Dollar Bogeyman

The dollar is PLUNGING, TUMBLING, FALLING TO RECORD LOWS. Etc. etc. Ladies and gentlemen, please say hello to the DOLLAR BOGEYMAN.

The falling dollar is frequently highlighted in the media, we think, not because of its significance or the level of interest among readers and viewers, but because it makes such good copy. There is nothing like fear when it comes to selling. This topic is one over which writers and talking heads can whip up ever so much fear, thereby ramping up readership/viewership and thus selling more newspapers.

The dollar can be, and has been, blamed for everything save hemohrragic fever. It "caused" the stock market crash of 1987, according to some. It is responsible for the shift of wealthfrom the U.S. to Asia and the Middle East. It is sapping America's economic strength and world primacy. Take your pick!

Like all great misconceptions, the dollar hypothesis does contain a measure of truth. When skilfully -- or hysterically -- distorted, it does indeed become plausible. Plausible, but not correct.

The declining purchasing power of our currency vis-a-vis stronger currencies has important advantages for the American economy. By reducing the cost of US products to foreign buyers, it stimulates domestic production and bolsters our economy. It attracts foreign tourists. For these reasons, administration after administration has stealthily supported a weak dollar policy, vehement assertions to the contrary notwithstanding.

It is certainly true that the ever-weakening dollar ENABLES the debt-addled American consumer. This is distasteful from the perspective of Calvinist morality, to be sure. It is also reflective of a fundamental weakness in the economy. While these defects are lamentable, the realistic question is: given the current structure of the debt-fuelled consumer economy, where would we be with a strengthening dollar?

Answer: we would experience an economic recession/depression of painful magnitude. The standard of living of the average American would decline notably. Social and political tensions would increase.

There also exists the threat that a downward economic spiral without any discernible bottom could ensue. The debt bubble in this country has been ballooning for more than six decades. Without it, the average American family would not have a house, 2 cars in every garage, and a host of electronic gizmos.

The American economy is built on PEOPLE BUYING WHAT THEY DO NOT NEED WITH MONEY THAT THEY DO NOT HAVE. This may be "ultimately unsustainable" as central bankers and staid gurus (firmly ensconced in their multi-million dollar New York apartments) solemnly declaim. But we are living in the here and now, and both political and economic realities command the indefinite perpetuation of what is admittedly an unhealthy status quo.
Those in power in American society have contemptuously dismissed the cheap money demands of the have-nots. Cheap money is both theologically unacceptable and economically dangerous. The truth, however, is that while denouncing cheap money, they have in practice embraced and perpetuated it.

In what was probably the most famous speech in American history, William Jennings Bryan told the Democratic National Convention in 1896: "We will not be crucified on a cross of gold." Quite right. Each time we have deviated from cheap money, the result has been depression. This is the reality. Therefore, the determinative imperative of actual fiscal and monetary policy: feed the debt monster endlessly.

Of course, there are losers in this game. Obviously, the losers are the creditors. Much of the unending struggle between the proponents of tight money versus the advocates of cheap money has been cast in the light of the purportedly looming disaster of foreign creditors pulling the plug. They will sell their Treasuries, forcing interest rates sky high, and crushing our economy. This is the bogeyman trotted out whenever the conflict between cheap money and dear money heats up.

Well, will this happen? Is it better to take our lumps now, rather than delay and suffer more severe pain?

We think not. While foreign investors might possibly pull the rug out from under us, the PROBABILITY of this occurring is very low. Foreign investors who hold US Treasuries are primarily foreign central banks. These banks may be short-sighted, but they are not about to cut off their nose to spite their face. Pulling the plug on the US means pulling the plug on their own economies.

THE US ECONOMY IS TOO BIG TO FAIL. No amount of "moral hazard" or investment returns is worth a global depression. So sovereign foreign investors have reasoned, and so they will continue to reason, we believe.