I recently had an e-mail exchange with an extremely distinguished conservative commentator -- a familiar name to most -- who was worrying that the dollar isn't getting the "respect" it used to.
This is, of course, largely true. But it also embodies an absolutely terrible way of thinking about our economic troubles that really has to stop.
What my interlocutor wanted, as a lot of people (and not only on the right!) seem to want, was a "strong" dollar. A strong dollar, like a strong defense or strong democratic institutions, sounds like just a naturally good thing. It sounds like something every American should want -- so long, of course, as they're not some sort of pinko-commie-freak socialist who secretly doesn't want America to succeed.
But they're wrong. A strong dollar is an unwise goal.
Why? Begin by remembering that the word "strong," when applied to currencies, is only a metaphor. The dollar is never literally "strong" like an army or even a cup of coffee is. What it is, is expensive or cheap, like any other thing that is bought and sold. Therefore the dollar needs to be dispassionately evaluated for the costs and benefits of any particular price it bears, not misunderstood as a totem of national vitality.
Remember, for one thing, that a "weak" currency can, paradoxically, confer national advantage. Germany, Japan and China all have undervalued currencies right now -- and all three are making out like bandits from this fact. They're laughing, all the way to the bank, much too hard to care whether anyone "respects" their currency. And they're quite happy to let Uncle Sam, eternal sucker of the global trading system, pursue that objective, because it helps them keep their currencies down.
Now that we've gotten the misleading metaphor out of the way, we can start asking the real question: should we want a high or a low dollar?
This question is obfuscated by those who would prefer that the public regard the matter as much too arcane for mere voters to worry about. (Better to let our trusty friends in the financial markets and the Treasury Department take care of it.) But it is really no different than any other question about the price of a thing: whether you want the price to be high or low depends upon whether you're buying or selling. If you're buying, you obviously want the price to be low, and if you're selling, you want it to be high.
Because we, as Americans, both buy and sell things with dollars all the time, the right price of dollars is going to be a compromise between these two needs. If the dollar is too cheap, then imports -- starting with oil -- will be too expensive. This will lower our living standards and cause inflation. Conversely, if it is too expensive, then imports will be too cheap and our exports will price themselves out of world markets. We will import too much, running up a trade deficit and destroying jobs.
As a result, there's nothing intrinsically good about a "strong" dollar. (Or a weak dollar, for that matter.) What's good for us is having an appropriate price for the dollar. Pace a billion complexities, it is, roughly, the price that balances our trade so that we run neither a deficit nor a surplus.
Will the good ol' free market deliver this price for us automatically? No, for two reasons. First, because foreign governments manipulate the dollar values of their currencies, they manipulate the foreign value of ours. Second, because the free market doesn't intrinsically care about time horizons. It can quite easily, in a nation with a bias in favor of short-term consumption, optimize short-term consumption at the expense of long-term economic health. (I explored this latter issue, which is grossly underappreciated, at length in this article.)
Some people confuse a strong dollar internationally with the stability of the dollar's value here at home. These two issues are related, but they're not the same thing. They're related because imports are about 17 percent of our GDP, which means that a lower dollar tends to make that chunk of our economy more expensive. But they're not the same thing, as is clear from the fact that a number of weak-currency nations, like Japan and Germany, have lower inflation rates than we do. Why? Because a lot of other factors get thrown into the mix, like the fact that the cheap capital flows that prop up the dollar lead to inflation in asset prices. If it's domestic inflation you're worried about, it's domestic cost drivers you should be focusing on. And don't forget that an unsustainably strong currency (as ours is) is building up inflationary pressures for the day the currency slides.
One can perhaps argue for an artificially cheap dollar so the U.S. can run a trade surplus which will create jobs and start paying back our vast accumulated foreign indebtedness. The problem here is, against whom would we run it? We're such a big economy that a trade surplus big enough to be meaningful for us won't disappear in the rounding errors of the world economy. If such a surplus ever happens, it will be a big factor globally. But the other big economic powers are (unlike us) wise to this game and probably won't allow their markets to be flooded with our goods the way we allow our markets to be flooded with theirs.
So balanced trade is probably the best we can hope for. The price of the dollar isn't the only thing that determines this -- tariffs, other trade barriers, and controls on international flows of capital also have their effect -- but it's certainly the biggest lever within convenient reach.
There are other problems with pining for a macho dollar. For one thing, one can't demand a strong dollar and simultaneously condemn Chinese currency manipulation. China artificially lowers the yuan-dollar exchange rate, making its currency cheaper in dollars and ours more expensive in yuan, in order to boost its exports and suppress its imports. As many people have argued, this is unfair to American producers. That's why there's a bill pending in Congress with 189 co-sponsors to retaliate against China for doing this.
Trouble is, if you want a strong dollar, then you should be down on your knees thanking Beijing for its currency manipulation, as that is precisely what this manipulation delivers.
Ultimately, it's not the dollar that's the object of anyone's respect. It's the strength of the American economy as a whole. If our economy is sound, respect will flow as a matter of course, regardless of exchange rates. The world is dazzled to some extent by the symbols and totems of power, but in the long run, real power always wins out. That's what we should be caring about.
This post has been updated from its original version.
Follow Ian Fletcher on Twitter: www.twitter.com/IanFletcher
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Yup agree, no point in talking about strong or weak dollar, let's talk about Tariffs; want them, need them, can't live without them. Everyone give a hand for the Tariff.
Now we see oil nations that have no exports other than oil calling for another currency because there is no respect for the dollar.
weak dollar might be great for exports but it does nothing for world investment. China on the other hand keeps their currency weak so they can keep hammering the US as they keep extracting cash out of this country.
the rules need to be balanced... and China needs to take its finger off the scale.
America has never recovered. No another single year of double digit GDP growth in THIRTY years. A mountain of debt that they have no plan to pay off. Worrying about QE3 and printing money is like worrying about the engine temperature on the Titanic. A crash is coming unless and until you fix the steering.
WWII Tax rates NOW!
http://www.usgovernmentspending.com/federal_debt_chart.html
Reagan is responsible. Fix the tax rates and eliminate tax expenditures, tax all foreign income, then watch what happens to the economy. It will soar like an eagle.
WWII Tax rates NOW!
But Obama sucks because he believes in REPUBLICAN economic philosopies- What's good for Wall Street is good for Main Street; Regulation-ANY regulation- is bad; only businesses create jobs (aka trickle down), and the Free Market is always better. Obama sucks to the extent that he believes these things. Look at what he DOES, not what he says.
All these ideas are the problem- they are job killing ideas that didn't come from liberals. Liberals disagree with Obama, and with Republicans. Liberals don't believe in trickle down at all.
Its not something that can be understood purely in terms of political parties. But since elected politicians turn ideas into policies, electing Republicans, and those that ACT like Republicans, is, IMHO, NOT the way to go. Rick Perry is CLUELESS.
You are right- the reason is because these politicians are actively working against the American worker, no matter what they say. Just look at what they DO.
Thanks for a great post.
There's a saying,' Dividing an elephant in half does not produce two small elephants.'
The American people are nearly evenly divided into donkeys & elephants. One of the reasons why 2% of the population is able to call nearly 100% of the shots.
Maybe all of this will eventually lead to a Judgment of Solomon moment?
The Judgment of Solomon refers to a story from the Hebrew Bible in which Solomon ruled between two women both claiming to be the mother of a child. It has become a metaphor referring to a wise judge who uses a stratagem to determine the truth, tricking the parties into revealing their true feelings. Specifically, the judge pretends that he will destroy the subject matter of a dispute, rather than allowing either disputing party to win at the expense of the other.
http://en.wikipedia.org/wiki/Judgment_of_Solomon
Maybe the American people will someday realize it's not possible to thoroughly divide a people without causing irreversible damage?
'Scuse me, but US$1.43950/€ doesn't feel very undervalued to me. My customers are German, Austrian, and occasionally Swiss companies trying to sell stuff in English-speaking countries like the US. When they have trouble doing that, I get less work. I'd like to see at least US$1.3333/€ before I start to consider the euro 'undervalued'.
WWII Tax rates NOW!
I wouldn't recommend WWII tax rates unless the country is in the middle of WWII. Take a look at the table of historical marginal income tax rates for married people filing jointly between 1930 and 1980 (http://en.wikipedia.org/wiki/Income_tax_in_the_United_States). The percentages are huge during the war years. To reinstate those rates now would be both immoral and illegal.
During WWII, our dear elected officials constitutional duties required them to impose the tax rates you see in that table. Today, there's no such constitutional sanction. The only legal and moral way to reduce the national debt now is to eliminate all and only expenditures that are unconstitutional, immoral or both. Those include chiefly, but not exclusively, the so-called entitlement programs and the illegal, immoral military adventures in which the country is presently embroiled.
Many of the responders here either, did NOT read the article - simply reacting to the headline, or, they just are not that smart.
What do we have to do to get his voice heard on the Sunday "news" shows, as well as everywhere else?
When the President of the United States, who is supposed to be a smart guy, and claims to care about the plight of the American worker, is out there promoting "Free" Trade agreements that put us in the position that we are in, obviously Mr. Fletcher, and others of his ilk, are not being heard.
We, as Americans suffer, the corprotists laugh, and we go down the same hole.
WWII Tax rates NOW!
The little guy who puts his money in a savings account as a rainy day or retirement fund doesn't come out very well. Might be better to invest in wheelbarrows to sell to others later when they'll need them to push their dollar bills to the grocery store.
Unbalanced trade is an underlying problem. It will continue not only because the Chinese want it but because the international corporate elite want to continue getting richer from it.
Economic diversity and self sufficiency are good things. As we continue facilitating free trade, we cover ourselves with economic kudzu.
"if you keep doing what you've been doing, you'll keep getting what you've been getting..."
I wonder if going to a gold or silver standard would help. Or eliminating the Federal Reserve with the Treasury issuing new money. It would be handy to be able to buy gold or silver through small banks and credit unions. The price of gold is a little high right now, but it reflects on the dollar's value.
Remember - money is an artifice so there is no stable system over time.
Gold is a terrible idea because a country like Peru can mess with the value of our dollar by mining more or less gold.
Gold is also inflexible and should the economy ever grow, we would need to either mine exponential amounts of gold to keep up with gdp growth or we would have to debase our currency.
The Fed is run by the corporations (look at any board of directors at any fed bank). Dimon and Immelt help run the NY Fed.
So those who RECEIVE new money as it is created, are in charge of 'liquidity' so they will ALWAYS want there to be too much money!
Having gvmt print money would be WORSE as Barney Frank would LOVE to give people tons of cash to get elected. Gvmt would print gobs of cash and hand it out behind closed doors as well.
Another problem is the increasing monopolization and crony regulation of the US industry and banks.
Only scaled tariffs or import certificates - as envisioned by the Balanced Trade Restoration Act of 2006 - can stop the global game of currency manipulation and restore the US and world economy.
I think you missed...
EVRYTHING!
Just saying "EVERYTHING" is saying nothing - nothing to talk about...
Today that would be $52.83 per hour.
If you ask me, the dollar is weak enough already.
If you want to rescue our economy, consider the following actions: Reduce outsourcing and imports by raising tariffs. Restore jobs eliminated by automation by shortening the work week.
Reduce our expense for imported oil and military intervention by a massive program to convert our transportation system to electric, natural gas and renewable energy.