It’s interesting to read and hear analysts and pundits try to explain the turbulence in the stock market coupled with dollar weakness and oil price increases. Even such august journals such as the Wall Street Journal have joined with the consensus in blaming the mortgage financial crisis coupled with the easy money policies of the Greenspan years which essentially subsidized debt for more than four straight years.

To compound the situation, investors began dumping tech stocks in 2000 and putting the capital into the heating real estate market. So while the tech bubble deflated, the real estate bubble inflated. (We know these are related, but did one cause the other, or vice versa?) Anyhow, we are seeing the effects of the real estate market on the financial markets on the stock market on the dollar on . . . .

Of course, leave it to the politicians to blame policies for the current instability. Expect the presidential candidates to point their fingers to the current administration, once they figure out what to say, assuming they even understand what might be going on.

Which brings us to the dollar: the Fed seems to be getting most of the blame for its fall, for cutting rates again in response to the housing/mortgage crisis and its possible (though not yet realized) effects on the overall economy, even though GDP growth, employment, and income figures are all positive, while inflation and commodity prices are increasing, leaving lots of economists to wonder about the wisdom of cutting interest rates even further.

Several myths are clouding the picture. Among them:

1. Massive U.S. trade deficits weaken the dollar. It’s intuitive, but unfortunately wrong. During the 1980′s, the deficit was larger than today’s but the dollar was worth twice as much relative to the euro. And there are several countries with trade surpluses (Japan, Argentina) and weak currencies.

2. A weaker dollar will improve the trade deficit and strengthen the economy. This is a corollary of the first myth, and is especially insidious because it is believed by so many policy makers who can do real damage. Sure, some exporters will benefit (Boeing, big agriculture, winemakers, software), but this benefit is nearly always short-lived and gained at the expense of everyone else who depends on investment capital, which is now being lured away into industries which operate in stronger currency environments.

3. A weak dollar is an indication of inflationary pressures. In monetarist terms, we’re talking about too much money in circulation chasing too few goods. But that hardly describes the current situation, excepting a few commodities. So while this is a myth, it’s a factual one (not all myths are false), but obscures other contributing factors. So while inflationary factors may contribute to a currency’s decline, it doesn’t necessarily follow that a decline is caused by inflation.

So what are the principal causes of the dollar’s weakness? Keep in mind that the value of a country’s currency is in large part an indicator of the economic climate of that country relative to other countries. But not the current or even recent economic condition: currency traders try to look forward, not backward.

So although the U.S. economy continues to grow, the prospects for continued growth aren’t as rosy as those of some other countries, particularly in the euro zone. Many former basket-case countries have cut or eliminated taxes (both individual and corporate), simplified or flattened their tax codes, reduced regulation, privatized or partially privatized state-owned industries (including health care, education, transportation, and social security), liberalized trade, and reduced the power of labor unions. In short, they have implemented reforms first initiated in the U.S. during the Reagan years and continued through the Clinton and Bush years.

The difference is that in the U.S., many of these reforms never got off the ground, others were implemented half-heartedly, and others have even been reversed.

What’s most distressing is the prospects for these reforms in the U.S. Not only have the Democrats completely abandoned them (in contrast with their socialist counterparts in Europe and developing countries), they are actively committed to reversing progress in virtually all of them. Their presidential candidates are all proposing a nationalized health care system, have criticized free trade, and are courting support from trial lawyers and labor unions, particularly public employee unions, as well as big corporate recipients of corporate welfare and trade protection, while demonizing those corporations who have profited from international trade and competition. And their members of Congress are writing legislation that will not only permit growth-producing tax reforms to expire, but add new taxes and regulations to the tax code, increasing its burden and complexity, while creating more business mandates and regulations rather than reducing them.

So while the former socialist governments of Europe are implementing growth-promoting reforms and reducing their grip on economic activity, our “progressives” are taking the opposite tack.

And the Democrats seem poised to win in 2008. Any wonder why the dollar doesn’t look so strong any more?