The NYT, like many politicians around Washington, seems intent on scaring people about the prospect of the dollar falling. It has an article today on the potential harm from the government printing money and borrowing, which warns that the dollar could fall in the future as a result. This article (which relies exclusively on economists who were somehow unable to recognize the $8 trillion housing bubble) wrongly asserts that the dollar could fall because the government is printing too much money. This is simply wrong. The dollar is at risk of falling because the United States has a large trade deficit. This trade deficit in turn is the result of the fact that the dollar is high. A high dollar makes imports cheap for people in the United States and makes U.S. exports expensive for people living in other countries. Because the country cannot run trade deficits of 5-6 percent of GDP indefinitely ($750 billion to $900 billion annually, at current output levels), the dollar will be falling sharply at some point in the future as part of the correction process to this bloated deficit. The exact mechanism is that foreign investors will be unwilling to buy the dollars that the trade deficit is supplying to the world, which will cause the price of the dollar to decline. This drop in the dollar is a necessary and desirable correction for our trade deficit and would take place whether the country was printing $10 trillion or whether it was printing no money. By contrast, if the country had a large trade surplus and was printing huge amounts of money, then there is no reason that the dollar would fall. The trade surplus would mean that there was large demand for our goods and services at the current price of the dollar. In this context, the fact that we had printed huge amounts of money would not matter. The NYT could have avoided this gigantic error if it had been familiar with the experiences of a small island nation in the Pacific called "Japan." Japan has printed vast amounts of money in an effort to boost its economy since the collapse of its stock and real estate bubbles in 1990. Japan's main concern has been about the value of its currency appreciating and its government has often taken steps to bring down the value of the yen. As the experience of Japan clearly demonstrates, it is ridiculous to assert that a currency will fall in value simply because a country has printed lots of money. The value of the currency can fall without printing money and the value can rise even if it prints enormous amounts of money.
--Dean Baker
