A strong dollar keeps the lid on inflation - mainly by rendering
imports cheaper. It, thus, provides the central bank with more leeway
to cut interest rates. Still, the strength of the dollar is only one of
numerous inputs - and far from being the most important one - in the
monetary policy. Even a precipitous drop in the dollar is unlikely to
reignite inflation in an economy characterized by excess capacity,
falling prices, and bursting asset bubbles.
A somewhat cheaper dollar, the purported - but never proven - "wealth
effect" of crumbling stock markets, the aggressive reduction in
interest rates, and the wide availability of easy home equity financing
should conspire to divert demand from imports to domestic offerings.
Market discipline may yet prove to be a sufficient and efficient cure.
But, the market's self-healing powers aside, can anything be done - can
any policy be implemented - to reverse the deteriorating balance of
payments?
In a testimony he gave to the Senate in May, O'Neill proffered one of
his inimitable metaphors:
"All the interventions that have been modeled would do damage to the
U.S. economy if we decided to reduce the size of the current account
deficit.
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