Federal Reserve Chairman Ben Bernanke explained today that the United States faces numerous economic "headwinds" and that he's looking out for the strength of the dollar. Wait a second. Wouldn't the growing strength of the dollar right now be just another headwind for the economy?
Bernanke is right that "reduced bank lending and a weak labor market will probably restrain the pace of the U.S. economic recovery," but where is this recovery coming from? Partly it's coming from the weakness of the dollar. A "weaker" dollar is good for U.S. exporters, and one of the reasons we're seeing an uptick in manufacturing is that Asia's strong recovery, combined with the weakness of the dollar (down more than 10 percent since March), is giving our manufacturing a huge boost. Today our manufacturing sector is growing faster than any country in Europe.
Why are manufacturing/exports so crucial for the economy right now? Precisely because of the headwinds Bernanke points out. American consumerism is in hibernation. One out of six workers are unemployed or under-employed. We need foreign markets to help drive production. We need higher production to drive company profits. We need sustainable company profits to lift employment. And before all of that, we need a low dollar.