Judy Shelton in her op-ed entitled “The Weak-Dollar Threat to World Order” (WSJ, 6-9-08) mistakenly attributes the fall of the dollar relative to the Euro to “accommodative Fed policy”, which must be news to Dr. Bernanke, and to protective threats emanating from the Democratic left. The reason the dollar has fallen relative to the Euro and other currencies is our annual trade deficits that exploded from $96.2 billion in 1996 to $708 billion in 2007. These put so many dollars in the hands of foreigners and their governments which they used not to buy our goods but to buy trillions of dollars of American assets, ranging from U.S. Treasuries to corporate equities. They began diversifying by investing their surplus dollars in Euro assets about three years ago causing the dollar to lose its value against the Euro and other currencies.
The view of the vast majority of economists and the current and past Councils of Economic Advisors is that increased trade is wonderful even if it is one-sided. They could not be more wrong. The consequences of the trade deficits include accelerated de-industrialization and loss of U.S. factory jobs, wage stagnation, a worsening distribution of income, soaring commodity prices, and economic stagnation and instability as well as a depreciating dollar. Ms. Shelton seems nostalgic for the gold standard but the gold standard is no defense against the mercantilist practices of China, Japan, and the oil exporting countries as we show in our book Trading Away Our Future.
Unfortunately, neither the Fed nor the Treasury has any solution to the problem of the falling dollar and its cause, the trade deficits. Dr. Bernanke himself has said that market forces cannot be relied upon to get the trade deficits under control. My co-authors and I explore these and other issues in our book just published, Trading Away Our Future (Ideal Taxes Association, 2008).
Dr, Raymond L. Richman, Prof. Emeritus of Public and International Affairs at the University of Pittsburgh.