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The next big political issue? The U.S. dollar

• Reuters
 

And that’s the political problem for the Obama administration. Its benign neglect of the dollar is another example of an economic policy — along with TARP and the $787 billion stimulus — that the White House thinks is helping the economy, but many Americans find wrongheaded.

In his New York Times column today, Paul Krugman makes the usual case for a weaker dollar: It helps U.S. exporters and is a necessary part of a global economic rebalancing. And there is some truth in that, particularly the idea that Rising Asia will result in a less-dominant dollar. Then again, a devalued currency hasn’t exactly been a proven path to prosperity. (Ask Jimmy Carter.)

But Krugman too easily dismisses the idea that the dollar’s decline could tumble out of control. Former Clinton economic officials such as Robert Rubin and Roger Altman have been making the case that investor concern about budget deficits could lead them to abandon the dollar. As Altman argued in a Financial Times op-ed piece today: “The dismal deficit outlook poses a huge longer-term threat. Indeed, it is just a matter of time before global financial markets reject this fiscal trajectory. That could lead to a punishing dollar crisis.”

Now many Democrats and liberals, like Krugman, don’t want to hear such talk, fearing a rerun of the Clinton era when the progressive policy agenda was sacrificed on the altar of budgetary rectitude.

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