Monday, December 03, 2007

Tyler Cowen makes sense on the declining USD

He writes (via Eddy Elfenbein):
A falling dollar does mean price inflation in the United States. Just as it costs more for an American to buy a fancy meal in Paris, so do French wines and German cars have a higher markup when they are sold in New York. But imports are only 16 percent of the American economy, and most foreign suppliers have been reluctant to risk their position in the American market by raising prices a great deal. Furthermore many price increases from Europe come on luxury goods and thus they fall on wealthy American buyers, who can afford it most easily. Wal-Mart serves a more working-class clientele and it is stocked with goods from Asia, where currency values have remained weaker against the dollar.
There are offsetting pressures on Europe, China, Canada et al with the falling dollar. We are having a harder time buying, and they are having an equally harder time selling. Our increasing exports are keeping our GDP pretty strong.

The sky is cloudier, but the sun brighter. The sky is not falling; just the dollar. And it may have already bottomed.

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