A Strong U.S. Dollar Isn't in Anyone's Best Interest

In ordinary times – times when interest rates are positive, inflation is a greater concern than deflation, and recovery from recessions is a foregone conclusion – the effect of a fiscal stimulus is usually to strengthen the currency of the country involved. It might reduce confidence in the currency, which would make the currency less valuable at any given interest rate, but it will normally cause the interest rate to rise enough to offset that effect.

In a sense this has to be true. A country running a fiscal deficit needs to attract enough capital to finance that deficit. By whatever means – generally by raising interest rates – it must make its currency attractive enough to attract that additional capital, and the value of the currency will rise as the demand for it increases.

Granted, there are other options. In theory, a country can finance an increased deficit internally, but this requires households or businesses to increase their saving enough to offset the deficit, which usually doesn’t happen. Or a country can try to create the necessary capital out of thin air by using monetary policy. In ordinary times that’s usually considered a bad idea because it tends to lead to inflation.

Needless to say, these aren’t ordinary times. Households and businesses are suddenly all too eager to save, and inflation risks are for the moment outweighed by deflation risks. The “natural” effect of a fiscal stimulus – to raise the value of the currency – doesn’t happen, because the stimulus is fully accommodated internally by monetary policy. In the absence of an explicit exchange rate policy, the value of the currency depends on the market’s judgments about what the uncertain future might hold.

There’s a certain poetic justice, though, in the behavior of exchange rates during ordinary times. If a country is spending recklessly and overstimulating the world economy, it gets punished with reduced export demand, the result of a strong currency. If a country is saving heavily and thereby facilitating investment throughout the world, it gets rewarded with increased export demand, the result of a weak currency.

In a time like the present, when real investment is out of favor and the demand for it is insufficient to absorb what the world wants to save, poetic justice would call for a reversal of the usual effects. Fiscal spending is good; fiscal spending is, in a sense, altruistic: the benefit accrues to the world economy – spending produces an international stimulus that helps absorb the world’s excess savings and avoid an economic implosion – but the cost is borne by the spending country, which (theoretically anyhow) will have to pay back the debt in the future. Poetic justice would ask that deficit spending be rewarded.

Fortunately, if some country – or let’s say some currency area – pigheadedly refuses to do its part to stimulate the world economy, the rest of the world may be in a position to supply the just punishment. Or, to put it in less moralistic terms, if one player refuses to give a stimulus voluntarily in the form of fiscal policy, the rest of the world may be able to take that stimulus in the form of exchange rate policy. Moreover, after insisting that an additional stimulus is not necessary, the resistant player will hardly be in a position to object to a policy that excludes them from the benefit of such additional stimuli arising elsewhere. If they are forced to provide a stimulus for themselves to offset the stimulus they are not receiving from the rest of the world, so much the better.

Abstractions aside, it’s time for the rest of the world – particularly the US – to start buying euros aggressively. By itself, the effect of the US fiscal stimulus will be to increase the demand for European products: governments in the US will buy machinery from Germany; the newly employed can celebrate with French wine; Americans who escape job loss won’t have to cancel their Italian vacation. It can hardly be considered unfair if we try to offset that effect by weakening our currency and encouraging some Americans to visit the Grand Canyon instead of the Colosseum.

Unfortunately this isn’t likely to happen. That old mantra, “A strong dollar is in our national interest,” still echoes through the air in the District of Columbia. Never mind that the strong dollar was largely responsible for the housing boom that led to the current bust. It was: the strong dollar encouraged Americans to buy from abroad and discouraged those abroad from buying from the US; as a result, the only way the Fed could induce a recovery was by cutting interest rates to levels that sparked a boom in housing. The rest, unfortunately, is history.

A strong dollar is not in our national interest. It is not in the world’s interest. It is not in the interest of justice. It is just wrong.

Comments

[Dave Wrixon:]

Back to the weak dollar strong dollar argument.

It is all down to fixed investment.

Why would anyone invest in the US right now? So where are the new jobs going to come from?

Real Estate and Shopping are not going to provide the answers.

What is needed is for foreign investors seeing US industries as good bets once more. That means seeing a comparatively low cost and high skilled labor force. Despite the propaganda, you have neither. All the investor can and has seen for a long time are falling returns in a currency that must ultimately depreciate.

To get over this problem for god sake get the depreciation behind you. Get your cost down, so that you industries can prosper and pay investors dividends. That is where the jobs have to come from. You have got to stop relying on Ponzi Schemes to make a living.

Apr 04 07:28 AM

[Cobra 1:]

I think you sir are pointing out a very important point! The EU trades predominantly with EU partners; hence protectionism.

If America wants to work its way out of this problem, we need to buy our own home made products. If we consume our own product, but we also must demand high quality of our mfg's, we can dig out rapidly! The rest of the world will not like this much, but, this is not any different then what they are doing.

Make free trade, fair trade, and things will work itself out in fairly short order.


On Apr 03 03:06 PM Celcius wrote:

> K9 - You ignore the fact that more EU trade is done within the EU
> borders than between the EU and US. I anticipate that the US's casino
> capitalism will cause the EU to decouple from the US and focus on
> internal EU economic development and trade expansion.
>
> This is the strategic tipping point where US imperialism is declining,
> and a multi-polar world is developing. IMO we are in for a long decline
> that will accelerate as our reserve currency status declines.

Apr 04 08:01 AM

[Chezfrederick:]

Would a weak dollar push China and others over the edge, prompting them to dump their US denominated reserves? Would this be in the interest of future US economic growth? Where would the US get their credit? What interest rate will it have to pay? and what happens to the deficit? Default... credit ratings... reserve currency status?....

This is not an issue of strong vs. weaker currency. Like everything else it is a balancing act and a difficult one at that. This is the high wire act that needs to be cautiously maneuvred which I think the boys in the US administration are faced with and I give them high mark to this point. The energy, determination, leadership and willigness to compromise on the world economic stage have set the tone, and given the market some hope... I wish them all the best of luck and success... We will be all better off. Can you imagine what it would have been like if Bush was still around?????

Cheers, and let's count our blessings...

Apr 04 08:05 AM

[Cobra 1:]

Your an idiot! What would we do if China decided to not buy the dollar...... If they are not buying, guess what, we cannot pass a 3.1 Trillion dollar budget! If you can find any person in America that thinks the (as is obvious you are one) ramming of this idiotic budget through, was a great idea, I'll eat your shorts!

When our Congressional leaders learn that they cannot piss away money we haven't even printed yet, we will continue to be in a mess! When America stops giving Billions and Billion's and as of yesterday a Trillion dollar bill to the IMF. Why give US dollars to governments that we know will never pay it back, we will be just fine. How many trillions of dollars to give to other countries, and for what?

Why is it that America is still the police of the world, how much does that cost every year, answer some of these questions, put some thought into your comment, and stop drinking the cool aid!


On Apr 04 08:05 AM Chezfrederick wrote:

> Would a weak dollar push China and others over the edge, prompting
> them to dump their US denominated reserves? Would this be in the
> interest of future US economic growth? Where would the US get their
> credit? What interest rate will it have to pay? and what happens
> to the deficit? Default... credit ratings... reserve currency status?....
>
>
> This is not an issue of strong vs. weaker currency. Like everything
> else it is a balancing act and a difficult one at that. This is the
> high wire act that needs to be cautiously maneuvred which I think
> the boys in the US administration are faced with and I give them
> high mark to this point. The energy, determination, leadership and
> willigness to compromise on the world economic stage have set the
> tone, and given the market some hope... I wish them all the best
> of luck and success... We will be all better off. Can you imagine
> what it would have been like if Bush was still around?????
>
> Cheers, and let's count our blessings...
>
>
>

Apr 04 08:17 AM

[Cobra 1:]

I can only assume you're a Brit or Euro trash from your comments here an in other posts you have made. To you I say the same.

"Your an idiot! What would we do if China decided to not buy the dollar...... If they are not buying, guess what, we cannot pass a 3.1 Trillion dollar budget! If you can find any person in America that thinks the (as is obvious you are one) ramming of this idiotic budget through, was a great idea, I'll eat your shorts!

When our Congressional leaders learn that they cannot piss away money we haven't even printed yet, we will continue to be in a mess! When America stops giving Billions and Billion's and as of yesterday a Trillion dollar bill to the IMF. Why give US dollars to governments that we know will never pay it back, we will be just fine. How many trillions of dollars to give to other countries, and for what?

Why is it that America is still the police of the world, how much does that cost every year, answer some of these questions, put some thought into your comment, and stop drinking the cool aid!"


On Apr 04 07:19 AM Dave Wrixon wrote:

> I would not worry about it too much, you aren't going to be importing
> very much of anything over the next few years.

Apr 04 08:20 AM

[dcb:]

I agree with his comments not yours


On Apr 04 08:20 AM Cobra 1 wrote:

> I can only assume you're a Brit or Euro trash from your comments
> here an in other posts you have made. To you I say the same.
>
> "Your an idiot! What would we do if China decided to not buy the
> dollar...... If they are not buying, guess what, we cannot pass a
> 3.1 Trillion dollar budget! If you can find any person in America
> that thinks the (as is obvious you are one) ramming of this idiotic
> budget through, was a great idea, I'll eat your shorts!
>
> When our Congressional leaders learn that they cannot piss away money
> we haven't even printed yet, we will continue to be in a mess! When
> America stops giving Billions and Billion's and as of yesterday a
> Trillion dollar bill to the IMF. Why give US dollars to governments
> that we know will never pay it back, we will be just fine. How many
> trillions of dollars to give to other countries, and for what?<br/>
>
> Why is it that America is still the police of the world, how much
> does that cost every year, answer some of these questions, put some
> thought into your comment, and stop drinking the cool aid!"

Apr 04 09:50 AM

[dcb:]

Folks look at dollar/Euro. world markets have risen (recovered) the US dollar has fallen. The implication being the market aren't going up so much as currency is moving around. Currency moves from low return to high return. Japan had a lost decade, during this time the yen fell a people moved their own savings into other currencies. The same thing here is going on.

As for a recovery, there is really no evidence of that at this time. rate of decay has slowed. Most recent forecasts say no growth 2009 (actually negative) with stagnation 2010 (IMF,OECD). If we assume these are accurate, and I have found their data to be very accurate, then the current market really is really about the dollar dropping in value and not about a recovery.

The behavior (called risk taking by others) of moving funds to non us currencies (euro, brazil) is called risk taking. To me I view this as a safety trade because the US aint going to have the benefit of flight to safety. I consider getting out of dollar based assets to be one of the few ways I will have to preserve my wealth and apparently more than a few people agree with me (Jim Rogers, Mac Faber, Peter Schiff). In 2002 I idnetified the US with structural problems, put a lot of my money abroad and made about 20% a year. When oil ran up I realized things weren't stable and somethng had to give. Now I am getting out of US again. This time it will be all of my money!!!!

Apr 04 10:03 AM

[dcb:]

Hey,
You can choose to believe me or not, but you should check out the Long View in todays (4/4/09FT) . I just looked at it. Yes I really didn't read it before I wrote my last piece!!!!

Apr 04 10:13 AM

[Chezfrederick:]

Cobra, look at the facts... The Bush administration blew up the economy and undermined the markets and the US. You have to agree with me, whether you like the budget or not, that you would like Obama to succeed in turning things around... unless you want the US to sink into oblivion. Keep an open mind, and let's all hope for success. At the end, cool heads prevail and hotheads fade.

Cheers and have a wonderful weekend.

Apr 04 10:14 AM

[dcb:]

strangely enough when looking at my technical indicators I have noticed a bottom in oil, euro, and commodities. despite the fact that macro indicators and supporting data imply they that commodities should actually not be rising. (oil prices have gone up yet supplies have remained high, and that oil has not reason on to be above 50$, from some Bloomberg expert). This would provide additional support that you are seeing a currency effect, not an economic effect. I will note the indicators did not tell me we have bottomed in stocks.

Apr 04 10:35 AM

[deuxsous:]

Mr. Harless, your wonderfully witty article is greatly appreciated!

Thank you

Apr 04 11:01 AM

[Dirk McCoy:]

I wrote an article called "Let's just say it- print more money" and had a lot of the same comments about savers not being rewarded and the Chinese dumping the dollar and our debt crushing us.

It is no longer a matter of printing more money, it's a matter of how much. At this point the US has effectively added about $13 Trillion of psuedo-credit and money, leaving a $2-3 Trillion dollar hole. Personally, I wouldn't mind seeing another $1 Trillion in money creation, but I doubt we'll see it.

The next key point will be when the Fed pulls the punch bowl just as the party is getting started. If they learn a lesson, they will start raising rates a couple quarters sooner, but not as high this time.

Meanwhile, it's not so much the dollar weakening as the yuan strengthening that is required. When a US engineer can buy a car on 8 months pay while a Chinese engineer needs to work 3 years for the same car, there is an imbalance that needs adjusted.

Apr 04 11:11 AM

[Cobra 1:]

In your opinion, now is the time to be in currencies? This is looking to be (from my research) to be near the bottom, your comments seem to reinforce my notion.

I want whats best for America, I think the man in charge has little to do with that. I do not believe for a minute, when you consider the total expenditures of the 8 year Bush admin, that more then 75% or 80% was directly pushed as agenda of the Bush admin..... Our legislators run this country and spend the real dollars, the ones most of the US public never hears or reads about.

The problem I have with BO is the socialist agenda he is pushing, he has made some scary blunders and moves that are unprecedented in the history of the US. This is my fear!


On Apr 04 10:35 AM dcb wrote:

> strangely enough when looking at my technical indicators I have noticed
> a bottom in oil, euro, and commodities. despite the fact that macro
> indicators and supporting data imply they that commodities should
> actually not be rising. (oil prices have gone up yet supplies have
> remained high, and that oil has not reason on to be above 50$, from
> some Bloomberg expert). This would provide additional support that
> you are seeing a currency effect, not an economic effect. I will
> note the indicators did not tell me we have bottomed in stocks.

Apr 04 11:22 AM

[jstratt:]

We are in a period of high currency volitility and likely will be for some time. The US government policies are acting to counter a worldwide deflation.

At the same time it strengthens the role of the US and US dollar in world commerce for the US to exercise world leadership while other countries who want the Euro argue among themselves about whether or not to act.

Many writers on SA clearly outline the risks to exercising US leadership in reflating the world economy. Count on large currency fluctuations whatever your position is and protect your profits.

Apr 04 11:53 AM

[dcb:]

I lool for what I call a "pop" at the top or a bottom of a run. that pop happened with the etf's dbc, oil, fxe. they did not occur with stocks and that left me wondering why the difference. Accordingly I will be place my assets I place my assets in those areas. I can't explain it, just that it was there. So since I know something works Vs. something that I don't know I stuck with what I know. I 'd march 9th as the bottom, but the pop I use to tell actually comes ususlly about a bit earlier. In may for top of markets the downdraft too a while and this time it really sprung up fast. On the pullbacks I will be investing in these securities or securities related to them (MXI, VDA). I don't like the commoditie ets because of roll over costs and the lack of dividend income. That is my plan, I am happy to share. Only the future can say if I am right or wrong. I expected the real bottom to be about 10% less than current bottom to have seen the pop. that is just a guesstimate.


On Apr 04 11:22 AM Cobra 1 wrote:

> In your opinion, now is the time to be in currencies? This is looking
> to be (from my research) to be near the bottom, your comments seem
> to reinforce my notion.
>
> I want whats best for America, I think the man in charge has little
> to do with that. I do not believe for a minute, when you consider
> the total expenditures of the 8 year Bush admin, that more then 75%
> or 80% was directly pushed as agenda of the Bush admin..... Our legislators
> run this country and spend the real dollars, the ones most of the
> US public never hears or reads about.
>
> The problem I have with BO is the socialist agenda he is pushing,
> he has made some scary blunders and moves that are unprecedented
> in the history of the US. This is my fear!

Apr 04 01:43 PM

[turnkeusa:]

"If a country is spending recklessly and overstimulating the world economy, it gets punished with reduced export demand, the result of a strong currency. If a country is saving heavily and thereby facilitating investment throughout the world, it gets rewarded with increased export demand, the result of a weak currency."

Not what actually happened. You miss a few points in forex history. The $ dropped as the US bubble economy crested until July 08 as fear drove the $ up. I sold a large pile of euros and bought euro puts in 7/08 because the euro was in a commodity boom-inflation fear driven bubble. Post Lehman, the euro crashed from $1.60 to $1.28/euro in the biggest short term move in postwar forex history, in exactly the inversion your scenario outlined above. Flight to safe haven currencies from a stock market and commodity crash drove demand to $ as institutions with toxic liabilities in $ had to buy $ to cover.

Apr 04 03:26 PM

[nova:]

Let us go back to the economic basics coming Demand and Supply.

If people want to buy from America, they need US$. This is exactly what happened after the WWII when US economy was strong and the whole world was buying from America. US$ was strong and America was rich and prosperous. Since US$ was strong, America used it to buy foreign goods and foreign companies making them work on America.

Now, American economy is in a toilet. US industrial base is incapable of providing American needs. Now, America must buy from outside.
Consequently, the demand for American products is down and US$ is weak.

Using weak US$, foreign entities can buy the most valuable US companies, technologies and know-how making Americans work for foreign masters.

Indeed, a weak US$ makes America foreign debt payments somewhat cheaper but, at the same time, the cost for buying foreign necessities (since we produce less and less) becomes more and more expensive. Furthermore, at some junction, foreign entities will reduce and/or stop providing credit to America and then we are cooked.

Summary
Strong US$ means a strong US economy and high standards of living in America.
Weak US$ means a weak US economy and low standards of living in America.

Question: what is better for America? A strong US$ or a weak one?

Apr 04 11:26 PM

[Oleh Kostetsky:]

I agree with the general thrust of this article. As the world turned away from Socialism toward Free Enterprise during the last 30 years, the world, relative to the US, has become much more productive and much more interdependant. This created a need for more and more of what has become the world currency-the dollar. This has enabled us to go into an orgy or dollar based money supply creation that enabled us obtain goods from the rest of world very cheaply. This has led to the destruction of factories in this country along with jobs. Service industries have picked up some of the slack but that is about to be reduced as the world is about to stop relying on our financial services because our stupidity. If we continue to be able to print money and world continues to need more and more dollars, this dynamic will result in a severe loss in our ability to produce almost anything. Eventually even the knowledge will atrophy. (Does anyone in this country even KNOW how to economically produce shoes anymore.) During the last 18 months the dollar has been weaker. This has lead to a smaller balance of payments problem as more US producers have suddenly become more competitive in Europe at least. If the gigantic stimulus creates more dollars that the world needs, and the value of the dollar goes down somewhat for at least awhile we may get back to producing more goods and create more jobs. A too strong dollar is not a good thing in the long run.

A historical aside: After the 1st World War, Winston Churchill successfully argued for keeping the pound pegged at high level (Empire!! and all that rot). This caused the UK to go into a prolonged depression as the goods that were produced in the UK were thus priced too high. As a result, Sir Winston begged us to keep our interest rates low so he could borrow from us. This caused an unsurge in our money supply, a boom on Wall Street and the subsequent bust and prolonged depression. See "The Economic Consequences of Winstron Churchill" by Kenneth Galbraith.

Apr 05 02:15 AM

[William Cowie:]

Whoa... wait a second. What is a "weak" dollar and what is a "strong" dollar? First off, there are no muscles or horsepower involved. A weak dollar doesn't equate to inflation or less buying power, and a strong dollar doesn't mean I can afford to buy a bigger house. A strong dollar doesn't mean the world bows down and kisses our feet or anything. Those are misleading terms, because they carry emotional overtones which can create confusion. Nobody likes to think weak is good. We all want to be on the side of strong, don't we?

But wait. We're only talking about relative value here. It is no accident that in the years when Japan and China had incredible economic growth, they had currencies universally regarded as "weak." So, for them, weak was good. How can that be? Can it be good for us?

When our dollar is "weak" our exports become cheaper, and therefore they grow. A contractor in Germany buys Caterpillars instead of a Komatsus because they're cheaper. So Caterpillar hires people to make them. Foreign airlines buy Boeings because they're cheaper than Airbuses. Boeing hires. Our hotels and airlines are filled with foreign tourists because their euros go further and the U.S. is a bargain. More jobs. When corporations decide where to locate a new customer support facility, the U.S. labor cost is lower, simply because it's measured in dollars with a lower value (it doesn't mean we earn less than before). The economy grows - more jobs for everyone, because more people in the world can afford what we make. McDonalds reports higher earnings because the yen they earned translates to more dollars. Stock prices go up - how is that so bad? The only bad news anyone can find about a "weak" dollar is those imports from China and Japan are suddenly not so cheap any more. American businesses can compete on a more level playing field. Is that bad?

Prices in the USA are pretty much unaffected, generally speaking. Bread and milk cost the same, we earn the same (except perhaps for raises because we're in demand all of a sudden). When we go to Disneyland or to the movies, admission is still the same. House prices are the same, unless you insist on fancy hardware made in China. If your Ford truck was truly made in America, its price stays the same. That Honda may be a little more expensive, though. That's what a "weak" dollar does to our daily lives. Terrible, huh?

Now, let's say the dollar is "strong." Let's do a Tim Allen grunt, hugh hugh hugh. Suddenly, Komatsu wins the bids and Caterpillar has to lay off people. Airbus gets orders and Boeing lays off thousands. Those customer support centers? India. American companies with strong foreign earnings report lower earnings. Stock drops. Bummer, dude. Hotels are empty, airlines hurt. Man, but we love our strong dollar. Sure feels good to have that strong currency. My neighbor (or I) don't have jobs, but hey, that Chinese TV is nice and cheap. The rich guy from Wall Street can travel to Nice a little cheaper on that bonus of his, that can't be all bad, can it?

Cut me some slack on my lousy humor, I'm an accountant by trade. The bottom line is: to me a "strong" dollar sucks. Hopefully you can see why.

So... in this case, a weak dollar is indeed a good thing for a country's economy. Not a single economy in the history of the world ever had prolonged exceptional growth with a strong currency. Think about that.

It's no accident that China kept a "weak" yuan (some claim artificially low) and flooded the world with their stuff. If their currency doubled, their prices would double. Who would want their stuff then? In fact, if we could get them to "strengthen" their currency, it would help U.S. industry a lot. My neighbor owns a specialty carpentry shop. He had to lay off several people s while ago because some of his customers decided to buy from China. If China "strengthened" their currency (or we "weakened" ours) he could hire those guys back.

How is that so bad??




On Apr 03 03:27 PM mac.barron wrote:

> So a weak U.S. Dollar is good? Given that logic then:
>
> War is Peace; Freedom is Slavery &amp; Ignorance is Strength.
>
> Be warned that thinking that a strong U.S. Dollar is good is now
> a thoughtcrime and that thinking such thoughts will get you shipped
> off to the RE-Obamaucation center so that you can relearn Dear Leader
> Obama's theories such as:
>
> assets are worth whatever the bank wishes them to be;
>
> we can create by fiat and gift to financial entities basically infinite
> amounts of money any negative consequences can be cured through creative
> accounting as above;
>
> we can support the overpriced housing market and buy votes for future
> elections by rewarding people who gamed the system by lying so that
> they could get into houses they couldn't afford;
>
> we do not want a sound manufacturing based economy;
>
> we are better off having a gigantic entitlement based economy with
> an equally bloated government apparatus enabling it; and,
>
> down the road we can always steal from actual hard working citizens
> and loot from honest businesses.

Apr 05 06:33 AM

[Allan Frain:]

For some time there has been pressure on sovereign nations to keep their tax rates high--so as not to become "tax-havens" (which simply means that they limit government enough so to attract capital). There is now a black list and a grey list for such nations.

This sounds like a proposal that nations be likewise excoriated for not printing enough currency--"enough" being on a par with the US, perhaps.

New World Order. Ain't it grand ?

Apr 06 07:14 AM