It is phenomenally good luck for the United States and for the world that oil prices are falling at the same time as the dollar. A lower exchange rate is essential for this country, but it generates troubling side-effects. The most dangerous of them is inflation, caused by imports that suddenly cost more. That threat is now substantially offset by cheaper oil.
Until the beginning of the year, it seemed certain that the decline of the dollar would sooner or later force a highly unpleasant dilemma on the United States and particularly on the Federal Reserve Board. Rising inflation would force the Federal Reserve to tighten the money supply and raise interest rates, at a time when slow economic growth called for lower interest rates. But to the very considerable extent to which the imported inflation will now be damped down by the effects of lower oil prices, that dilemma now becomes manageable.
And not only in this country. Among economic strategists, there was real concern late last year that the rest of the world -- especially its two most powerful traders, Japan and Germany -- had become overdependent on exports to the United States. With the decline of the dollar, they are going to lose their enormous trade advantage here and, with it, some part of their export market. That looked like the prelude to a recession abroad. But the effects of a falling oil price are even more powerful there than they are here, because Europe and Japan are now buying cheaper oil with cheaper dollars. At $15 a barrel, the price of oil in Deutschemarks and yen has fallen nearly two- thirds since last winter.
That in itself will speed up the growth of the economy in both countries. It will also reassure both governments that they can afford to lower their own interest rates -- as the Japanese are now doing -- without risk of inflation. It means that the chance of a severe worldwide recession is much diminished.
Amidst so much great and good fortune, what could go wrong? There are two things that might make trouble. The dollar is coming down smoothly and with no sense of panic, but it is coming down awfully fast. Since the exchange rate hit its peak just a year ago, it has now slid about two-thirds of the way to the level that would bring American trade into balance and eliminate the United States' gigantic foreign deficit. But the dollar could easily overshoot that level at great cost to the country. There is no international machinery to stabilize it. Second, with the falling dollar, the flow of foreign money into this country will decline. That will probably push American interest rates upward at some point in the future. But for the present it's enough to say that the dollar is moving in the right direction and by a marvelously happy coincidence the adverse side-effects of it are largely drowned in oil.