The dollar is the tail, and the strength of the US economy is the dog. The dollar is the world's reserve currency because the US dominates the world's economy.

I used the think The Economist was a pretty good magazine and subscribed to it for many years. During the last decade, I found that their analysis plummetted from plausible to incoherent, and I cancelled my subscription about four years ago. This article is yet another example of the incoherent.

Wasn't it the Economist that had the "Rumsfeld Resign" order as a headline a while back?

If Rumsfeld and economics have a relationship, it must be illegitimate.

A Big Mac in Morocco costs $0.26 and over $7.00 in Kuwait? I guess oil really is a curse.

The Economist serves much the same purpose as the NY Times. It covers a whole lot of interesting places, and their coverage is so biased and shoddy that you feel compelled to go on the Web and find out from local sources what really happened.

The simple reality is that if our currency were unstable we would currently be suffering from high inflation and high interest rates. Are we?

Hold that thought, Bart.

The dollar has fallen because of our budget and current account deficits; the fall threatens its status as the world reserve currency; that status is valuable because it lets us borrow cheaply; ergo, we must stop borrowing in order to maintain our ability to borrow cheaply.

David, what it means is that dollar reserve status gave us some leeway to run current account deficits witout suffering the consequences of higher interest rates or higher inflation than other countries without that status did not have. But the leeway is not infinite, if you abuse the priviledge then you'll eventually break the system.

We won't have to worry about micromanaging the dollar exchange rate, the rest of the world is doing that for us. But you usually have more control when you manage it yourself.

Robert,

As Thomas Sowell showed quite clearly in another article on this blog, the percentage of our debt to GDP is about 60-65%. By contrast, there are several European nations, central to the stability of the Euro, where that ratio exceeds 100%. During the 70s, we were above 100%. And during that time, we did have trouble with both inflation and certainly high interest rates under Carter.

The market manages the exchange rate, not the nation. That concept is called 'floating.' Some nations do try to manage their exchange rate, usually maintaining it artificially low to help their export markets, as is the case with the PRC. Some nations maintain an artificially high currency value with a no-growth economy and double digit unemployment all in the name of egomania, the EMS comes to mind.

Bart, the budget deficit is not what is mainly driving the dollar down right now, it is the current account deficit. You're right, currencies float (or sink) unless the central bank of the country tries to peg it. Japan has been doing that for many years, but even they are tired of having all their reserve eggs in the dollar basket if we're going to just let it fall. The world is running out of savings to throw at our deficits.

If 'the world is running out of savings to throw at our deficits', then our interest rates in nominal and real terms would not be at record lows. We would have to pay more for money. That is why your argument fails.

Our interest rates are at record lows, that is why Americans are borrowing and spending instead of saving. Europeans have higher interest rates, and that is why they have more savings. The dollar is dropping as an incentive to keep the savings flows coming. If you don't incent savers with higher interes rates, then you'll have to do it via the exchange rate.