Mundell and the dollar.

In recent weeks, economic indicators from the Dow to retail sales to employment have flattened or declined. Talk of a bear market and a double dip recession is prevalent.

Now, in a Bloomberg interview, Nobel Laureate and supply-side father Robert Mundell suggests the U.S. recovery has been interrupted by the dollar's significant rise against the euro, with the euro falling to $1.20. Mundell likens the current dollar rise to the greenback's sharp 30 percent appreciation in summer 2008, after six years of decline, which he believes caused that year's severe financial crisis and recession.

Mundell's thesis is that the euro is now a major global currency and that the dollar/euro exchange rate is of prime importance. He refers to a "tug of war" between the two currencies, suggesting the seesawing value between the two poles is a threat to world stability and expansion.

In Mundell's view, the euro's rise to $1.64 against the dollar in 2008 led to the continent's current economic and debt crisis. Its fall to $1.20 today is healthy and predicts a faster-than-expected European turnaround.

Meanwhile, after the strong-dollar error of 2008, U.S. monetary authorities in 2009-10 brought the dollar down, relieving the financial crisis and spurring recovery. Mundell sees that recovery imperiled as dollar scarcity makes U.S. exports less competitive and debt relatively more expensive.

On a side note, the dollar's rise is also causing difficulties for China which has pegged its yuan to the American currency. The yuan's appreciation is causing trade difficulties for China with Asia and Europe.

Supply siders are keenly aware that while markets don't like inflation, they cannot tolerate deflation, like those of 1981-82, 1997-03 and 2008. On the other hand, many supply siders will be left scratching their heads as to how their intellectual progenitor can suggest deflation when gold just hit an all-time high. Mundell seems to be suggesting that the dollar's relative position against the world's #2 currency is more important -- at least in the near term -- than its real value as measured by gold.

Regardless, if Mundell is correct that Europe will experience an unexpected recovery this year while the U.S. recovery is short-ciruited, it will highlight again the validity of his call for fixed exchange rates among the major world currency zones -- Asia, Europe and the Americas.

Is U.S. political leadership aware of these issues?