Request for monetary reference — 9/22/2011

  1. mrt

    All you who are better versed in economics than I – what does it mean when the ‘dollar climbs’? Please tell the economic consequences for the USA, for those regular folk living in the USA, of a rising dollar (and conversely for a weaker dollar). What impact might it have for USA employment, credit/mortgage interest rates, and for consumer spending, for example?

    Also, Don, you talk about stocks taking a plunge today. Aren’t stocks generally more volatile than other financial instruments, and therefore for any one day, one need not conclude that armegeddon is nigh?

    thanks for any input.

    POSTED THURSDAY SEP 22, 2011 18:42 #
  2. chrisrobling

    Relative value of a currency, say, the dollar. If the dollar appreciates, other things equal, then it is relatively less expensive for Americans to buy goods produced overseas, and relatively more expensive for foreigners to buy our goods. If the dollar declines in value, other things equal, then the reverse — we pay more for foreign goods and they pay less for ours. Trade econometrics estimates something called “net barter terms of trade” to account for more likely real world scenarios, in which most currencies are floating against each other and thus subject to a wide variety of other factors. Btw, Paul Krugman’s Nobel Prize in economics was for his extraordinarily nuanced description and explanation of international trade flows. In this realm, about which he almost never writes for general audiences, he is unquestionably one of the top people in the world.

    Anyway — we have, for 125 years, been a “strong dollar” economy, even at times when our policy has made the dollar weak. A weak dollar has at times been stimulative, especially in the last 30 years, to the extent that it increases foreign sales. Strong dollars tend to increase domestic consumption of foreign goods, which tends to send dollars overseas. Strong dollars tend to be associated with higher interest rates, and weak with lower rates. Dollar supply — called M1, M2 or M3 in the business — is in a significant way indicative of dollar value, relative to production. Increasing supply, other things equal, tends to reduce the value of the dollar. Restricting growth in supply, other things equal, tends to increase the value of the dollar.

    Monetary theory and history is a vast, complex and technical discipline in the big house of economics. Yet the greatest monetarist, Milton Friedman, advanced a simple equation as explanative of almost all economic activity, a sort of E = mc2. That equation is MV = PQ. M means the money supply, V is the velocity of money, or the speed with which dollars change hands, P is the relative price level and Q is the quantity of production. It has its critics, but for a little equation it is very powerfully descriptive, explanative and predictive. Studying money will never let anyone down.

    POSTED THURSDAY SEP 22, 2011 21:43 #
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