By Mike Whitney

 As we embark on 2007, the world continues to get smaller (and flatter) because of the communication technologies readily available to so many people in fully developed and developing countries. In the global village we all see and hear things in real time, with the only difference being the spin that local politics and ideologies put on the reporting of world events.

 Lately, there has been a great deal of attention in the United States and the rest of the world paid to the value of the almighty U.S. dollar. The thinking has been that the dollar has become not so almighty, and that its decline relative to other currencies can have grave impact on the lives of U.S. citizens, and the lives of people around the globe.

 The movement of international exchange rates can be affected by many variables, and there is a pretty large component of emotion in these movements. A short list of factors that affect world exchange rate movements based on local country conditions includes:

 ·interest rates
 ·inflation rates
 ·government stability
 ·government regulations
 ·labor productivity
 ·labor productivity
 ·population growth rate
 ·tariff policy
 ·central bank policy

 The point being that when the discussion turns to the relative values of local currencies, it isn’t a simple matter. For the last decade we have heard warnings of impending doom because the U.S. savings rate is low or negative and we are running an “unsustainable” trade deficit. As these warnings have been sounded, there has also been a general opinion around the world that the dollar is over–valued and needs to decline in value. This argument about the dollar declining in value is not so much about should it happen, as how fast it should happen. If you look over that list of factors above and then think about how the United States stacks up relative to other countries on those factors, I believe the case can be well made that any decline in the value of the dollar will be gradual and measured. At this time the 30 countries that make up the Organization for Economic Cooperation and Development (www.OECD.org) place the relative value of the dollar per the chart.

 At any given time, different world currencies are moving up and down relative to one another depending upon how the factors in the list above are playing out at the local country level. If there was ever an argument for the efficacy of free markets, versus centrally managed markets, then the worldwide foreign exchange rate mechanisms, with very few distortions, provide a winning story.

 Will there be temporary distortions in the exchange rate picture and attempts by local governments to manipulate their exchange rates? The answer is, “yes.” But, overall, exchange rates of countries relative to one another will always be in a state of flux — moving up and down as the factors listed above play themselves out in world markets.

 We live in a world where the accumulated central bank holdings of U.S. Treasury securities are around $2.2 trillion, with Japan and China holding $1 trillion of that total. (http://treas.gov/tic/mfh.txt) This reality gives the world a strong incentive to assist in facilitating a gradual and orderly decline in the exchange rate of the dollar versus other primary currencies.

 Two groups that will benefit greatly as the U.S. exchange rate picture plays out and the dollar declines are U.S. manufacturers and suppliers to those manufacturers. Exported U.S. goods will be less expensive on a relative basis and more competitive with goods from other countries, so our exports will grow consistently. This export growth will be a result of our own manufacturing ingenuity and investment in new technologies as well as the free-market adjustments of relative currency purchasing power around the world.

 For further up–to–date and in–depth information about the world trade picture go to the World Trade Organization website at: http://www.wto.org/english/res_e/statis_e/its2006_ e/its06_toc_e.htm