Special FX: What is 'Strong Dollar' Policy, Exactly?

♠ Posted by Emmanuel in at 5/02/2011 12:01:00 AM
My, my, my--have we been here before. And I suspect we have far from heard the last of it lest 'weak dollar' policy becomes a rhetorical favourite in certain parts of North America. When it comes to sheer hypocrisy, the 'strong dollar' policy quite possibly tops a very lengthy list of vapid statements emanating from American officials. Originating from the Clinton administration--more specifically Robert Rubin's selection as US treasury secretary--all who've succeeded him have been made to repeat this mantra regardless of the actual value of the dollar. Larry Summers is arguably the last to have put his mouth where the dollar was at. Meanwhile, the Bush tax cuts, the bursting of the dot-com and housing bubbles, and military adventurism have taken their toll on the state of American finances as America transitioned into Bush 43's "big government conservatism."

Just as Bush's treasury secretaries Paul O'Neill, John Snow, and Henry Paulson famously had to repeat the "strong dollar" line, so does Obama's own Tim Geithner. If anything else, Obama has overseen an even more remarkable deterioration in US finances. Hence, as the dollar flirts with all-time lows on any number of fronts, what I previously mentioned has come to pass: To avoid an outright rout of the US dollar but not actually help in any substantial way, Geithner was forced to repeat the increasingly empty 'strong dollar' line late last week. (Footage of Geithner's speech is available online.) Anyway, on to the Bloomberg report on this sorry restatement of a transparent falsehood:
Treasury Secretary Timothy F. Geithner today reaffirmed the U.S. commitment to a “strong dollar” and said the country won’t weaken the currency to gain an advantage over its trading partners. “Our policy has been and will always be, as long as at least I’m in this job, that a strong dollar is in our interest as a country,” Geithner said in remarks at the Council on Foreign Relations in New York. “We will never embrace a strategy of trying to weaken our currency to try to gain economic advantage [my emphasis].”

Geithner’s comments, in response to a question about the dollar’s recent decline, show his efforts to reassure investors that the U.S. will restore long-term economic growth and stability. The Treasury chief said the U.S. must earn investor confidence “over time” and said there’s “fundamental” trust in the U.S. ability to cope.
If only the markets had more belief in this pronouncement. Maybe he should repeat it some more as others don't seem to be listening yet:
The dollar dropped for a sixth day against the euro, matching the longest losing streak since May 2009, on speculation the Federal Reserve will consider measures to keep yields low to support the U.S. economy. The greenback also fell to almost the lowest level since August 2008 against the currencies of major U.S. trading partners...

Geithner said today that the U.S. needs a “credible strategy” to reduce its budget deficits over time, without moving too quickly and choking off economic recovery. “You have to commit to bring the budget deficit down to a level that will put our overall debt burden on a declining path as a share of the economy,” he said. The Obama administration wants to move onto that path by about 2015, he said.
The thing is, of course, that there is no guarantee that the Obama administration will still be around come 2015. Geithner then gets back to the immediate need to raise the US debt ceiling from its current $14.3 trillion lest it be breached come 19 May. Which of course is jarring insofar as calls for fiscal responsibility are mentioned in the same breath as pleas to be given the permission to issue more debt:
Geithner also said Congress needs to act by June to raise the debt limit, saying it would be “irresponsible” and “unacceptable” not to act. “The idea that the United States would take the risk people start to believe we won’t pay our bills is a ridiculous proposition,” he said. Congress is facing a vote as early as next month on raising the $14.3 trillion debt ceiling. The Treasury Department projects that it will hit the cap on May 16, though it could use emergency measures to avoid default until about July 8.

The chairman of the Treasury Borrowing Advisory Committee today said it would be “catastrophic” if the U.S. did not raise the limit. The advisory committee includes representatives from firms including Goldman Sachs Group Inc. and Bank of America Corp. “Any delay in making an interest or principal payment by Treasury even for a very short period of time would put the U.S. Treasury and overall financial markets in uncharted territory, and could trigger another catastrophic financial crisis,” Matthew Zames, chairman of the advisory panel, wrote in a letter to Geithner released in Washington today. Zames is a managing director at JPMorgan Chase & Co.
Geithner then mentions high oil prices as a hindrance to America's economic recovery without mentioning the likelihood that a weak dollar is in reality causing price spikes in many commodities--including oil:
Geithner said today that oil prices have become an obstacle to growth for the U.S. economy, which is otherwise set to accelerate. “We started the year with a little less momentum,” Geithner said. “We’ve got some new headwinds, most prominently of course in oil,” Geithner said. “What’s happening in oil is obviously potentially very significant. At current levels, on its own, it won’t put the recovery at risk.”
So what exactly does he mean by "strong dollar" policy that is not evident to me? By any conventional measure of the dollar's value--the broad index or major currencies index in nominal or real terms, the real effective exchange rate, etc--the US dollar is slumping towards all-time lows once more, period. There's also the charge that American free money policies are causing speculative flows to buoy commodity values he has yet to rebut as mentioned above.

This sort of hooliganism (see my comments on 'strong dollar' bulls--t being typical Yanqui behaviour) reflects an increasingly incoherent America. As its massive deficits inevitably weigh on its currency, it no longer possesses the willingness or ability to shore up its currency. In other words, it is more than willing to take dollar holders for another in an endless series of rides. That is, "strong dollar" statements no longer carry the weight they did during the Clinton administration. When you can no longer convince others of the integrity of your currency but have to resort to cheap talk which is totally disconnected with reality, well, the lie is revealed all too easily. Uncle Sam is a confidence man.

And if you're dumb enough to hold dollars--or believe 'strong dollar' talk for that matter--there's no one to blame but yourself.