Weak Dollar, Strong Economy?

Posted by Jeff Carter
on September 14th, 2010

SPU’s have been up 8/9 days. Bonds were destroyed late last week. However, so was the dollar.

Sometimes I think that Washington DC people love to see the dollar fall. It is supposedly “good for exports”. That makes sense on a chalkboard, but not in real life. The American economy shifted from a manufacturing export driven economy to a service based knowledge economy in the 1980′s.

When a politician talks about jobs going overseas, or saving manufacturing jobs, they a playing to populist fears. That same politico is also wishing that the dollar were a lot cheaper than the yuan so the jobs miraculously will come back to the US. Crazy.

Pursuing a weak dollar policy didn’t help Bush, and it’s not helping Obama. We ought to reverse course, and pursue a stronger dollar policy. Why?

Number one, our population is aging. The baby boomers are retiring. They are spending less. Reliant on the savings they built up over a lifetime, the weak dollar policy is bludgeoning them. Retirees during this financial crisis might have been hurt the worst. Their asset values plummeted, and now the assets they have left are being devalued.

Second, the knowledge job economy that we have created is less sensitive to price fluctuation. In economic terms, the elasticity of demand for the consultant is far less than the elasticity of demand for a laborer. This gives pricing power to the provider of services. A stronger dollar puts more money in their pockets.

Third, the zero interest rate path the Federal Reserve is on damages the economic environment. They need to raise rates by a minimum of .5%, probably more like 1%. This will eliminate their member banks surfing the yield curve. Bankers go on television every day saying there is no demand for cash. There isn’t demand at the prices they are charging. Banks are looking at the risk/reward of reinvesting risk free at 2.5%, or assuming risk and lending at a higher rate. Much easier to sleep at night investing risk free. Hiking the interest rate will force a change in this behavior. The excess reserves the Fed has created will be sopped up-or lent out. If the government pursues other expansionary policies, like a flat tax, the reserves will be lent out.

Democrats cannot be blamed for wanting a weak dollar. Republicans are eating at the same table with them. The last President I remember that actually wanted a strong dollar and did something about it was Ronald Reagan. He also enacted fiscal policy that would benefit from a stronger dollar, and was successful. Bush I, Clinton, Bush II all talked the talk, but only Reagan walked the walk.

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