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The Public Policy
Weak Dollar, Strong Dollar
The U.S. strong dollar policy is not strong enough.
The Obama administration says it supports a strong dollar, but its major fiscal initiatives suggest otherwise. As our currency erodes, the U.S. strong dollar policy needs to be enhanced so those who claim its mantle are held accountable to achieve it.
The current strong dollar policy originated with Treasury Secretary Bob Rubin in 1995. There was logic for the policy at that time amidst a declining U.S. currency. Afterward, in the latter 1990s, a strengthening dollar coincided with a period of growth and prosperity.
After Secretary Rubin’s tenure, every Treasury Secretary and Federal Reserve Chairman has supported the goal of a strong dollar. But not all have been comfortable with the underlying policy. For example, Paul O’Neill simultaneously supported a strong dollar while calling the underlying policy “vacuous” because “it implies in it that somehow we have the ability to manage the relationship between the value of the U.S. dollar and other currencies”.
Federal Reserve Chairman Alan Greenspan and fellow Board members famously “cringed” at Rubin’s frequent mention of his strong dollar policy calling it “nonintellectual.” Greenspan later conceded that the policy had value in immobilizing the press via Rubin’s constant repetition of the strong dollar mantra to thwart the media’s tendency to interpret senior policy makers’ remarks as nuanced change in the government’s dollar policy. Clearly, our most central economic policies should do more than shield policymakers from annoyance by press.
All administrations, Democrat and Republican, now proclaim allegiance to a strong dollar, yet because of the policy’s absence of teeth, they can do so while pursuing wildly divergent fiscal initiatives ostensibly in pursuit of the same goal. Consider the disconnect of word and deed in the current administration: Tim Geithner and the President have both claimed support for a strong dollar yet pursued such weak dollar strategies as debt-financed deficit spending, ignoring entitlement reform, a massive regulatory overlay, and enabling a ratings downgrade.
And, while they have rightly respected the independence of the Federal Reserve, they have, by their silence, tacitly consented to the central bank’s massive monetary intervention.
As such, advocacy of the strong dollar policy by this administration has been more a rhetorical tool than a sacred guideline. Instead of serving as a catalyst for fiscal discipline, our strong dollar policy is political cover for this administration.
Maintaining a strong dollar is in the interest of the United States for many of reasons. It lowers the cost of oil to U.S. consumers, enhances global purchasing power, attracts investment, and tilts the global economic balance of power in our direction. Importantly, it lends credibility to the dollar’s status as the global reserve currency and international medium of exchange for numerous commodity transactions.
Yet, as it currently stands as an amorphous overarching policy, it is flawed because it has no underlying roadmap for policymakers and is too open to interpretation. The goal is the right one, but because policymakers have no uniform view of what defines a strong dollar, the policy is open to manipulation and politicization.
Consider how “strength” lies in the eyes of the beholder: Some consider the dollar strong only if backed by a hard asset such as gold. Economists traditionally gauge the dollar’s strength relative to “purchasing power parity” with other nations. Politicians tend to refer to confidence as the underpinning of a strong dollar. Others believe underlying economic strength is a prerequisite for a strong dollar.
Each of these has good merit, but a policy with such ambiguity of purpose is clearly imperfect, and lacking clearly defined goals by which to measure success or failure, the current policy breeds unaccountability.
With the rise of China and the globalization of trade, there is a growing contingency of left-leaning US policy makers and commentators who appear ready to cede US economic hegemony to their preferred new world order. In 2009, for example, at a meeting with the Council on Foreign Relations, Tim Geithner said he “was open” to China Central Bank governor’s suggestion for a new global currency based upon the IMF’s program of Special Drawing Rights. George Soros similarly said, “The big question is whether the U.S. dollar should be the [world’s] reserve currency.”
Other pressures threaten the dollar’s reserve currency status. China and other large sovereigns have built massive holdings of dollars and now question the lack of diversification implied by their large dollar exposure.
To mitigate these pressures, to give teeth to our dollar policy, and to prevent its use as a political slogan, our strong dollar policy should be enhanced with definable and measurable goals. The new policy would have three pillars:
First, it would seek to preserve, as sacrosanct, the dollar’s status as the world’s reserve currency. Second, the policy would explicitly target long-term dollar exchange rates that are characterized by stability and underpinned by market fundamentals and the free flow of capital. Third, recognizing economic strength as critical to a strong dollar, long-term GDP growth would be targeted at a lofty 4 percent.
About the Author
Emil W. Henry, Jr. is CEO of Henry, Tiger, LLC, a private equity firm, and is a former Assistant Secretary of the Treasury.
Letter to the Editor View all comments (11) | Leave a comment
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Von Mises Jr.| 4.11.12 @ 8:48AM
Milton Friedman: "Inflation is always and everywhere a monetary phenomenon."
TARP, QE1, QE2, the Stimulus and Bernenke's current policies are to expand the money supply.
Core Inflation, a new doublespeak economic term; excludes gas and food, and includes depressed housing and price reductions in technology to arrive at a ficticious rate of about 2%. But until recently, inflation statistics were not bastardized; and if we measure inflation as we have in the past, it was 2% for the first three months of 2012. That is an 8% annualized inflation rate.
Core inflation is a lie, just as the unemployment numbers have been forged by reducing the universe of jobs by over 2 million since 2008.
Jim P. at http://blogs.reuters.com/james-pethokoukis/ cites real unemployment at 10.9% for the U3. That does not include full-time workers relegated to part-time work, failed SMB and others who's job disappeared from the universe of jobs, and the under-employed. If you used to work on Wall Street, and now you work at Home Depot; you may have to cut your vacation short and eat the pink slime instead of fillet mignon. But Obama and the regime reports you are gainfully employed.
Bill Hussein O'Stalin| 4.11.12 @ 9:08AM
Yesterday, as I sat in one of my favorite Silver Spring, Md. restaurants for lunch I pondered the dollar.
For about $7 you can get a 1/4 rotisserie chicken, two sides and a large bottled drink. I eat there once a week or so.
As I ate I looked about the restaurant and wondered what motivated the people behind the counter to work. As I observed them a women burst through the back door to grab a couple of trays and take them into the back to be cleaned.
She had a look of anguish and perhaps anger on her face and it was obvious something was ruining her day. Perhaps the job, perhaps a problem at home
I was fascinated by the fact that I could sit there rather content, eating a good meal and rather cheaply.
This led me to the fact that what made it happen was the dollar.
It then occurred to me what my life would be like if the dollar collapsed and it's not as far fetched as one might think.
I worked hard all my life to provide myself a good retirement, better than most I would imagine. But it could all come to a rather abrupt end if the dollar goes into crisis.
In 2001 I started investing in gold and I invested big. When gold hit a $1,000 an ounce I quadrupled my money so I took the money and ran. That was a mistake.
I totally underestimated the horrible fiscal policies that would emanate from the Obama administration and their effect on the price of commodities.
In that sense I think the public has underestimated Obama's policies and ultimate effect on the dollar.
If the public re-elects Obama I would jump back into gold and big. The dollar at that point would have a horrible future and is not to be trusted.
The most disappointing thing behind all that is I believe we could see the collapse of our government. All that is holding it together is the faith of the people in the dollar.
They will work behind lunch counters for it and stick around to clean trays while other problems are pressing in their lives.
If they ever lose that I won't be able to have my $7 lunches while I watch others work hard.
And many other things would follow.
Von Mises Jr.| 4.11.12 @ 9:29AM
Bill, you are in good company with the great Milton Friedman. I just started his book "Money Mischief" and he starts by explaining how the "Continental" collapsed after the Revolutionary War since the people lost faith in the currency. He cites numerous examples in the first 25 pages of how the only value of money (above its commodity value if it has one) is other people's willingness to accept it based on faith.
I would buy that gold back, my friend.
jan| 4.15.12 @ 3:05PM
At Costco you can get a WHOLE 3 lbs. rotisserie chicken for $ 4.99!!!! Now there is value.
By eating out you only get 28 cents of food for every dollar you spend, what value.
JP| 4.11.12 @ 10:28AM
A weak currency begets inflation. And inflation favors borrowers over lenders. It is for that reason that governments favor inflationary policies. The federal government for a century has had a built-in mechanism that favors borrowing over saving.
And let's be clear: the current administration is using the powers of the purse to buy votes and the political power that comes with it. The Federal Reserve is a co-conspirator in this, as we've seen it monatarize our debt to unheard of levels. In short, the Dems are buying votes through massive amounts of borrowing, which they never intend to fully repay. Since Jan 2009, all economic and budgetary policies have been engineered to this November's election.
The creation of the Federal Reserve, the Federal Income Tax, and the 17th Amendment were all Progressive goals. And 100 years later we are seeing the end-game.
"WOLVERINE" in training| 4.11.12 @ 11:19AM
a weak dollar is another way of making the US a 2 class society/ economy
it destroys the motivation to save, to have a "i'm going to pull myself up by my bootstraps prospective," and destroys US ability to influence world events
with weak dollar, the bric countries could care less what we say or do, if they are smart, they will dump our dollar denominated debt before we devalue it more, thus starting our own spanish/greek spiral downward
it's just more marxist , socialist manuvering by the jackass in the white house,...we are at his (their) mercy until november (january 2013), and if he wins re-election by those sucking on govt and foolish independents, then shame on us for forfeiting our birthright to propagandists,
well, I WILL BE READY....
Mistral| 4.11.12 @ 1:17PM
Even a fool should be able to see that the dollar is weak but then again they are all Democrats.
cicero| 4.11.12 @ 1:54PM
Weak dollar/strong dollar. At the present time, the Treasury cannot even find lenders to buy their paper. As a result, the Fed is buying the U. S Treasury notes. How rediculous is that? This allows the government to, in effect, print money with not even a facade of legitimacy behind it. They then fudge the inflation stats so that the citizens won't panic, and quietly wait for the election returns. If they fool enough of the people again, they will have 4 more years to spend the country into oblivion. If they lose, they leave with cartloads of wealth, and leave the mess for the Republicans, whom they will blame for the train wreck. Sounds like fun to me.
DatsunMark| 4.11.12 @ 4:00PM
Emil,
Good definition on the what a strong dollar would look like but as long as politicians can fund their votes by selling bonds to the Fed and creating money out of thin air....you'll have a weak dollar.
backwoods| 4.11.12 @ 10:02PM
Strong doller? Ha! Against what? Aweaker currency, don't make fer a strong doller. All hell is about to break loose and we're playin games with arguing curriencies? I specifically remember President Reagan one time remarking on the strength of our doller. He said that was good, although there were lay-offs, things could be bought cheap in our country, and that was good. I also remember his saying another time when our doller had slipped and was much weaker, that that was good, becaus that meant our products would be purchased in other countries and that would create jobs. BIG F'N DEAL! No matter which way the wind blows thats good. That is what this is. BLOW! Best forget the doller, gold, silver, stocks they are all infected with worms. Best stock canned goods, dry foods, survival gear, water, and ammo. When the SHTF, you won't be able to reach your broker, 401k administrators nor would you want to.
JohnK| 4.14.12 @ 1:56PM
The role of the US Dollar as the global reserve currency is surely an idea whose time has passed. It made sense in the period 1945-1971 when the US economy accounted for about 50% of global GDP, and the dollar itself was backed by gold. Now, the US represents about 20% of global GDP, and the dollar is backed by nothing. Breaking the link with gold in 1971 has lead, slowly but surely, and now much more rapidly, to a debauched and devalued currency. If you give politicians the ability to create money at will, they always and everywhere abuse it, sooner or later. The USA had it very good for a long time, but its politicians blew it.