A Strong Dollar Is Just What the U.S. Needs
Until recently, President Donald Trump had wanted a weaker dollar because he romanticizes manufacturing. A weaker currency has been a temptation for world leaders since the early days of industrialization, as it's generally believed it will provide a boost to exports and stimulate the economy in the short run. We all remember the beggar-thy-neighbor policies that led to competitive devaluations, leaving everyone worse off.
Nobody talks about the benefits of a stronger currency: It makes it difficult for manufacturers to export, so they have to cut costs, lay off workers, get leaner and be more competitive to compete with overseas players. A stronger currency can make domestic industries more efficient, which is better in the long run.
Currencies fluctuate in value against one another, so it can be difficult to tell how much paper money is worth on an absolute level -- unless you look at the price of gold. Gold, whether you like it or not, is a pretty good yardstick to measure the value of all currencies. And against all currencies, the metal has risen in value significantly since 1999, when it reached a low of $252.80. In 1999, a general statement that all currencies were strong on an absolute level would have been mostly accurate.
So why were all currencies strong in 1999 and why are they weak today? The culprit is, mostly, interest rates. Rates were high in 1999, and they are low now. Not nominal rates, but real rates, which back then were strongly positive, and today are negative and have been for many years. And, it's not just about the U.S.: Real rates are negative around the world.
Negative real rates are a good short-term fix for an economy. As Janet Yellen said in here first speech as chair of the Federal Reserve in 2014:
By keeping interest rates low, we are trying to make homes more affordable and revive the housing market. We are trying to make it cheaper for businesses to build, expand and hire. We are trying to lower the costs of buying a car that can carry a worker to a new job and kids to school, and our policies are also spurring the revival of the auto industry. We are trying to help families afford things they need so that greater spending can drive job creation and even more spending, thereby strengthening the economy.
With statements like these, what would be the possible counter-argument? You want high interest rates so you can have a weaker economy? With higher rates, you might have a weaker economy in the short run, but under a high rate regime, individuals, households and businesses are forced to be disciplined about borrowing, leading to greater efficiencies and a stronger economy in the long run.
It is an old saw that policy makers don't really engage in long-term thinking because they'll be unpopular in the short term. And in the long term, they won’t be able to take credit for the good times their policies fostered. Yellen is generally credited with the seemingly amazing state the economy is in, with unemployment low and growth and asset prices high. Unfortunately, the probability is high that we have borrowed from the future.
We live in an age of low rates and weak currencies globally, and the world economy is very inefficient. Manufacturers are protected by weak currencies, so their costs are high, and they hire too many people. Businesses and households show huge profit margins because rates are so low. They haven't had to deal with austerity in years. Even governments have been able to borrow at negative real rates, which roughly corresponded to the increase in spending in the late 2000s.
Things may seem to be good, but I think many people, deep down, know the economy is largely based on fluff and speculation and high asset prices, rather than real economic growth. This is a pretty grim assessment, and for sure, there has been economic growth, and for sure, things are better than they were 10 years ago, but it is not durable economic growth.
I would love nothing more than for Trump -- or his surrogates -- to say credibly that the U.S. has a strong dollar policy just like former Treasury Secretary Robert Rubin said in the 1990s. I would love nothing more than for new Fed Chairman Jerome Powell to discover the Taylor Rule. It would be nice if the occupant of the White House could think about economics longer than the duration of one term in office. In the long run, we are not all dead.
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