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  • Money Problems

    Posted by Jonathan on June 8th, 2003 (All posts by )

    Don Luskin is right about how a “strong” – i.e., appreciating – dollar is not in itself a good thing. But neither is current dollar weakness, because with fiat currency everything that pols and central bankers say takes on excessive, even superstitious significance that can be economically destructive.

    There’s no way around it. Any verbal fart by a major official could be the first indication of a policy change. Vague talk by treasury secretaries that weakens the dollar is therefore just as bad in its own way as are deflationary policies that keep the dollar appreciating. Nobody would care what Snow or Greenspan – or James Baker – said, if the U.S. Govt’s established (ideally, legislated) policy had been to maintain the money supply such that the price of gold stayed in a range of, say, $345-355/oz.

    Even when a discretionary currency regime seems to work well, there’s a strong risk that eventually the people in charge, being people, will overdo it and screw things up. That’s why investors are not unreasonable to fear that the Bush administration may, in a shortsighted political attempt to aid big-business exporters or otherwise boost the economy before an election, or even to punish Europe, be going overboard in weakening the dollar. Sure, Bush said that he doesn’t want a weaker dollar, but he wouldn’t have said that if there weren’t a problem.

    And even in a discretionary-policy environment it’s possible for officials to have enough sense to keep their mouths shut. Clinton and Rubin seemed to understand this, while Bush and Snow apparently do not. That’s reason enough for dollar-holding investors to be nervous.

    Currently the dollar seems to be stalled in a range of 1.17-1.19 Euros. We’ll know soon enough whether we’ve seen the bottom.

     

    5 Responses to “Money Problems”

    1. Don Luskin Says:

      Jonathan, if the dollar was too “strong” and too much “appeciating” for a period, then a compensatory perior of “weakness” and “depreciating” is called for to balance the books. Whether we have overshot that balancing point is a matter of potential disagreement, of course. I don’t see how we’ve overshot it, at least not by much.

    2. Pete Harrigan Says:

      Jonathan,

      Look at Luskin’s chart. The dollar did far more declining before Snow made his comments than afterward.

      If I see any causal relationship, it is that big currency moves cause comments by Treasury Secretaries, not the other way around. In fact, I think there is a stronger logical case for that.

    3. Jonathan Says:

      I don’t attribute the dollar’s fall to Bush & Co. or think we would necessarily be better off with a stronger dollar. I’m arguing that we would be better off with a nondiscretionary monetary policy, particularly one that tied the dollar to gold. Currently, if the treasury secretary and the president comment on the value of the dollar, after it has already declined, the very fact that they think it necessary to comment is likely to be interpreted as evidence either of ineptitude or policy change (that is, to a weaker-dollar policy). Either way, they generate uncertainty that can further weaken the dollar and probably makes the U.S. marginally less attractive as a destination for investment funds. For these reasons, officials in a discretionary-policy environment should be careful of what they say. The safest way to do that is to say nothing.

    4. Pete Harrigan Says:

      Sure, they should say nothing. But you have to remember the pressures on these guys to say something after a substantial move. They are going to be asked questions about dollar policy after a fall. So which is more destabilizing: a “no comment” or Snow’s commentary about what elements make up a good currency?

      As to using a price rule targeting gold between $340 and $360, I’m all for it. That would have had the Fed adding liquidity from about mid-1999 or, at the latest mid-2000. That would have been an improvement on what actually happened.

    5. Jonathan Says:

      It’s a no-win situation for officials – a point which supports the case against discretionary policy.