Ron Paul, libertarian icon, former member of Congress from Texas and father of Republican presidential candidate Rand Paul, eagerly proclaimed in a recent email that his ‘final prediction of a dollar collapse is about to become reality’.
The email was a bit extreme, perhaps, with references to the hyperinflation of Weimar Germany, Robert Mugabe’s Zimbabwe, and the Book of Genesis. But Paul’s dire premonition fits within an overarching Republican proposition that the Obama administration and the Federal Reserve are relentlessly undermining the US economy. Other, more serene analysts have also predicted a weak dollar. Martin Feldstein, who was a top economic adviser to President Ronald Reagan, argued some five years ago that the country’s large trade deficit and ultralow interest rates, coupled with sales of US assets by international investors and changes in the Chinese economy, would push the dollar down over coming years.
They were exactly wrong. The dollar’s rise, which started virtually the day Feldstein made his prediction in 2011, shows little sign of abating. It amounts to only the third instance of such consistent appreciation since Richard Nixon took the United States off the gold standard in 1971.
The US economy might just be bumbling along, but it is doing substantially better than the rest of the advanced industrial world. “It is quite natural,” said Barry Eichengreen of the University of California, Berkeley, “that the currency of the country whose economy is least bad should have the least worst currency.”
But with many developing economies in a tailspin, commodity prices and stock markets tumbling sharply around the world, could a rising dollar damage a fragile economic order?
Many economists argue it is mostly a good thing. A strong dollar should help Europe and Japan overcome their deeper economic weaknesses by making their products cheaper on world markets — an overall positive for global growth. The strengthening of the dollar, Olivier Blanchard, former chief economist at the International Monetary Fund, told me, ‘is a fundamentally healthy process’.
But there are reasons to be cautious. A strong dollar will squeeze US manufacturers, which have otherwise benefited from falling energy prices and rising wages in China. That will weigh on growth in the United States and further suppress inflation, which is already well below the Fed’s target.
Stanley Fischer, Fed vice chairman, said in a speech in November that, according to the central bank’s models, a 15 per cent rise in the dollar could cumulatively trim almost 2.5 percentage points off gross domestic product after three years, if its rise did not turn around and it was not offset by easier monetary policy or more public spending. And it could reduce 2015 inflation by as much as half a percentage point.
This has prompted some calls for corrective action. In November, C Fred Bergsten, former head of the Peterson Institute for International Economics, argued that the euro and Japanese yen were sharply undervalued against the dollar, and urged policy makers to pursue a rerun of the deal struck by the Reagan administration and the United States’ chief trading partners at the Plaza Hotel in New York in 1985, when they agreed to coordinate their actions to weaken the value of the dollar. And the effects in the United States are not the principal worry.
Federal Reserve officials can get cranky when foreigners criticise their policies. The Fed was accused of starting a ‘currency war’ when quantitative easing sent the dollar sharply lower. Now it is criticised when interest rates and the dollar are going up. And yet the critique, articulated most forcefully by Raghuram Rajan, the governor of India’s central bank, has merit. That’s because these swings, even when justified by the needs of the US economy, can induce enormous volatility around the world. — New York Times News Service
A strong dollar will squeeze US manufacturers, which have benefited from falling energy prices
