Tyler Cowen answer critics of his post promoting a weaker dollar. In particular, he responds to critics who ask, “well why not just let the dollar go to zero then?”

Never forget the difference between real and nominal exchange rates.  That answers the conundrum about wishing for a dollar of near-zero value.

I am not sure what Tyler means here, but I ask – Really, why not let the dollar go to zero? From the US point of view that would be on net good thing right now, no?

Now, it doesn’t make a lot sense to think about the dollar crashing that far. The changes that such a crash would provoke would be severe enough to stop the crash. Still, thinking through the implications of such a move, it seems that the path towards a zero dollar would be a net positive one.

And, I want to be clear. Under full employment a stronger dollar does make the US richer in the sense that we can buy more foreign goods. Its not clear if it makes life better for the average American or not. Cheaper imports are balanced by a reduced demand for unskilled labor.

That is, its very clear that highly skilled professionals benefit from a stronger dollar and the increased purchasing power that it brings. Its not immediately clear that the average American, who is a high school graduate but does not have a B.A. is on net better off.

However, during a recession a higher dollar can be on net positive for the whole economy. Essentially a falling dollar gives us higher prices for foreign goods and a stronger demand for US labor. But, low prices and low demand for labor are the essence of a recession. A falling dollar would provide exactly the kind of stimulus the Fed is trying to provide, but is having a hard time creating.


Some people are undoubtedly going to ask about oil. A truly collapsing dollar would create a major oil shock. The size of the US economy means that the price of oil isn’t going to infinity as the dollar goes to zero, but it would still go pretty high.

This is a major concern, however, its not clear to me that it isn’t balanced out by soaring demand for US products.

In some sense I guess this depends on where you stand on recalculation vs. monetary effects. Higher oil prices mean a major recalculation effect, but a weaker dollar also means a major monetary stimulus