Will the US dollar fall forever?

On a clear day, the US dollar cannot fall forever.

That the dollar is now weak because the United States is more willing than Europe or Japan to create money is a story that is easy to accept.

But it is altogether a different question how long Europe or Japan would be willing to see the United States do better in terms of maintaining employment, Keynesian style.  That is, if textbook macro works as conventionally thought.

This means that at some point the European and Japanese central banks will be willing to tolerate more inflation than in the United States.  The question is when.  But when it happens, the US dollar should stage a strong recovery.

Yet, the behind-the-scenes debate must be all about the effectiveness of Keynesian policies.  The Americans believe, while the Europeans and Japanese are skeptics.

But times and opinions can change.  As spectators, we can only watch and guess.

If Keynesian policies ultimately don’t work for Obama, his economic team will have to give up and look for more “micro”-based solutions, such as those  a la Hayek.  This would also set the stage for a dollar recovery no matter what happens outside the US economy.

Either way, the dollar fall cannot last.


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