-case scenario, brought on by the deficits needed to fight the recession: If China starts to divest itself of dollar holdings, the effect would be to do what the Federal Reserve isn't willing to do but ought to, which is to use a more aggressive expansionary policy to fight unemployment. That wouldn't be so bad, would it? (Why Ben Bernanke isn't doing that anyways is another story entirely.)
Krugman observes that the dollar is more valuable now than it was in early 2008, but at that time the financial press was not freaking out about it the way we've seen recently. You could argue that our current economic situation makes a cheaper dollar more problematic, but Krugman notes that the opposite is in fact true. Here's what would happen in the supposed worst-case scenario, brought on by the deficits needed to fight the recession: If China starts to divest itself of dollar holdings, the effect would be to do what the Federal Reserve isn't willing to do but ought to, which is to use a more aggressive expansionary policy to fight unemployment. That wouldn't be so bad, would it? (Why Ben Bernanke isn't doing that anyways is another story entirely.)-- Tim Fernholz
