Wednesday, November 11, 2009

America's Misguided Strong Dollar Policy

Since the early 1990's the United States has maintained a much touted but badly misguided strong dollar policy that has destroyed America's foundation. Most nations of the world seem to be vying for the opposite - a weak currency, which will allow their exports to stay competitive. Take for example Europe and Japan, both these nations are facing declining domestic consumption (due to falling populations) and therefore their economic growth is hugely depended on exports, which is why they'd love a weak currency. Even large populous nations like India and China favor weak currencies because their domestic population simply does not have the same purchasing power as Western nations, so they need factories powered by strong exports to keep their people employed.
So is America the lone fool that has wanted a strong currency? Yes indeed. And we did it to keep the engines of debt fueled consumption going. You see in the early 90's, the folks that run this country decided that they could rev up domestic consumption if people borrowed more money and spent it. Now since most of the borrowings came from foreigners, in order to make this work one needed a strong dollar. As Thomas Palley of the New America Foundation explains:
"[The dollars] overvaluation began with the Mexican peso crisis of 1994, and was officially enshrined by the "strong dollar" policy adopted after the Asian financial crisis of 1997. That policy produced short-term consumption gains for America, which explains its popularity with US politicians, but it has inflicted major long-term damage on the US economy and contributed to the current crisis. The overvalued dollar caused the US economy to hemorrhage spending on imports, on jobs lost overseas and on investment to countries with undervalued currencies".
What our foolish policy makers did not realize is that as Americans lost their manufacturing and services jobs (which were shipped overseas to competitive nations), their purchasing power declined. Now this would have affected American consumption had it not been for the Fed, which deliberately allowed for asset inflation (house and stock market appreciation) to substitute for wage growth. This left most citizens feeling artificially rich, so much that they took to borrowing even more against these appreciated assets and kept the consumption bubble going.
What is even more mind-boggling is that the American media has skillful marketed the asset inflation phenomenon to the common man. They have managed to convince Americans that it is o.k. for companies to ship manufacturing/services jobs overseas because it helps companies’ bottom line and that keeps their stock prices high. And wouldn’t you Mr. common person want your portfolio returns higher, even if it comes at the expense of losing your job? Yeah, fake stock market appreciation (i.e. asset inflation) sure beats having a job. If the Fed had any iota of common sense they would have choosen full employment for Americans with wage appreciation accounting for increased consumption (instead of debt driven asset inflation).
So not only has the strong dollar policy caused Americans to lose their jobs, it has pushed them deeper in debt and most importantly it has dumbed us down by wiping out a generation of manufacturing skills and knowledge. Why would you send your kid to become an engineer when you know he/she will not have a job upon graduation?
Now as the Fed created asset bubble has burst, Americans are waking up to a new reality. Ironically it is now that we as a nation actually need a strong dollar policy, to keep interest rates on our gargantuan U.S. treasury debt pile from escalating, and choking off any semblance of a recovery.

1 comment:

Anonymous said...

this is excellently written and simply put . Thank you .