Frequent readers of BlawgConomics may have noted the recent increase in posts that seem to represent the 'conomics' portion of the portmanteau more than the law portion. However, most laws, regulations and rules have some manner of economic impact or consequence, while most economic activity is impacted by laws, rules or policy considerations. Essentially, the areas of law and economics, whether ones uses one to analyze the other or vice versa, are inextricably linked. No other topic in the news recently illustrates this proposition better than the decline of the dollar. True, one could make an argument for topics such as health care or green technology, but it is the dollar which has made the biggest splash in the financial press over the past few news cycles.
So how does a dollar post reach beyond economics and financial analysis and into the area of law and policy? The link below provides a strong example of exactly how the two broad topics become so entangled. A few simple lines discussing the White House stance that the dollar remains strong conflict strongly with the theory of many that the government is actually looking for a slightly weaker dollar. It is not difficult to rectify the two, conflicting though they may seem. On the one hand, and despite recent rumors of broad dissatisfaction with the dollar as the global currency of choice, it remains just that. It is utilized in trade, it is the currency commodities are priced in, and is the currency backing almost inconceivable amounts of US debt held by nations around the world. It is important for the American government to publicly support the dollar and reassure foreign holders of the greenback that it remains a solid investment.
On the other hand, the US trade imbalance with many partners has reached frightening levels. One way to balance these numbers (and at the same time increase foreign demand for our products and help the flagging economy) is with currency fluctuation. For example, if our currency is lower in comparison to trade partners, they will sell less product here, and our producers will potentially sell more product abroad. Of course, this simple math depends on a multitude of other factors outside US control, such as savings rates and more broadly, overall global demand.
In addition to trade considerations, the Fed is very unlikely to move interest rates much higher, if at all, over the next few cycles. This means that interest rates in the US will likely lag those in other countries further, creating more demand for other currencies, and therefore lower demand for dollars. This is being factored into trading currently as well.
Which consideration, reserve currency or trade, is more important? Well, once again the answer is a tangled web of interrelated factors. If nations were to sell the dollar, or replace it with another currency, it would spell disaster for the US economy and overall place in the world. However, it is critical that exports increase if trade imbalances are to even out and the economy is able to work itself out of the current downturn. In sum, both considerations are important, and both impact the policies of the US government. In other words, it is a very thin tightrope, and it is very difficult to ultimately fine tune something like a global reserve currency very well when the nation backing it is in a historic downturn. Put one final way, I am glad to be able to write about it as a law student with a blogging hobby rather than a Fed worker or policy maker.
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