Friday, November 2, 2007

Larry with another vague proposal

Larry Summers, writing on the dollar decline:

The Clinton administration approach [translate: Bob Rubin's approach] of asserting the desirability of a strong dollar based on strong fundamentals while allowing its value to be set on foreign exchange markets was highly successful in its time and has largely been followed by the Bush Treasury. But it is insufficient in the current world, where the dollar’s trade-weighted exchange rate is to an important extent managed abroad. Some means of engagement must be found with those who have yoked their currencies and so their financial policies to that of the US.
"Some means"? What means?

It's a good insight to consider those pegging to the U.S. But, if the U.S. fundamentals are deteriorating, then why shouldn't those currencies go down alongside the dollar? They are tied there for a reason, usually because of strong trade with the U.S.

If the dollar is becoming 'unstable' for reasons (other reasons?) that make it a "poor peg choice", then "some means" is for those countries to get off that peg, right? Of course, there might be a policy response to avoid that market response, but I don't see what it is that LS has laid out to do, do you?

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