http://krugman.blogs.nytimes.com/2009/11/24/notes-on-the-dollar-panic/
Paul Krugman - New York Times Blog
November 24, 2009, 6:56 am
Notes on the dollar panic
Atrios notes that according to the financial press the dollar is always
falling, even though it isn't. As Chris Hayes points out, hype about a
falling dollar also feeds the story line that we mustn't do anything to
upset the Chinese, because terrible things would follow if they sold
some of their dollar reserves.
So a look at actual numbers and experience comes as something of a
shock.
Here's the dollar over the past ten years: [Chart at link]
Even now, the dollar is stronger than it was in early 2008. And the
fall since its financial-panic peak (when everyone was rushing into the
safety of US Treasury bills) has been trivial compared with the huge
decline from 2002 to 2007. Do you remember all the scare stories, all
the Wall Street Journal editorials, about the degradation of the dollar
under Bush? Neither do I.
And what would happen if the Chinese decided to sell a large part of
their dollar holdings, which amount to about $5,000 for each resident
of the United States? They'd be doing us a favor.
To see why, consider an interesting fact mentioned in passing in this
story about Stan Fischer at the Bank of Israel: as part of the response
to the crisis, Fischer sold shekels and bought dollars -- that is, sold
domestic currency and bought foreign currency -- to the tune of more
$30 billion, or about $6,000 per Israeli. Bear in mind that this was an
expansionary policy -- Fischer wanted a weaker shekel.
So if the Chinese sold all their dollars, they would in effect be doing
for the United States what the Israelis did for themselves. As I've
said before, the Chinese would actually be doing quantitative easing on
behalf of the Fed -- and our response ought to be to send them a
thank-you note.
The point is that the financial press has us scared about all the wrong
things. By peddling scare stories about the dollar and the Chinese
menace, it's diverting attention from the real threat: mass
unemployment.