The Case For A Strong U.S. Dollar

Mar. 19, 2013 1:04 PM ET, , , , 2 Comments
John M. Mason
17.64K Followers

It seems as if more and more people are attempting to make the case for a strong dollar, period.

One of the latest is George Magnus writing in the Financial Times. He closes with the statement, "The U.S. dollar should be expected to trend higher against most leading currencies…"

He places the current situation in perspective by alluding to past dollar cycles. He writes, "Since the collapse in 1971 of the Bretton Woods Agreement, a system of fixed exchange rates, the U.S. dollar has been through three downwaves (1968-78, 1985-92, and 2001-11) and two upwaves (1978-85 and 1992-2001), with an average duration of a little over seven years."

Magnus makes no reference to the fact that the two "upwaves" were connected with periods in which United States policymakers actually acted to either severely tighten monetary policy or acted to bring the federal budget under control.

The first such period was the one in which Paul Volcker was the Chairman of the Board of Governors of the Federal Reserve System and which saw the Fed act in a very restrictive manner, driving short-term interest rates up to more than 20 percent.

The second period was one in which Robert Rubin led the Clinton administration to bring the federal budget into a surplus position.

Other than these two periods, the 1961 period can be characterized as one of almost constant federal credit inflation!

Mr. Magnus is trying to convince us that we might have a period of U.S. dollar strength, another "upwave", however, one that would not be achieved during a period of either monetary constraint or federal government budgetary surplus.

In fact, this period of U.S. dollar strength would be achieved with just the opposite things happening, where monetary policy is extraordinarily expansive and where the federal government continues to have large, uncontrolled deficits. In other

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17.64K Followers
John M. Mason writes on current monetary and financial events. He is the founder and CEO of New Finance, LLC. Dr. Mason has been President and CEO of two publicly traded financial institutions and the executive vice president and CFO of a third. He has also served as a special assistant to the secretary of the Department of Housing and Urban Development in Washington, D. C. and as a senior economist within the Federal Reserve System. He formerly was on the faculty of the Finance Department, Wharton School, the University of Pennsylvania and was a professor at Penn State University and taught in both the Management Division and the Engineering Division. Dr. Mason has served on the boards of venture capital funds and other private equity funds. He has worked with young entrepreneurs, especially within the urban environment, starting or running companies primarily connected with Information Technology.

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