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September 25, 2003
US weak dollar
More remarks on governing global markets. Under an imperial presidency the United States has embarked upon an imperialist foreign policy with a large external payments deficit. With the United States pursuing a more unilateralist foreign policy, it will have to absorb all of the costs without help from traditional allies. Under an imperial presidency power is highly centralized at the White House and in the Pentagon and the American Senate is increasingly sidelined. Under the Imperial presidency we have the twin deficits of budget and trade.
The current-account deficit is with China, Japan and other developing Asian countries. These countries are sitting on huge reserves of dollars accumulated through their lopsided trade with the U.S., as exporters get dollars as payment when they sell goods to U.S. And so Japan sold US consumers Toyotas in exchange for owning US real estate or ownership in our corporations.
An alternative to the protectionist strategy of getting (ie., coercing) China and Japan to allow the appreciation of their currency is for the US to run a weak dollar stategy. This strategy is a policy of dollar depreciation that would boost exports whilst eroding the wealth of foreign bondholders.
Such a strategy means that the lower value of the dollar makes U.S. exports more attractive. Hence more jobs in export-oriented manufacturing whilst the growth in exports reduces America's trade deficit (exports up imports down). it will have a negative impact on Europe and Australia. And the Europeans respond thus.
Such a soft dollar strategy also means both less money flowing into the U.S. looking for securities to buy, and the supply of capital flowing through U.S. financial markets falling. Falling supply with constant demand means a rising price. The price of capital flowing through U.S. financial markets jumps--the interest rate. The currency risk of holding depreciating dollars means that foreign investors will demand a higher rate of return, which will likewise create upward pressure on interest rates. Higher interest rates would also hurt the housing market and the present value of future profits.
According this account the US Treasury Secretary, John Snow, has aligned himself firmly with the Texas tradition in U.S. political economy that favours a weak dollar. He has rejected Washington's longstanding policy of supporting a strong dollar.
Posted by Gary Sauer-Thompson at September 25, 2003 01:53 PM
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