Foreign Exchange Rates - Sense or Nonsense?

One of our twin deficits -- the trade deficit, now running about $800 billion annually -- should be self-correcting. As our dollars pile up overseas (an increase in supply), their value should fall, but that has not been the case against many currencies. However, the Economist reports some adjustment in two stories, one online yesterday "The Fed's latest rise
May 11th 2006 From Economist.com The greenback has been drifting down against other currencies but there seems no sign, yet, of a collapse. " (See http://economist.com/agenda/displaystory.cfm?story_id=E1_GJDSPGD).

The other story was in the print edition May 6, 2006. In "Canada: A practical man", the Economist shows in a chart on p. 38 that Canada's rising trade surplus with us has been accompanied by a rise in the value of the Canadian dollar over the past four years, from a value of $0.65 US to $0.90 US.

The laws of economics may operate with a lag, but they do operate. Trade deficits and budgets deficits cannot persist in the long run with massive inflation!