Currency debauchment is a choice. Most governments don't want to debauch their currency -- it's just that they don't want to take the actions that might prevent it, because those actions are perceived to be intolerably painful. Thus it was that last fall, the Federal Reserve, the world's central bank, decided to "let the dollar go" because staying the course on interest rates might threaten the world's financial system (or so the argument goes).

Meanwhile oil prices are high, inflation is considerably above the Fed's own stated long-term targets, and the dollar is in danger of losing its reserve currency status. Should we care? Are saving the dollar and saving the global financial system mutually exclusive alternatives? And isn't a dollar decline necessary for "rebalancing" the U.S.'s external deficits? The answer to the first question is a resounding yes, and to the last two questions, resounding nos.

Why is a weak dollar bad for America? First of all, it directly pushes up oil and other commodity prices by paying the producers with a depreciating piece of paper (thus removing the incentive to increase production), while lowering local currency oil prices for the rest of the world (thus increasing oil demand at the margin). It is no coincidence that the world's two great oil shocks in 1972-73 and 2004-2007 both came after long periods of off-balance-sheet global monetary expansion and subsequent dollar weakness -- the growth of the eurodollar market in the late 1960s and 1970s, and the SIV and CDO expansion of the last several years.

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Oil traders know this, and it is why the immediate consequence of the Fed's earlier 50-basis-point cut was to take the dollar down and oil prices up. One could write a separate essay on what a lower dollar and higher oil prices do to our strategic interests, such as propping up regimes like those in Iran and Russia.

Second, a lower dollar reduces the wealth of the U.S. consumer in global terms, immediately through the dollar's lower purchasing power, and longer term through the erosive impact of inflation. It hits retirees and those on fixed incomes particularly hard, and is a totally counterproductive policy for a potentially weak consumer.

Third, the weaker dollar accelerates the growth of our competitors. China may be growing at 11% or more in yuan terms, but their growth in U.S. dollars in 2007 was greater than 17%, and it is their dollar growth rate that is relevant for the rate of their rise in the world's economic hierarchy. Using Europe as another example, in 2002 U.S. nominal GDP was nearly 10% larger than that of the Eurozone 15. Today it is 14.3% smaller. Although Europe has been growing more slowly, its global economic power has been rising more rapidly than that of the U.S. because of our falling greenback.

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