More than two years ago, economist Dean Baker wrote a paper about the "double bubble" in the United States.
One bubble was stock-market prices. That one has burst.
The other was the price of the dollar. It has yet to pop.
The dollar is off a little. Compared with currencies of major US trading partners, the dollar has lost 3.5 percent or more of its value since February.
But probably most economists think the dollar is still overpriced on foreign exchange markets perhaps by 20 to 30 percent. Like David Huether, chief economist of the National Association of Manufacturers (NAM) in Washington, they regard the present dollar level as "unsustainable."
"The only issue is whether it falls now or later," says Mr. Baker of the Center for Economic and Policy Research in Washington.
The dollar's price is important to Americans. If the currency tumbles, trips abroad and imported goods become more expensive. As import prices rise, so could the US inflation rate. On the plus side, a cheaper dollar, could restrain the withering of manufacturing in the US, saving many well-paid jobs.
In a way, the dollar has proven to be a Teflon currency. Its strength has survived foreign financial crises, the collapse of stock prices, and Sept. 11.
Yet many economists say the dollar must decline further at some point. "Six months, a year, two years...." says Baker.
The reason is the nation's huge deficit in its current account its international payments balance. The red ink was $430 billion last year, or almost $1.2 billion per day. That's 4.3 percent of gross domestic product (GDP), the nation's total output of goods and services. Without any change, the trade deficit will soar to $800 billion, or 7 percent of GDP, by 2006, notes C. Fred Bergsten, director of the Institute of International Economics in Washington.
So when an American spends a dollar, foreigners will provide 7 cents worth of the goods and services in excess of what Americans would otherwise have earned from selling their goods abroad. Up to now, foreigners have been glad to do that. The extra dollars they earn have been invested in US Treasury securities, stocks, bonds, firms, or properties that have offered good returns. Foreigners, in effect, finance the massive US trade deficit.
But the size of the deficit is now reaching the "danger zone" where the US and other industrial countries have traditionally seen their currencies dive, making exports easier and imports less competitive, Mr. Bergsten maintains.
"It's a cascading matter," Baker says. Foreigners not only acquire extra dollars through their trade surplus with the US; they earn more interest and dividends on their US investments.
In a decade, foreigners could own investments in the US equivalent to 70 or 80 percent of GDP, Baker calculates.
There have been signs that foreigners are edgy about their US investments. Enron, fear of a US-European trade war, and the Israel-Palestine troubles prompted foreign investors to turn bearish in March, writes William Kucewicz, editor of GeoInvestor.com. He blames much of the recent decline in US stock prices on foreign-capital flight.
Further, foreign central banks have been dumping some of the dollar assets they own. About $13.9 billion net, or 2.3 percent, since early April.
Moreover, foreign takeovers of US firms have plunged this year compared with the 1990s.
If such shifts become a trend, the dollar would certainly fall.
Mr. Huether expects the decline to be gradual. But nobody really knows when or how fast.
The NAM has been campaigning for many months for a weaker dollar. Between August 2000 and December 2001, the nation's manufacturing sector has lost 1.4 million jobs. Huether blames weak exports because of the strong dollar for 500,000 of those lost jobs.
What the NAM would like is for the US Treasury to change its "strong dollar" policy. Under President Clinton, Treasury Secretaries Robert Rubin and Lawrence Summers affirmed the desirability of a strong dollar so often that it has been termed a "mantra."
Current Secretary Paul O'Neill, after an initial slip, adopted the mantra. He hasn't used it lately, but merely says there is no change in policy.
Only last Tuesday, White House economist Glenn Hubbard told Reuters in Paris that the current-account deficit was sustainable and not a threat to recovery.
It could be for a while.
A weaker dollar is not cost-free. The US would have less foreign money to invest in productive plants, equipment, and buildings. Fewer Americans could afford French cheeses and Korean cars.
Baker thinks Americans should be allowed to hedge against a plunge in the dollar by opening checking accounts in the US denominated in Japanese yen, euros, or pounds. Europeans can open dollar accounts.
But at election time, a strong dollar sounds better than a weaker dollar. So don't count on the Bush administration changing its dollar policy any time soon.