Deeds, not Words on the US Dollar
From Bloomberg, I quote our Treasury Secretary:
“I believe deeply that it’s very important to the United States, to the economic health of the United States, that we maintain a strong dollar,” Geithner told reporters in Tokyo today.
Before I write, I can hear my friend Caroline Baum of Bloomberg gearing up her mental energies to say something like, “Again? How many times can they say that with a straight face?”
If I wanted to create a strong dollar, what would I do?
- I would have the Fed raise short-term rates.
- I would reduce the creation of dollar claims by bringing the Federal budget into balance.
Neither of these are realities. Thus the weak dollar.
But perhaps there is another way, and if you are reading me at the Treasury, please listen. The idea is to make the countries that have acquired a lot of Dollar obligations realize that they are likely better off acquiring goods and services from the US now, rather than at a lower exchange rate later.
There is brinksmanship here, but when I was a bond trader, I could make it happen. In the present context, there is no value to piling up more dollar obligations in exchange for goods today, unless one has a domestic political agenda to fulfill.
Now, with Japan and China, (and OPEC) both should be encouraged in this way. Buy today, your dollars will likely buy less tomorrow. That one action would restore balance to the global economy, as less business would be done on a credit basis across nations.
After that, the harder problem of dealing with structural US budget deficits becomes paramount. What do you do with a government that has promised more than it can deliver? The French Revolution comes to mind, but maybe we can do something more gentle. The President addresses the nation, and tells the Baby Boomers that benefits from Medicare will be reduced. It becomes a small medical needs and hospice program. The nation can’t afford anything more, and if you were paying attention, you knew that. Oh, and the foolish Part D, created by Bush gets eliminated, with no replacement.
As for Social Security, it becomes means-tested, and becomes an old age welfare program, complete with stigma. “If you are receiving Social Security, you couldn’t have done that well.”
If we take actions like that, the US can survive. Short of that, we face significant inflation, and a greater diminution of our living standards.
Until then, whoever is our Treasury Secretary will go around the world and say, “The US is committed to a strong dollar.” And this is a valuable service. We all need fairy tales to help us fall asleep easily at night, both here and abroad.
November 12th, 20098:49 am at
every treasury secretary has to publicly say they want a strong dollar whether they really do or not. can you imagine the political uproar if any senior level politician said otherwise? he would be gone in a minute.
> Now, with Japan and China, (and OPEC) both should be encouraged in this way. Buy today, your dollars will likely buy less tomorrow.
i’m surprised to hear you talk about solving the crisis through the mechanism of inflation expectations, but there you are.
November 12th, 20093:17 pm at
Such is the ambiguity of qualitative measures that the dollar could drop 15% and still be strong. It is not misleading as much as meaningless.
November 12th, 20097:49 pm at
“Buy today, your dollars will likely buy less tomorrow.”
How would one go about convincing them of this that isn’t already being tried? Personally, it seems to me that they plan on permanantly holding our securities at low rates of interest.
November 13th, 20098:32 am at
I like the fairy tale bit, David. In another context they have been called “necessary lies.”
November 13th, 200911:55 pm at
There’s the problem with democracies. They seek to give the people what they want, not what they need, which does rather tend to limit their life spans. How can any politician in our system sunset Social Security or Medicare?
November 14th, 200911:21 pm at
There is actually a very good definition of “a strong dollar”. A strong dollar is one that supports a negative current account balance. The dollar is very strong and will remain strong under almost any conceivable circumstance.
November 15th, 20099:08 am at
Perhaps the precondition of having a strong dollar is to first have it become cheaper. If the USD/EUR cross was 1.80 and the Yuan was priced in the market rather than in Beijing, then with truly abundant natural gas reserves, fully developed infrastructure, and competitively priced labor, the US would have a strong economy and dollar. The elements are already there; it’s just a matter of price and policy.
November 15th, 20092:04 pm at
One way to save money on Medicare would be to phase in a higher eligibility for it, as was done with Social Security. Let non-indigent older Americans spend a couple more years on private health insurance.
As for encouraging the Chinese and others with large dollar holdings to spend that money on U.S. goods and services, I suspect they’d rather buy U.S. assets. Remember when they tried to buy that American oil company though?
November 17th, 20093:32 pm at
Medicare is a huge problem; Social Security just isn’t. The “trust fund,” such as it is, will never be paid back out, and that means growth in benefits will have to be cut back. That’s not pleasant, and some heads are certainly going to roll, but it’s hardly the end of the world as we know it. Relatively minor adjustments to any number of factors will keep it solvent and paying out at least today’s level of real benefits as far as the eye can see.