PAYING THE COST TO BE THE BOSS

The Deflation Weapon: The weakening dollar means trouble for Europe. (Irwin M. Stelzer, 05/27/2003, Weekly Standard)

The final bit of good news is that the dollar is likely to remain "under downward pressure," according to White House adviser turned consultant Larry Lindsey. The American trade deficit is at record levels, and low interest rates and a shaky stock market make it less attractive for foreigners to hold dollar assets. The cheaper dollar, equivalent to the stimulative effect of a 1.5 percentage point cut in interest rates, according to the Fed's models, should stimulate exports and make imports increasingly costly, both of which will give the labor market a fillip. And in this best of all possible worlds, the presence of excess capacity and intense competition should prevent the dollar's decline from triggering domestic inflation.

Meanwhile, euroland watches as the Chinese keep the renminbi pegged to the dollar, and the Japanese intervene to drive down the yen, at least temporarily. That is forcing euroland to absorb virtually the entire impact of the dollar's fall, threatening to throw the region into recession.

Whether that prospect will finally force Germany and France to implement the economic reforms that successive American presidents have been urging upon them is uncertain. Intrusive regulation, rewards for staying out of work, penalties for creating jobs, and stifling taxes are deeply embedded in those nations' welfare states. The falling dollar might, just might, provide the impetus for economic regime change that the first D-Day provided for political change almost 60 years ago.

The problem being that things like the Marshall Plan and the Cold War prevented that economic regime change from happening when it should have, six decades ago. Posted by Orrin Judd at June 2, 2003 7:53 PM