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A weak dollar is a sign of a weak governmentand a weak economy. So why are so many peoplesaying the sagging greenback is nothing to worry about?

Though the dollar is down 21% against the euroover the past 12 months, the U.S. Treasury and WallStreet economists, and even media commentators, havedownplayed the relevance of the slide. Indeed, somepeople say the decline, if moderate, is a good thing,because it will make American goods cheaper toforeigners and will therefore boost exports and addjuice to the sluggish economy.

Truth be told, thisfondness for a depreciating currency springs out ofthe something-for-nothing school of economics, whichalso advocates higher government spending and lowerinterest rates as solutions to any form of economicmalaise. Though all these things actually end upcausing more economic malaise, we should neverunderestimate the seductiveness of quack solutions topoliticians, traders and idealists.

Now, with the economy showing few signs ofstrength after drastic cuts in interest rates andmassive lending to individuals for houses and cars,we have reached the point at which central bankers andgovernment officials start to favor the next brand ofsnake oil. After months of rock-bottom interest rates,an influential Federal Reserve governor said that the central bank must be prepared to buyall manner of financial assets to reflate an economynot responding to very low interest rates.

And we havehad Treasury Secretary John Snow making strangelysoft remarks on the dollar. On March 4, Snow said hewas "not particularly concerned about" the dollar'sdrop. Then, in a Sunday TV interview, he made thefollowing remark: "When the dollar is at a lowerlevel, it helps exports, and I think exports aregetting stronger as a result."

Waffle Iron

To some, It sounded like Snow was saying he couldtolerate a weaker dollar if it led to higher exports.Tuesday, however, Snow seemed to back away from thedevaluation-is-good stance. In an interview with Reuters, he said: "As I've said on variousoccasions, devaluation strategies are not wellcalculated to breed long-run domestic prosperity. Youcan't devalue your way to long-term high standards ofliving."

So, does Snow's second remark mean he doesn'tbelieve in devaluation as a useful economic tool? No.Look how he has inserted the adjectives "long-run" and"long-term." The message seems to be that devaluationmay give your economy a short-term boost but it willhave little effect over time.

That stance is economic orthodoxy, and it fitsnicely with Fed and Treasury efforts to boost theeconomy. The party line goes something like this:"Yes, low interest rates may be causing overpricing ofhouses in certain pockets of the country,overproduction of autos and swelling debt levels onpersonal and corporate balance sheets, but thesethings won't matter when we get the economy hummingagain."

But what if these things end up restrictingeconomic growth? Won't chronically high debt levelsmake individuals and companies cautious in theirspending till their balance sheets are restructured?

The same principle applies to the dollar. Benignneglect of dollar weakness will lead to much moreweakness of the dollar if the economy doesn't pick up.Investors are selling dollars for a number of reasons-- the swelling trade and fiscal deficits, Fed andTreasury statements, weak productivity numbers,stubbornly high leverage numbers and the obvious factthat neither Wall Street nor corporations have learnedanything from the bubble's popping and are back topumping overpriced stocks. The bull argument is thateconomic revival is just around the corner and thedollar will rise when that materializes. But if growthdoesn't happen and the Fed and Treasury still seemunconcerned by the drop, many of the dollar bulls willflee the currency and the slide will be gruesome.

Value Subtracted

And there is good reason to think devaluationwon't bring the much hoped-for growth in time. NorthernTrust economist Paul Kasriel points out that lowerforeign demand for U.S. goods, resulting from theslowing economies of Europe and Asia, could offset theboost given by a cheaper dollar. And he notes that abig competitor in manufacturing like China coulddecide to devalue its currency in line with the dollarso that U.S. exporters lose some of the advantage of acheaper currency.

Finally, at its very core, the devaluationargument makes no sense. Money's worth is defined bywhat it can buy in real goods and services.Devaluation leads to inflation as producers experiencehigher demand for their products and raise prices. Asprices rise, the currency buys fewer real goods andservices. No one wins. The market knows that and bidsthe currency even lower, forcing economic officials tojack up interest rates to stop the slide. This causesthe economy to grind to a halt.

Granted, we are not at that point. But someoneneeds to make a strong defense of the greenback soon.Snow could make unambiguously tough statements aboutthe greenback and intervene in the markets along withother countries to ambush investors making theshort-dollar trade. He could effectively become Mr.Dollar, just as Eisuke Sakakibara was known as Mr.Yen. The fact that he doesn't is evidence that he'sfine with the decline. But if he waits much longer, itwill be too late to stop.

In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send any to peter.eavis@thestreet.com.

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