It’s clear that the dollar’s been falling, but what does it mean, Horatio? What does it mean? Different things to different people, comes the reply from the financial gods on high.

Indeed, weighing the implications of the decline and fall of the world’s reserve currency has perplexed more than a few in the dismal science. Among the topical questions of late: why hasn’t a chastened buck reduced imports and increased exports from these United States?
Whatever the answer, there’s no debating the fact that the trade deficit has grown larger as the dollar’s fallen further, the Census Bureau informs. Invoking the age-old phrase of frustration and inquiry we respectfully wonder, What gives?
Kathleen Cooper, under secretary for economic affairs at the Commerce Department, took a stab at an answer in today’s New York Times. “The current surge in imports is strongly related to our rising industrial output,” she explains. “Goods that are assembled in this country have an awful lot of imported components that used to be made in this country.”
So the economy’s strength receives the blame–or should we say praise?–for the bull market in imports. But even taking the optimistic view, as some do when it comes to America’s expanding trade deficit, there’s the sticky issue of the dollar. Let’s assume for a moment that the rising appetite for imports in the U.S. is a function of the country’s economic growth. Clearly, that’s the case—recession economies tend to import less, or so one could assume. But no if whether higher levels of imports are good or bad, imports in excess of exports put pressure on the currency, in this case the dollar. Sometimes a currency can weather the storm, sometimes it can’t. The U.S. is clearly in the latter category at the moment.
And that state of affairs raises a question: If increased exports are a good thing, as some claim, must the definition of continued economic improvement imply that the dollar will get weaker? If so, can the U.S. economy grow if its currency runs the other way?
Complicating the analysis is the fact that a rising share of goods imported into the U.S. comes in the form of crude oil. Consider that in January 2005, oil’s value as a percentage of the total value of goods imported (separate from services) was 8.5%, up from 7.9% a year earlier, based on crunching numbers published by the Bureau of Economic Analysis. In other words, an increasing portion of “our rising industrial output,” to borrow the phrase from Commerce Department’s Cooper, is imported oil.
Conceptually, which is to say in a world of truly free oil markets and a lack of geopolitical friction, that’s not a reason for worry. Rising energy inputs, after all, jibe with a growing economy. The former is essential for maintaining and even stoking the latter. But there’s a glitch with that model in the real world as it applies to the U.S., namely: the value of oil imports is rising faster than the physical quantity of oil imports. Indeed, the number of oil barrels imported into the U.S. rose by 4.3% in January 2005 over the year-earlier month—that translates into a fraction of the 29% pace of increase in the dollar value of those oil imports.
That’s a convoluted way of saying that oil prices are rising. Or that the value of the dollar is falling. Or both.
For the American economic machine, some observers are taking it all in stride at the moment. Higher oil prices have yet to bite the U.S. economy by any material degree that’s obvious, at least to the lay eye. And with oil prices down again on Friday for the fifth day running, hope that more of the same will prevail is in the air.
But the oil gremlin isn’t dead, he’s only geographically challenged, or so it seems. News of weak retail sales in Europe last month, in the wake of the sharp rise in oil prices, has turned a few heads. “Oil prices are surely having a damping impact on sentiment and diminishing purchasing power,” Juergen Michels, an economist at Citigroup Global Markets in London, tells Bloomberg News. French retail sales, for example, declined the most in over a year last year. Aie! All of which convinced one bond manager in Geneva to declare to Bloomberg: “Oil is a threat to economic growth.”
The World Bank yesterday seemed to jump on that horse with the prediction that global growth is at a “turning point,” and that rising oil prices were partly to blame, the Boston Globe reports. ”Global growth momentum has peaked,” the bank announced.
But even if you think that rising oil prices will take a toll, there’s still plenty of opportunity to debate in terms of outcome. The traditionalist thinks that rising oil prices will resurrect inflation. But such thinking is so yesterday among pessimists. Rather, oil spikes deliver deflation, or so goes the progressive wing of the gloomsters.
Escalating energy prices will lead to a slowdown, Adolf Rosenstock, senior economist at Nomura International, explains via
Reuters. But there the traditional analysis ends: “Once a slowdown kicks in, you are back to the old deflationary scenario,” he adds.
Make that the new old deflationary scenario. Back to the future. That’s your cue Mr. Bernanke.