Matt Yglesias Does EconomicsNo surprise, he
does it badly, probably because he's reading Krugman and Brad (Gutless Punk) DeLong.
I’ve heard some economists argue that we’re pursuing some kind of misguided strong dollar policy that’s responsible for our currency’s refusal to devalue, but I don’t actually see what policy that might be. We appear to be doing everything you would do to shake investor confidence in U.S. public finances and spark a decline in our currency.
Interest rates are very low in the US right now, which would ordinarily signal a declining currency. But you can't just look at interest rates or else everybody would invest in a country which had high interest rates (which are offset by high inflation). With inflation almost certainly to be negligible or even negative over the next year or two, investors are happy to take the low interest rates in the US as part of a "flight to quality" that quite commonly occurs during times of economic recession.
In addition, the countries we've been running a trade deficit with (notably China) are keeping their dollars in the US in an effort to prop up the currency. They saw what happened to Japan in the early 1990s when the yen rose spectacularly against the dollar, resulting in a decade and a half of no growth for the Rising Sun.
