Making the dollar cheaper means inflating the currency

Inflation is caused by too much money chasing too few goods; conversely, deflation is caused by a shortage of money in relation to available goods. Controlling the basic money supply in America is the U.S. Federal Reserve, whose stinginess three years ago – in part through an overly high dollar – contributed mightily to the deflation of stocks and the economy. But now, says Lawrence Kudlow, a "stable" dollar is all the recovering economy and stock market need.

However, recent actions by Treasury Secretary John Snow and the Group of Seven industrial nations suggest that global policymakers want the dollar to be worth less and buy less.

The world's largest developed economies (the G-7) have called for flexible exchange rates rather than stable ones. Snow wants Japan and China to revalue the yen and the yuan upward – making the U.S. dollar cheaper.

  • Since the September G-7 meeting, the U.S. greenback has fallen nearly 6 percent on foreign exchange markets, after losing about 20 percent of its value.

  • In terms of domestic purchasing power, the dollar has lost about one-third of its value measured against the rising price of gold.

  • The dollar's slide followed deflationary conditions – commodity and business prices declined from 2000 to 2002; but in the past year, raw material and producer prices have turned around and begun to rise.

    Spurred by lower tax rates, both the dollar and stocks appreciated late this summer. But since the G-7 declaration and Snow's trip, it has given back its gains:

  • The stock market rose 25 percent in the rally between March and June.

  • But since the G-7 meeting, stocks have lost more than 4 percent of their value.

    A cheaper dollar and excess money creation could cause spiking interest rates and inflation, short-circuiting the bull-market recovery, warns Kudlow.

    Source: Lawrence Kudlow, Currency Cooks Jeopardize Jobs and Bush's Re-election, Investor's Business Daily, October 6, 2003.

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    For more on Inflation

    FMF Policy Bulletin\7 October 2003
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