What The Strong Dollar Is Saying

Surf's up, and the dollar's washing over every currency in sight, dousing the once-mighty German mark in Europe and the Thai baht, Malaysian ringgit, Philippine peso, and Indonesian rupiah in Asia. With the trade-weighted dollar back to its all-time high, it's a return to the Superdollar that strangled economic growth in the '80s, right?

Wrong. Everything about the current dollar high is different from last time. Then, a soaring U.S. budget deficit sent interest rates up and drew in foreign money. Now, fiscal prudence and a disappearing deficit make the dollar the investment standard of choice--even over gold--by central banks, corporations, and individuals around the world. Then, the economy was sick, bloated U.S. corporations couldn't compete, and Japanese and German imports created a huge current-account deficit that had to be financed. Now, America has captured the high-tech summit, its corporations are the world's most competitive, and exports are booming. Foreign cash is pouring in to get a piece of the New Economy action.

The world is now split between two kinds of capitalism--the market-driven economies of the Anglo-Saxon countries and the more managed economies of Continental Europe and Asia. In Europe, Germany and France can't find the political will to deregulate the economy and downsize the welfare society. In Asia, bureaucrats protect domestic companies from foreign competition while connected cronies divvy up the capitalist spoils.

On both continents, the economic model is to keep the economic status quo and spur growth by exports. Hence Germany is encouraging the German mark to decline vis-a-vis the dollar to make its exports cheaper. The new euro is also expected to be a weak currency, for the same reasons. Southeast Asia's economic model, patterned after Japan's managed economy, is in trouble. An avalanche of cheap, competing, made-in-China goods is crushing Southeast Asian exports on the low end and Korea and Taiwan are more competitive on the high end. This is forcing Thailand, Malaysia, and others to devalue their currencies against the dollar. If Southeast Asia continues to base its economy solely on low-cost exports, it will have to compete with mighty China in a losing battle for many decades to come.

In a world of bipolar capitalism, the strong dollar is sending a signal to policymakers in Europe and Asia. They should listen to the market and free their economies.

Before it's here, it's on the Bloomberg Terminal.