Talk about the dollar has been all the rage these days. The Economist is leading with it as an issue this week. Seeing the dollar fall this much is bothersome—and may be very bad news, for all I know—but it still seems to be about forcing China to break that peg. As for The Economist’s suggestion that we focus on the budget deficit, as long as it’s confined to spending restraint, I agree. The tax cuts, though, need to stay in place to force the issue of entitlement reform. Future tax increases—and there will be future tax increases—should be implemented once that’s been accomplished. Here’s what The Economist had to say:

In a free market, without the massive support of Asian central banks, the dollar would be far weaker. In any case, such support has its limits, and the dollar now seems likely to fall further. How harmful will the economic consequences be? Will it really undermine the dollar’s reserve-currency status?

Periods of dollar decline have often been unhappy for the world economy. The breakdown of Bretton Woods that led to a weaker dollar in the early 1970s was painful for all, contributing to rising inflation and recession. In the late 1980s, the falling dollar had few ill-effects on America’s economy, but it played a big role in inflating a bubble in Japan by forcing Japanese authorities to slash interest rates.

This time round, it is a bad sign that everybody is trying to point the finger of blame at somebody else. America says its external deficit is mainly due to sluggish growth in Europe and Japan, and to the fact that China is pegging its exchange rate too low. Europe, alarmed at the “brutal” rise in the euro, says that America’s high public borrowing and low household saving are the real culprits.

There is something to both these claims. China and other Asian economies should indeed let their currencies rise, relieving pressure on the euro. It is also true that Asia is partly to blame for America’s consumer binge: its central banks’ large purchases of Treasury bonds have depressed bond yields, encouraging households in the United States to take out bigger mortgages and spend the cash. And Europe needs to accept, as it is unwilling to, that a weaker dollar will be a good thing if it helps to shrink America’s deficit and curb the risk of a future crisis. At the same time, Europe is also right: most of the blame for America’s deficit lies at home. America needs to cut its budget deficit. It is not a question of either do this or do that: a cheaper dollar and higher American saving are both needed if a crunch is to be avoided.

We’ve been here before, as they note, in the 1980s. It wasn’t disastrous then, unless you happened to live in Japan, and it needn’t be disastrous this time either. China could start by breaking that peg and we could start by getting spending under control. Entitlement reform would be nice as well. Given that the unfunded liabilities for them are in the tens of trillions of dollars, they’re a far bigger long term problem.