New Haven — AS the dollar continues to sink against the euro, the yen and other currencies, the conventional wisdom is that there is little choice but to allow it to continue to fall.

America's trade imbalance can be corrected, the current reasoning goes, with a much cheaper dollar - perhaps 30 percent cheaper than it is today. The idea - supported by Treasury Secretary John Snow and Alan Greenspan, the Federal Reserve chairman - is that this would raise the price of imports for Americans, who would thus buy less from abroad. A cheaper dollar would also supposedly allow us to sell more to the world by making our exports less expensive.

Here is what's wrong with this analysis.

A falling dollar is unlikely to curtail imports as much as hoped. It is more likely instead to act as a consumption tax. About one-quarter of the United States import bill arises from oil purchases, which are priced in dollars. A rapidly depreciating dollar thus means lower earnings for OPEC producers. In response, the cartel might well raise prices. Goods from Asia, especially China, account for at least another 25 percent of our import bill. Because these computers, machine tools, TV's and toys are essential to our work and lifestyle, chances are that we will still buy them, even at higher prices.

Nor will a cheaper dollar encourage domestic production that can replace imports, as some argue. Auto parts, for instance, are increasingly produced in Mexico and other developing nations. These plants, part of a highly specialized global supply line, are not likely to be replaced by suppliers in the United States just because of temporary currency movements.

The author continues with descriptions of the pitfalls of a devalued US dollar, none of which are particularly encouraging.

A great power does not debase its currency - a currency around which most global commerce revolves. It does not take its hand off the tiller, as if the market bears all responsibility for global financial stability. To fix the problems that underlie huge trade imbalances, it uses statesmanship - at home and abroad.

From New York Times (free subscription required)

JEFFREY E. GARTEN Published: December 7, 2004

Does GW know or care about this situation? Can he become the statesman that is required to move things in the right direction?

On the other hand, I suppose a global recession would probably put a damper on terrorist operations...