The Public Policy

Weak Dollar, Strong Dollar

The U.S. strong dollar policy is not strong enough.

By 4.11.12

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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.

The refined policy recognizes that as long as the dollar remains the primary depository for global savings, then, by definition, its relative strength will be appropriate to serve U.S. long-term interests, and the U.S. will remain the global leader in trade and free-market commerce. Tying the policy to market-driven stability would not only lend strength to our currency, but it would be intellectually consistent with how we encourage others to act, such as with our current posture towards China.

And nothing serves a strong dollar more than economic growth. Tying the policy to a precise and definable measure of growth is the mechanism both to foster strength and to forestall politicization of the goal.

Currencies attract global confidence and strength when supported by fiscal discipline and underlying economic growth. The most desired outcome from a strong dollar policy is continued U.S. economic superiority, and a policy with more teeth will bind future administrations to such an outcome in a way that our current strong dollar policy simply cannot.

And, importantly, no future Democrat administration will be able to mislead the uninformed of its commitment to such a core economic principle, while making every effort to produce the opposite result.

 

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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.