Enough Already With the Macho U.S. Dollar

By: Ian_Fletcher

A strong dollar, like a strong defense or strong democratic institutions, sounds like a naturally good thing. But it's not. A strong dollar is an unwise goal.

I recently had an e-mail exchange with an extremely distinguished conservative commentator-a familiar name to most-who was worrying that the dollar isn't getting the "respect" it used to.

This is, of course, largely true. But it also embodies an absolutely terrible way of thinking about our economic troubles that really has to stop.

What my interlocutor wanted, as a lot of people (and not only on the right!) seem to want, was a "strong" dollar. A strong dollar, like a strong defense or strong democratic institutions, sounds like just a naturally good thing. It sounds like something every American should want-so long, of course, as they're not some sort of pinko-commie-freak socialist who secretly doesn't want America to succeed.

But they're wrong. A strong dollar is an unwise goal.

Why? Begin by remembering that the word "strong," when applied to currencies, is only a metaphor. The dollar is never literally "strong" like an army or even a cup of coffee is. What it is, is expensive or cheap, like any other thing that is bought and sold. Therefore the dollar needs to be dispassionately evaluated for the costs and benefits of any particular price it bears, not misunderstood as a totem of national vitality.

Remember, for one thing, that a "weak" currency can, paradoxically, confer national advantage. Germany, Japan and China all have undervalued currencies right now-and all three are making out like bandits from this fact. They're laughing, all the way to the bank, much too hard to care whether anyone "respects" their currency. And they're quite happy to let Uncle Sam, eternal sucker of the global trading system, pursue that objective, because it helps them keep their currencies down.

Now that we've gotten the misleading metaphor out of the way, we can start asking the real question: should we want a high or a low dollar?

This question is obfuscated by those who would prefer that the public regard the matter as much too arcane for mere voters to worry about. (Better to let our trusty friends in the financial markets and the Treasury Department take care of it.) But it is really no different than any other question about the price of a thing: whether you want the price to be high or low depends upon whether you're buying or selling. If you're buying, you obviously want the price to be low, and if you're selling, you want it to be high.

Because we, as Americans, both buy and sell things with dollars all the time, the right price of dollars is going to be a compromise between these two needs. If the dollar is too cheap, then imports-starting with oil-will be too expensive. This will lower our living standards and cause inflation. Conversely, if it is too expensive, then imports will be too cheap and our exports will price themselves out of world markets. We will import too much, running up a trade deficit and destroying jobs.

As a result, there's nothing intrinsically good about a "strong" dollar. (Or a weak dollar, for that matter.) What's good for us is having an appropriate price for the dollar. Pace a billion complexities, it is, roughly, the price that balances our trade so that we run neither a deficit nor a surplus.

One can perhaps argue for an artificially cheap dollar so the U.S. can run a trade surplus which will create jobs and start paying back our vast accumulated foreign indebtedness. The problem here is, against whom would we run it? We're such a big economy that a trade surplus big enough to be meaningful for us won't disappear in the rounding errors of the world economy. If such a surplus ever happens, it will be a big factor globally. But the other big economic powers are (unlike us) wise to this game and probably won't allow their markets to be flooded with our goods the way we allow our markets to be flooded with theirs.

So balanced trade is probably the best we can hope for. The price of the dollar isn't the only thing that determines this-tariffs, other trade barriers, and controls on international flows of capital also have their effect-but it's certainly the biggest lever within convenient reach.

There are other problems with pining for a macho dollar. For one thing, one can't demand a strong dollar and simultaneously condemn Chinese currency manipulation. China artificially lowers the yuan-dollar exchange rate, making its currency cheaper in dollars and ours more expensive in yuan, in order to boost its exports and suppress its imports. As many people have argued, this is unfair to American producers. That's why there's a bill pending in Congress with 189 co-sponsors to retaliate against China for doing this.

Trouble is, if you want a strong dollar, then you should be down on your knees thanking Beijing for its currency manipulation, as that is precisely what this manipulation delivers.

Ultimately, it's not the dollar that's the object of anyone's respect. It's the strength of the American economy as a whole. If our economy is sound, respect will flow as a matter of course, regardless of exchange rates. The world is dazzled to some extent by the symbols and totems of power, but in the long run, real power always wins out. That's what we should be caring about.

Ian Fletcher is the author of the new book Free Trade Doesn’t Work: What Should Replace It and Why (USBIC, $24.95)  He is an Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think tank founded in 1933.  He was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net.

© 2011 Copyright  Ian Fletcher - All Rights Reserved

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