Falling Dollar Boosts Growth

From the “in case you missed this” department:

Last week, the Wall Street Journal‘s “Number of the Week” was 0.5 percent.  That is the amount of potential growth in the US economy that is estimated to be the direct result of the dollar’s slide since August:

As finance ministers from the Group of 20 developed and developing nations meet in Seoul in an effort to avert a currency war, it’s helpful to recognize the temptation they face. A little move in an exchange rate can have a big impact on a country’s growth.

Consider the recent fall in the dollar. Since August 27, when Federal Reserve Chairman Ben Bernanke signaled the central bank was likely to pump more dollars into the economy, the greenback’s value has fallen about 4.8% against the currencies of U.S. trading partners (data through October 15). Given the historical behavior of U.S. exports and imports, a sustained move of that magnitude should shrink the U.S. trade deficit by nearly $140 billion over the next two years. That’s the equivalent of an added 0.5 percentage point of economic growth in each year.

Of course there is a downside to this.  If we really pushed devaluation as a path to prosperity, every other nation would follow suit.  The result would be no net gain for anybody and a sharp increase in commodity prices such as energy.

But we can still dream. . . .

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