So the dollar fell to its lowest level against the pound in 26 years yesterday. On face value, that’s good news for US exporters and British tourists in Florida, but it’s bad news for US tourists, and British exporters. But, then again, maybe there is a bit more to it than that.

The US economy, just like the UK economy is out of balance. For too long the economies of these two countries have been kept going through consumer borrowing, with savings actually negative in the US and UK of late. A falling dollar could right that, it could cede new power to US exports and reduce the importance of the consumer. But, to believe this transition can occur without considerable pain en route seems at best na#239;ve. At worst, it’s hopelessly optimistic.

In any case, a falling currency is no panacea to a balance of payment deficit. Just think of Harold Wilson, our Labour Prime Minister during much of the 1960s and 1970s had his own balance of payments crisis. It was big news back then, for that was in the days when it was considered to matter if a country was spending more money than it was earning. So, in 1967, the pipe-smoking premier devalued the pound, and famously said, “It does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued.” And yet, Harold was wrong: the pound in the pocket could buy a lot less, and purses needed to be filled with a lot more money too before it was enough. Why? Because the benefits of a lower pound were cancelled out by inflation.

Some say a falling dollar won’t lead to inflation, although the US has already lost out through rising oil prices as a partial consequence of a lower dollar, but it seems inevitable that this optimistic prognosis will be proven wrong. It’s been cheap import prices that have helped keep US inflation so low, but at the same time made it hard for US exports to compete. So, conversely, more-expensive import prices might help exporters, but will also make prices higher.

Just at a time when the US consumer is feeling the pinch, the dollar plummets, making goods more expensive. Of course, this will hurt, and at least some of the benefits of falling interest rates will be cancelled out by more expensive goods imported from abroad.

In Europe and the UK we worry about the falling dollar. There is no doubt this will hit our economic growth, but it is worth remembering that the real problem Stateside is consumer borrowing. Whether the cost of unsustainable US borrowing is paid for by Europe in the form of cheaper dollars or just low demand from the US, it will make little difference.

The bottom line is that the US-led consumer boom could not possibly last.

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