A Strong, Stable Dollar Is Best for America

After a surge during the early stages of the financial crisis, the U.S. dollar has resumed its secular trend downward. Many applaud this dollar weakening as a way to spur exports and economic growth. Martin Feldstein, the chairman of the Council of Economic Advisors under President Reagan, has written that a more “competitive” or weaker U.S. dollar is good for America.

I cannot overstate how strongly I disagree with this position. “Strong Dollar, Strong Country” is more than a mantra for me, since economic history indicates that no country has ever achieved greatness, nor maintained it, by debasing its currency. Have you ever heard of a country in deep economic trouble because of a strong currency? In short, the value of a nation’s currency is a reflection of the perceived value of the country in the global marketplace.

While global markets will determine the value of the dollar, America’s financial policies as well as public statements by key officials will impact how markets will weigh the greenback in the future. A weak dollar policy undermines U.S. competitiveness, job growth, standard of living, capital investment, share prices, and our ability to finance our public debt.

Feldstein rolls out a litany of reasons why he believes America benefits from a weaker dollar: in short, increasing exports as well as maintaining growth and employment.

Here is my case why a weaker dollar hurts America. First, a weaker dollar translates into a cut in the real spending power of American consumers; in effect, a reduction in real income. This is one reason Switzerland has the top ranking for the highest density of millionaire households, with dollar millionaire households accounting for 6.1 percent of all households due to the strong Swiss franc. Meanwhile, measured in euros, American real per capita GDP is down more than 25% since 2000.

Second, a weaker dollar diminishes the role of the dollar as the world’s reserve currency. Why should investors and central banks around the world invest in U.S. assets when its value is steadily declining? The world’s fifth-largest pension fund will no longer buy U.S. Treasury bonds because yields are too low. The move signals what could be a big shift by financial institutions away from U.S. government debt into higher-yielding assets. South Korea, whose National Pension Service has $220 billion in assets, is just one of many countries that wants to broaden its range of overseas investments. The Chinese are taking the opportunity of the weak dollar and the global financial crisis to push hard this past weekend at the ASEAN Summit for a diminished role for the dollar in Asian trade and reserves. Why give them the opportunity?

Third, during a time when the American consumer is cutting back, attracting international capital investment by private companies will be crucial in financing innovation and entrepreneurship and badly needed infrastructure which will, in turn, spur economic growth and employment. With interest rates at or near zero, we need every incentive possible to attract the capital necessary to finance our ballooning public debt.

A weak dollar also undermines American jobs and industry since American companies have an incentive to borrow in dollars and use the proceeds to invest in overseas plant and equipment. A weakening dollar encourages capital outflows. Global investors have increasingly borrowed in dollars and used the proceeds to invest overseas in higher yielding faster growing stock markets that have stronger currencies. This is one reason emerging country stocks are up 85% since March. The more the U.S. dollar drops, the more international equities rise.

Fourth, the argument that a weaker dollar will lead to a sharp reduction in America’s trade deficit is highly unlikely since 40 percent of the current deficit is due to oil imports, which are denominated in U.S. dollars. An additional 20 percent is due to trade with China, which has its currency pegged to the dollar. A weaker dollar also hampers marketing efforts by American companies in strong currency countries because marketing expenses are prohibitive. One example is $600 three-star hotel rooms in many European countries. Even if a weaker dollar gives a bump to exports in the short term, like a drug, it wears off, and we have to start all over again from an even weaker position.

Business leaders know that discounting prices may spur near-term revenue and profits but at a real cost to long-term profitability, not to mention inflicting damage to the brand name. This is what we are doing to the brand of America by trying to increase exports by lowering their price in the global marketplace. Better to stand firm on price and sell into global markets on the basis of what is great about American products—superior quality, innovation, and service.

Fifth, a weaker dollar is inflationary, since it increases the cost of imports. Just look back to the U.S. economy during the 1970s—ugly stagflation and markets going sideways year after year. I might also add that plenty of countries under IMF tutelage devalued their currencies with the hope of exporting their way out of financial trouble—name one such program that worked.

Last and perhaps most importantly, I view a weak dollar policy of to improve America’s competitive position as merely the path of least resistance. Let’s not roll up our sleeves and cut federal spending, greatly simplify our tax code to encourage productivity and achievement, or reduce corporate tax rates and excessive regulation. Let’s just wink and let our nation’s currency drift lower on automatic pilot.

The value of a nation’s currency is a reflection of the market value of the country in the global marketplace. Maintaining and strengthening the value of the U.S. dollar is in the national interest: the best interests of American consumers, businesses, and investors.

Comments

[user396040:]

I think that there are a few confusions here. A strong currency is a reflection of certain strengths of a country or an economy - not necessarily the CAUSE of those strengths. A country with a trade surplus will tend to have a stronger and stronger currency(which will gradually reduce the trade surplus) unless the government intervenes to "peg" the currency as the Chinese government has. We should take actions to strengthen our country and its economy - better education, a more rational tax system, energy independence, improved infrastructure. The results of these actions will in the long run likely strengthen the currency. But to follow a "strong dollar" policy on the theory that it will CAUSE these results is absurd. As long as we have a large trade deficit, the natural direction of our currency is down. Its decline will gradually lead to a trade balance in the form of increased production and exports and reduced imports as imports become more expensive to our consumers and our exports become cheaper to foreign customers. Trying to frustrate this process by an artificial "strong dollar" policy would be shooting ourselves in the foot and ultimately self-defeating.

Oct 27 06:18 PM

[chap08:]

"Have you ever heard of a country in deep economic trouble because of a strong currency?"

Yes I have - it's a country called America. Have you ever heard of a country that got economic strength through a weak currency? Yes I have - it's a country called China. There are many, many more examples in history.

This article is typical of the kind of back to front thinking that characterizes strong dollar thinking. As the comment above points out, you are confusing cause and effect.

None of your arguments stack up. I could go through them all, but in the space of 1 comment, let's just talk about 1 of them. You say that a weak dollar will undermine US industry because it will cause investors to "invest in overseas plant and equipment". There is no evidence to support this argument. On the contrary, you should consider the following:
1. We have had a strong currency and massive capital inflows for years. Has this resulted in massive investment in plant and equipment in the US? No. The reason is because we have an uncompetitive economy based on an uncompetitive exchange rate. Until we fix that, no one will invest in US plant and equipment.
2. China has had a weak currency for years. Has that resulted in a lack of investment in plant and equipment? No. Of course not. Neither has it for any other mercantilist. Neither will it for us.

Oct 27 07:12 PM

[bob adamson:]

Mr. Delfeld –
No one is suggesting that the US now debase its currency. The fact is that the US investment banking system (ably assisted by those of the UK, Switzerland and some others) created a debt bubble before 2008 largely in the form of securitized debt and derivatives. The US Government during that period ran up large consecutive budgetary and trade deficits with the assistance of East Asian lenders. These actions in the past created the dollar crisis, insofar as one exists.
Current government deficits and Fed policies provide stimulus that is necessary now to forestall a deflationary depression which, besides its many other ill effects, would cause even larger budgetary deficits at the Municipal, State and National Government levels. Therefore, paradoxically, the current deficits and Fed policies are supporting the USD.
In short, the ‘strong dollar’ policies you advocate would debase the currency rather than help set the stage for recovery; recovery being the only sound foundation upon which the USD can find strength.
This is not to say that a moderate devaluation done in concert with the other major mature and emerging countries may not be necessary as part of a sound recovery plan. The need for that devaluation would largely arise from the state of affairs that came into being before the second half of 2008.

Oct 27 08:31 PM

[Donald Ingram:]

Everywhere you look in America there is debt. The entire country is swimming in a sea of debt. The consumer is deleveraging at a rapid pace that is speeding up. At least those citizens that still have jobs with some disposable income. Those that have lost employment have defaulted or are about to/have walked away from under water mortgages. The massive Federal debt is growing. In most corners there is agreement that this debt will not be paid. Therefore you default or pay down the debt with a devalued currency.
All debt will be paid. Either by the debtor or by the lender. Either with pennies worth dollars or with dollars worth pennies. It will be paid. Not with a strong dollar.

Oct 27 09:53 PM

[derryl:]

"We have had a strong currency and massive capital inflows for years. Has this resulted in massive investment in plant and equipment in the US? No. The reason is because we have an uncompetitive economy based on an uncompetitive exchange rate. Until we fix that, no one will invest in US plant and equipment."

I second chap08's take on this situation. US companies have been hollowing out the American economy for years because the price structure of US labor and other costs is uncompetitive with emerging economies. American workers cannot afford to live in America on emerging economy incomes so wage decreases are not the solution. But American workers can afford to live in an America with a weak dollar because the major costs of living like housing and food and utilities are domestically produced and not subject to currency exchange rates. As imports become prohibitively expensive America will fill in the production that was hollowed out by cheap Asian imports. This will restore domestic production and employment which are the true foundation of the strength of any nation and its currency.

Mr. Delfeld is right about the oil imports problem. Unless the US can increase domestic production, start major consumption reductions and innovate into alternatives to oil, the trade deficits will remain structural. A weak dollar means very expensive oil, which will make alternatives more competitive and will be a start in getting the US prepared for a world of peak oil. Right now a weak dollar could be the road to salvation for the US while strong currency countries trod the road to cheap oil perdition.

Oct 27 10:22 PM

[Moon Kil Woong:]

The author and commenters are correct in bringing up the issue of pegging. A weak dollar or a strong dollar won't help America that much as long as our 2 biggest trading partners are pegging their currencies to the dollar (Canada and China). The rules of free market forces are suspended in light of that. Rather when it comes to trade deficits we loose buying raw materials and gain by selling more to Europe, Japan, and the ROW with a weak dollar. Both those effects will never counter pegging.

What we can do is drag the US dollar through the mud to the point that those that peg to us loose so much money relative to the ROW they can't afford to stay on the peg. Unfortunately this will really hurt us as well. Or we can make the US dillar so scarce and plunge the US into such a deep recession/depression those that peg can't make a decent living off of dumping stuff to us anymore.

If we wish to solve this issue without visiting these two drastic scenarios we can entrtain a counterbalancing trade war/protectionist scheme or we can get those that peg to the US dollar to stop it. If China seriously wants to get off the dollar I fully encourage it because it will inevitably mean some decouplment to the US dollar. The only issue is that I doubt they will. For one thing they don't know how to operate a free floating currency so mistakes will naturally be made. Also their economy without a US growth driver is not as strong or sustainable as the world would wish. For if it was, it would have opened its currency to a floating exchange rate a long time ago.

Unfortunately for China, inevitably low level production will increasingly slip away to lower cost countries the same way it did with Japan and South Korea regardless of how much they try to supress their currency and deny their own citizens a decent wage for their labor. Pegging imbalances have long term negative effects for both sides of the peg, mainly market distortions and instability.

As for Canada and the US pegging things are much better. For one thing it's not absolute, they actually do float their currency and it varies with the dollar. And although Canada gets some cost advantages staying below the dollar the US gets lower cost raw materials from Canada offsetting much of the imbalance. So far their good fence has made them good neighbors.

Oct 28 02:02 AM

[socrateaz:]

Your statements on policy are right. Reducing corporate taxes and government spending will help. I think things have gone too far and that is what has been causing a weaker dollar. Americans have been living beyond their means for a long time. The current falling in value of the dollar is just reality catching up! There have been many attempts to keep the dollar strong. Just can not force belief when reality is so strong! Many policies pushed by the current leader will just push the dollar down more. I do think the dollar is currently oversold. Maybe by as much as 5%. I also think the future is downward. Too many variables to say how much and how fast! Changes in policy can and will change movement of the dollar. But not the recent policy changes

Oct 28 03:34 AM

[Nikola:]

I don't think that Carl is implying that a strong currency will CAUSE a better economy, I think he is trying to say that the current policy of WEAK dollar will CAUSE a worse economy. You can't declare your currency strong. But you CAN wish your currency weak. How? Oh... I don't know.... how about by having your government overspending gazzilions of said currency, and borrowing like there is no tomorrow and printing money (Fed buying Treasuries). And spending a good chunk of it on unproductive activities like wars in Iraq and Afghanistan and ponzi schemes. AND THEN, when your currency goes down a bit, saying you don't really care, in fact, you are glad it did.

What happens is that your bankers start to worry, which CAUSES them to give you less money, under more and more unfavorable terms, which CAUSES your currency to go down even further, which CAUSES your economy to take quite a beating for the reasons which Carl explains, or .... at the very least because now you can't borrow more, you owe a whole lot, and you can't invest into anything new and productive.

Yes, you can then, if you are bold, employ hundreds of millions to make doorknobs, toothpaste, T-shirts and shoes and improve their living standard from official UN poverty level ($1/day) to a solid middle class making $12,000 2009 dollars per year.

If your vision of America's future is China's past (starvation, failed "economic" experiments and Cultural Revolutions), and you are happy that you will be able to recover from that just like China (sweatshops and human rights abuses), then, well, I don't think we have much left to discuss.

Oct 28 04:18 AM

[Dave Wrixon:]

You cannot deny the argument in principle, but isn't it all rather academic? There just isn't going to be a strong Dollar.

Oct 28 05:30 AM

[chap08:]

Nikola, I think that you are falling for what I call the "sweatshop fallacy". In other words you think that a weaker dollar implies that our future is competing with China in making T-shirts and shoes. It doesn't mean this.

A weaker dollar would have an impact at the margin. It would never (hopefully) weaken enough to make us competitive on T-shirts and shoes, but it would weaken enough to make us competitive in high tech manufacturing, software services, accounting services etc. These and other high skill, knowledge intensive jobs are currently being lost.

We have no future in sweatshops, but if we don't do anything about our trade deficit, we will have no future, period.


On Oct 28 04:18 AM Nikola wrote:

> I don't think that Carl is implying that a strong currency will CAUSE
> a better economy, I think he is trying to say that the current policy
> of WEAK dollar will CAUSE a worse economy. You can't declare your
> currency strong. But you CAN wish your currency weak. How? Oh...
> I don't know.... how about by having your government overspending
> gazzilions of said currency, and borrowing like there is no tomorrow
> and printing money (Fed buying Treasuries). And spending a good
> chunk of it on unproductive activities like wars in Iraq and Afghanistan
> and ponzi schemes. AND THEN, when your currency goes down a bit,
> saying you don't really care, in fact, you are glad it did.
>
> What happens is that your bankers start to worry, which CAUSES them
> to give you less money, under more and more unfavorable terms, which
> CAUSES your currency to go down even further, which CAUSES your economy
> to take quite a beating for the reasons which Carl explains, or ....
> at the very least because now you can't borrow more, you owe a whole
> lot, and you can't invest into anything new and productive.
>
> Yes, you can then, if you are bold, employ hundreds of millions to
> make doorknobs, toothpaste, T-shirts and shoes and improve their
> living standard from official UN poverty level ($1/day) to a solid
> middle class making $12,000 2009 dollars per year.
>
> If your vision of America's future is China's past (starvation, failed
> "economic" experiments and Cultural Revolutions), and you are happy
> that you will be able to recover from that just like China (sweatshops
> and human rights abuses), then, well, I don't think we have much
> left to discuss.

Oct 28 07:13 AM

[hereinNC:]

The US worker can

Oct 28 03:57 PM

[hereinNC:]

Comment destroyed by sign up process.


The fundamental problem with a Strong Dollar policy is that it is at odds with the aims of Free Trade.

You cannot be a Free Trade advocate and assert a Strong Dollar policy. Free Trade is about the most qualified resources being able to perform a job more efficiently than other resources based on skill and ability to perform.

The US strong dollar policy forbids the best skilled manufacturers, if they are in the US on dollar basis alone. Workers can't compete with foreigners that have no federally mandated minimum wage and lax environmental and labor laws. The US can maintain NO competitive advantage through schooling or training to compete with countries that have pegs to the US dollar that have trained their employees in a similar manner to US training.


If Free trade is to be the way of the world, the Strong Dollar policy has to end, and everyone should make good trades based on this fact.

If Free Trade is not to be the way of the world. then the US will have to run protectionist tarrifs and embargos to protect the US dollar's strength.

Oct 28 04:07 PM

[hereinNC:]

"In short, the value of a nation’s currency is a reflection of the perceived value of the country in the global marketplace."

Perception is much different now when jobs that used to be done in the US can be offshored to India, China and any other location.

The percieved value of the US dollar when it comes to the US worker is that they are too expensive for any job that it is possible to offshore, Which according to some stats I have seen is 25% of the current jobs. So how long will a Strong Dollar last when Unemployment hits 15-25%?

Oct 28 04:28 PM

[Duvanie:]

And the Federal Government was worried about exporting encryption technology, all the while when we were exporting our manufacturing and high tech technology, right under their noses. How ironic.


On Oct 28 04:28 PM hereinNC wrote:

> "In short, the value of a nation’s currency is a reflection of the
> perceived value of the country in the global marketplace."
>
> Perception is much different now when jobs that used to be done in
> the US can be offshored to India, China and any other location.
>
>
> The percieved value of the US dollar when it comes to the US worker
> is that they are too expensive for any job that it is possible to
> offshore, Which according to some stats I have seen is 25% of the
> current jobs. So how long will a Strong Dollar last when Unemployment
> hits 15-25%?

Oct 29 02:53 AM