Shut up about the weak dollar

The magazine Foreign Policy has given quite a bit of space to Obama administration critics in a section called “Shadow Government”. I like the idea a lot, but when the national Republican party has decided to abandon rationality for teabagging, even the more reasonable Republican intellectuals have a hard time coming up with a coherent argument.

Phil Levy, former official at State under Bush and current Shadow Government blogger is just one such example, and gives me an excuse to explain why people need to shup up about the ‘weak’ dollar already.

Levy’s most recent Shadow Government article examines the implications of the falling value of the dollar in foreign currency terms. He’s caught between a rock and a hard place, cheering the falling dollar on the one hand, and bemoaning it on the other.

  • First, Levy likes the idea that if the dollar ceases to be the international reserve currency, then the US government will lose its seignorage rights and the cost of borrowing will go up. It’s an interesting internationalist twist on the old ‘starve the beast’  strategy, in which we will be forced to reduce spending if we are no longer able to borrow at low rates. Caught up in cheering at cuts in social spending, Levy seems to ignore the fact that driving up domestic interest rates will also limit the amount of credit available to the private sector and will strangle business investment, home ownership, and employment.
  • Second, while he likes the idea of reducing financing available to Americans, Levy is worried that a weaker dollar will give “a sense among allies that the United States is an unreliable partner.” Since this part of his argument is a little hard to follow, let’s break it down:
    • Europes worry that “a continued slide of the dollar may pose long-term structural problems for Europe, forcing down wages and hurting employment in the months and years ahead.” 
    • The Chinese, holders of trillions in USD-denominated assets, say that “major reserve-currency issuing countries should take into account and balance the implications of their monetary policies for both their own economies and the world economy.”
    • A devaluation of the dollar will hurt Europe and China.
    • And to tie it all together, this priceless assertion: “It is very difficult to tell such a story in which the United States’ standing, prestige, and ability to project power do not decline along with its currency.”

Let’s pick apart that second argument point by point. First, Europe’s worries. Yes, a sliding dollar will have real implications for European well-being, as US exports become more competitive. So? Its not as if Europeans have a built-in right to a structural advantage over the US when it comes to exporting. As long as the US isn’t fixing the price of the dollar by controlling capital flows, then the dollar is going to do what the dollar is going to do, and no amount of European whining is going to change it.

Second, with regards to China, I fail to see why the US government has a responsability to safeguard China’s economic interests above our own. Yes, China invested lots of money in USD assets as it accumulated huge foreign exchange reserves due to its trade surplus. But that surplus was the result of an intentionally under-valued yuan, whose value China has actively manipulated to artifically inflate its exports. After accumulating this unearned surplus, China had to invest it somewhere. It could have chosen any currency in the world. It chose the dollar, in part as a bet on the long-term stability of the USD, and in part because no other currency could handle the sudden influx. Now that it looks like the USD is in secular decline versus other world currencies, China’s bet isn’t looking so good. Naturally they’re complaining, but should we care?

Levy wants us to care. He sees the crocodile tears of the Chinese and Europeans, and decides to put the welfare of those nations above the welfare of the US, whose domestic economy could truly benefit from a lower dollar and more exports. His reason? Our ability to “project power” will decline if we piss off the Europeans and the Chinese.

On that point he looks to be completely wrong. How good was America’s ability to project power back during the higher dollar years? Did the Europeans, grateful for a stabile currency market, march along with us to war in Iraq? Did the Chinese ever take any meaningful steps towards pressuring North Korea? Far from it. During the high dollar years, the US seemed amazingly unable to prod the Europeans and the Chinese to take any steps we wanted.

And we shouldn’t be surprised about that. Nations don’t pay back other nations for maintaining international economic stability. If anything, every other nation on the planet has had ample opportunity to free ride on the system (see China, People Republic of). So now, as the absolute hegemony of the USD seems to be on a long-term decline, the free riders are voicing their anger. Let them. We won’t lose any support we would have otherwise had on the international stage, and we just might reap some long overdue economic benefits while we’re at it.

Of course, I think Levy and other smart Republicans understand this. But they’re unwilling to pass up such an easy opportunity to play games with the public’s limited understanding of economics. A ‘weak’ dollar makes the president look bad, so the more times they get to say ‘weak dollar’ in the coming years, the better for the opposition party. And Levy is not exactly above the partisan fray, having already been caught manipulating incomplete CBO numbers to advance his own agenda. We should hold him and other Shadow Government bloggers and Republican intellectuals to a higher standard of analysis and truth-telling instead of letting them get away with publishing partisan gibes under the guise of real thought.


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This is a group blog. JSC5 currently writes from the US. JSC7 writes from behind the Great Firewall of China.

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