Professor Elam

Check out the article on page B1 of the Friday WSJ 12/1/06.  Shopping as the Dollar Drops details how Europeans are flocking to the US to shop, since goods are cheaper here with the US Buck at a 20 year low against the British pound.  This is an offshoot of the story on page one about how the new Secy Treasury Paulson is letting the dollar fall to boost our economy and improve the trade deficit.

Okay, do you see anything wrong with this idea-let one’s currency fall and so our goods become more competitive?  Yep, you guessed it, the problem comes when one tries to put the brakes on the fall. AT that point one risks becoming a shrewed manipulator of a currency and falling right into banana republic status. The latter term refers to the reality of Central and South American countries to inflate their currency only to have to devalue you it against stronger currencies.  Social welfare programs, read vote getters, like those of Hugo Chavez, are the usual culprits. For the time being Hugo has the money to do it, most countries have not in the past.  The result is that their currency is priced down with out a real economy and output to back up the increase in currency in circulation.  The result i ruinous inflation and re pegging the currency to lower levels.  The Russians pegged the ruble to the dollar one for one in the early 90s. After it fell to 3500 rubles to the dollar, the economy was well on its way to being dominated by the Russian Mafia.

Cheaper currency, more trade, a Siren Song with the same eventual result that befell sailors lured onto the rocks in Homer’s Greek Odyssey.  The Sirens were a group of women in the Odyssey that sang such beautiful songs sailors would be lured to their island only to crash on the dangerous reef.   You will recall Ulysses had the crews ears stuffed with cotton and himself lashed to the Mast so he could hear the song without injury.  It is no accident that the stock market is topping as the dollar is falling, watch out below.

DLE