Unless you really like financial news, you may not have noticed that the value of a dollar has been sharply declining this week. The dollar has been declining for quite a while, but the pace has started to alarm investors, economists, politicians, and businessmen both here and abroad.
The good news — if it can be called that — is that a weak dollar makes American goods more competitive overseas. For example, a Volkswagen will cost more relative to a Ford in the states, while the Ford will seem to have a price cut in Germany. Unfortunately, this logic applies to everything Americans buy that is imported: fruit, meat, clothing, computer chips, Canadian lumber, Italian leather sofas, Bosch spark plugs; frankly Americans import most of what they buy. That is the definition of a trade deficit. That is where this policy will hit you in the wallet. The theory is that a weak currency will make it more cost effective to manufacture things here in the Good Old U. S. of A. and cause companies to hire back those 3 million or so factory workers whose jobs have evaporated during the Bush II Administration. This assumes several unrealistic things, not the least of which is that companies that have moved manufacturing overseas to take advantage of cheap labor and brand new factories are willing to move back.
The same devaluation that makes it desirable for foreigners to buy American cars makes it undesirable for foreigners to have American assets, such as stocks and bonds. Big deal, you say? Asian banks own over $1 Trillion (with a T) of the United States’ national debt. Imagine what happens if they decide to sell just a tenth of their positions.
Furthermore, the weak dollar makes it undesirable for foreigners to travel to the United States, as if current visa policies do not do the job. Has anyone told the Treasury Secretary that the Commerce Secretary is trying to encourage tourism? Secretary Snow, who replaced the largely ineffective Paul O’Neill,* has made a series of statements that make sense in a vacuum, but not in reality-land.
For example, back in June, Snow defined a “strong currency” as follows: “You want people to have confidence in your currency. You want them to see the currency as a good medium of exchange. You want the currency to be a good store of value. You want it to be something people are willing to hold. You want it hard to counterfeit, like our new $20 bill. Those are the qualities.” This may be his personal definition, and it may even be the Administration’s official definition, but it is not the definition most people use. It’s like defining all computers as using Microsoft Windows; saying it does not make it so. As CNN’s Justin Lahart put it, “Most currency traders had thought that the “strong dollar” policy had something to do with fostering economic policies — like low inflation, reduced debt and strong growth — which lead to a higher exchange rate for the dollar.”
In a more recent example of Bizarro-World Economics, just yesterday Snow proclaimed before an international audience of leading bankers and economists that the United States’ budget deficit would be cut in half by 2008. He went on to say that would take place due to growth and “disciplined spending” without tax increases. I fail to see how this is possible without hiring accounting experts from Enron and Worldcom. The fact that an expert from the International Monetary Fund thought this was reasonable should raise big red flags. Granted, it only took 2.5 years to go from budget surplus to an over $400 Billion deficit. But that was before the War on Terror, nation building in Afghanistan, overthrowing the albeit oppressive government of Iraq, two massive tax cuts, adding an entire new Department to the Executive Branch, proclaiming that No Child should be Left Behind, and giving sweeping new powers to the Department of Justice. We haven’t even figured out how to make Social Security work out after the Baby Boomers start retiring, and we’ve had since 1946 to work on that.
In the end, the currency devaluation is a high stakes game of chicken with China and Japan. The primary aim is to force China to de-link it’s currency with the dollar.** This link is one of the reasons Chinese goods are so darn cheap you almost can’t avoid buying them in the States — well, that and slave labor. The secondary aim is to force Japan to stop artificially lowering the value of the Yen, making Japanese goods cheaper overseas and stimulating Japanese manufacturing.
Should prices of Asian goods rise, inflation will result. That will force Greenspan to raise interest rates. That in turn will effect mortgage rates, the availability of investment capital, and the amount of interest the United States has to pay on the National Debt.
No matter who blinks, you lose.
*O’Neill was a good CEO, lousy Secretary of the Treasury. When he was nominated, Wall Street was pleased, thinking it meant someone competent and clueful would be running the show. It is unknown why exactly the administration thought another good CEO would succeed where another failed.
**Linking a currency may be a good short term idea. For example, certain South American nations did it to halt hyper-inflation. However, in the long term, Alan Greenspan is paid to care about how monetary policy effects America, not any other nation whose currency may be linked to our own.