Tags: dollar

Feldstein: Dollar Has to Go Down From Here

Monday, 04 Aug 2008 12:35 PM

Former White House economic advisor Martin Feldstein, says the dollar is going to continue to decline in value, and that it is "wrong to conclude" that American goods are so affordable at today's exchange rates that the dollar simply must rise from its current level.

"For travelers to America from Europe or Asia, American prices are dramatically lower than at home. A hotel room or dinner in New York seems a bargain when compared to prices in London, Paris, or Tokyo," Feldstein wrote in The New York Sun.

"And shoppers from abroad are loading up on a wide range of products before heading home. But, despite this very tangible evidence, it would be wrong to conclude that American goods are now so cheap at the existing exchange rate that the dollar must rise from its current level."

Feldstein, currently a Harvard professor, says the falling dollar over the last few years has actually made American products more competitive and has caused the real value of American exports to rise by more than 25 percent during the last three years.

The trade deficit in 2007 remained at more than $700 billion, or 5 percent of GDP.

The large trade deficit and the massive current account deficit, which includes investment income, suggests that foreign investors must add $700 billion of U.S. securities to their portfolios.

"It is their unwillingness to do so at the existing exchange rate that causes the dollar to fall relative to other currencies," writes Feldstein.

"The dollar lowers the value of the dollar securities in foreign portfolios when valued in euros or other home currencies, shrinking the share of dollars in investors' portfolios.

"The weaker dollar also reduces the risk of future dollar decline, because it means that the dollar has to fall less in the future to shift the trade balance to a sustainable level."

Americans receive more goods and services from the rest of the world than they send back — $700 billion more last year. Feldstein says.

"It is unthinkable that the global economic system will continue indefinitely to allow America to import more goods and services than it exports," Feldstein says.

"At some point, America will need to start repaying the enormous amount that it has received from the rest of the world. To do so, America will need a trade surplus."

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Former White House economic advisor Martin Feldstein, says the dollar is going to continue to decline in value, and that it is "wrong to conclude" that American goods are so affordable at today's exchange rates that the dollar simply must rise from its current level. "For...
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2008-35-04
Monday, 04 Aug 2008 12:35 PM
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