The falling dollar is the best thing that could have happened to the U.S. economy, given today's difficult circumstances, former U.S. Treasury Secretary John Snow insisted in a speech last week in Manhattan before the insurance industry's best and brightest at a gala dinner hosted by Lloyd's. While I appreciated his point, I begged to differ.
While acknowledging that the economy is sputtering, "we'd have a real crisis if the dollar was not trading as [low] as it is now," he told the gathering. "The American economy is resting on the dollar. Exports, fueled by a cheap dollar, are the only thing keeping the economy going."
He went on about this for awhile, talking about how our booming exports are covering up a lot of other sins--such as the housing market's collapse and the explosion of debt throughout the economy.
However, during the Q&A, I once again played the familiar role of skunk at the garden party, raising the problem of soaring oil prices, and the shock waves energy costs are sending throughout the U.S. and global economies.
I noted that while it's popular to bash OPEC and other big oil producers--including our own oil companies--as ruthless profiteers, in fact the falling dollar is perhaps the biggest culprit, since oil is priced in plummeting U.S. currency. It only makes sense that if the dollar keeps dropping, oil sellers have no choice but to keep boosting their price to maintain the relative value of their precious commodity.
Therefore, I asked, isn't the weak dollar hitting our economy in the gut like a boomerang, since it ultimately means skyrocketing oil prices?
"There's no doubt there are negatives" to the falling dollar, Mr. Snow conceded. But he quickly added that on the bright side, "there are unintended benefits of higher oil prices." He noted that soaring oil costs "might alter behavior in the long term--encouraging less driving, as well as the purchase of smaller, more fuel-efficient cars."
He also said higher prices might be a wakeup call for Americans, providing both economic incentives and political cover for those seeking new oil supplies (such as drilling offshore, as well as in the Alaskan wilderness), while encouraging development of alternative power sources.
The biggest fear, Mr. Snow said, is not a falling dollar or rising oil prices, but "a political and regulatory overreaction."
"The last thing we need is a Sarbanes-Oxley-type of overreaction to the mess we're going through," he said--referring, of course, to the strict compliance demands made of companies and their officers in the wake of the Enron scandal.
"The financial markets blow up from time to time," he said, citing the dot.com and housing implosions as just two examples. "The point is that the private market reacts and compensates. The market itself corrects these mistakes, and will do so again if given time."
"We all want the dollar to come back," he concluded, "just not too fast, because that would mean a crippling recession, rather than the mild correction we are experiencing now."
Better regulation, not just more, is the best response, he advised. "We already have way too many regulators in the U.S., without any one of them knowing exactly what's going on or what to do about it. We need to streamline."
So there you have it. Like an infected individual needing a fever to burn out a contagion, we're asked to wait and let the market's "invisible hand" do its magic.
I fully understand how the U.S. has turned into a gigantic 99-cent store for the world these days, with shoppers flocking here--in person or remotely--to buy up our goods and real estate.
Feeling like a pauper with worthless currency in my pockets when I traveled to London last fall was just a temporary inconvenience we Americans must bear for the greater good.
Still, the cheap dollar leaves me very uneasy. With the people of America--and its government--running up massive debts, with no end in sight to the fiscal madness, you have to wonder at what point this whole house of cards we've built might come tumbling down.
What do you folks think?
Comments (4)
We live in a credit-based society, where Americans and our government alike think we can spend money we don't have.
With the falling dollar aimed at propping us up for our past deeds, we are now finally realizing what our past sins have wrought.
The problem is our so-called leaders have no courage to curb government spending, and even less courage to tell the American public just how dire our financial situation is and what really needs to happen to fix it.
Instead they would have us drink the economic Kool-Aid that insists that lowering taxes and increasing spending somehow is sound economic theory. It started in the '80s, and it's called Reagonomics.
SAM RESPONDS:
I hear you, David, but I have one point to add. Americans need to look in the mirror.
While I agree politicians don't have the guts to tell us the truth and make the hard decisions necessary to put this country back on a sound financial footing long-term, a big problem is that most Americans can't handle the truth!
In fact, we punish those who try to tell us the truth by refusing to vote them into office, or threatening to vote them out. Any politician who promises to raise taxes or cut the budget to restore fiscal sanity is going to have their head handed to them in the ballot box, and politicians know it.
In a democracy, the people get the government they deserve. Until people start taking these economic problems seriously and demand real solutions, we don't stand a chance!
Posted by David | July 1, 2008 6:22 PM
Posted on July 1, 2008 18:22
As an insurance industry economist who actually pursued international economics as a field of specialization, it's a rare treat to be able to comment on global economic events over the past year.
The fact of the matter is that the export boom is the sole silver lining arising from the crash of the dollar. It's probably what's kept the country out of an official recession.
But as a nation we cannot sustain ourselves by selling a narrow range of agricultural and manufactured goods to countries like China while they export to us most of what we buy at Walmart every day.
The proximate problem with the dollar is that U.S. interest rates are lower than those found in much of the rest of the world.
The Fed pushed interest rates down sharply this year in order to calm markets in the midst of the credit crisis. This action alone is responsible for a significant share of the dollar's depreciation. It has been exacerbated in recent months by European Central Bank, which is looking to raise interest rates to battle inflationary pressures.
With the Fed pushing interest rates down and the ECB (and others) pushing rates up, the dollar is caught in the middle.
The bottom line is that nobody wants to hold dollars when the interest rate is half that or less of what can be had elsewhere for little or no additional risk.
As Sam points out, most of the world's major tradeable commodities are denominated in dollars. The producers of those commodities--none more important than oil--want to keep their purchasing power constant.
The only way to do that is to extract as many dollars as possible from the buyers of those commodities--you and me. This, in turn, leads to the importation of inflation. This is exactly what has led inflation to its highest levels in 17 years in the United States.
Once the the inflation genie is out of the bottle, it's hard to get back in. Back in the early 1980s, then Fed Chairman Paul Volker had to raise interest rates to unprecedented levels to choke off inflationary pressures--triggering a deep recession.
The way out of the proximate dollar problem and to simultaneously begin putting the cork on inflation is to raise interest rates before inflationary pressures build further.
The Fed is beginning to jawbone on this, albeit unconvincingly at this point. When the Fed begins to raise interest rates (most likely late this year or early in 2009), the dollar will rise and the price of most commodities, including oil, should begin to fall.
If the Fed pursues this strategy in a convincing manner, we will see a bursting of what is clearly a bubble in the commodities markets.
Rising interest rates will hurt some borrowers, but individuals and businesses are busy deleveraging their balance sheets and should be somewhat less affected by higher interest rates, since the aggregate amount of debt outstanding should be lower--especially debt issued to lower-quality credit risks.
It's also the case that lower interest rates are not the right tonic for what ails financial markets today.
A number of banks and investment banks suffered from a crisis of confidence. The Fed's decision to "open the window" and allow some financial institutions to swap their tainted securities with Treasurys is what prevented a broader economic collapse.
Lending dried up not because interest rates were too high, but because credit markets seized up.
At the end of the day, today's low dollar can be interpreted as nothing other than a sign of deep economic weakness. It's not too late to fix it.
Posted by Bob Hartwig, President, Insurance Information Institute | July 2, 2008 9:53 AM
Posted on July 2, 2008 09:53
Here's an idea--government can cut spending and reduce taxes. Investors and earners would get to keep more of what they earned, so they'd invest more. This would reduce the chance of inflation and increase the value of the dollar.
Call it Reaganomics, trickle-down, whatever you want. It works--and would have worked in the past if the government had the feds put a lid on spending instead of blowing the increased tax revenue on additional entitlement programs and pork.
Earmarking $300 billion to backstop the morons at Countrywide and their even more obtuse customers--except for Senator Chris Dodd, of course--is what passes for sound economic policy in D.C. these days.
My goodness!
SAM RESPONDS:
I wouldn't cut taxes just yet, not as long as there is a war on and an annual budget deficit ticking up.
If you long for the "good, old days" (my Uncle Jim always used to growl at that phrase, 'What the heck was so damned good about them?'), what about the Clinton years, when we had budget surpluses, were well on our way to paying down the national debt, and economic activity boomed!
You know, I am starting to think that instead of insisting that our presidential candidates prove their patriotism by sporting flag pins on their lapels, that they be forced to wear a ticker showing the national debt spiraling out of control each and every second!
CHARLIE GETS THE LAST WORD:
Clinton intended to nationalize the health insurance industry (at what cost??), and he was the benificiary of the so-called Republican Contract with America--which included, among other things, a reform of the welfare system, which helped to create the surpluses. In short, the budget surpluses were a political accident.
There has never been an instance when lowering the marginal tax rate for business and personal incomes has not resulted in an increase in tax revenue.
Government spending needs to be curtailed, and one of our candidates is itching to spend an additional +/- $900 billion on entitlements during his first four years in office.
In contrast, Bush's tax cuts resulted in an $800 billion increase in tax revenue through 2006, and I believe 2007 reveues were 7% higher than those of 2006.
We have problems, but it is not on the income end--it's the outgo, which is only going to get worse, irespective of which candidate wins the next election.
Posted by Charlie | July 2, 2008 11:23 AM
Posted on July 2, 2008 11:23
And let's not forget one other very important factor: Americans use 4 times as much energy per capita as the rest of the industrialized world, and they don't want to give it up.
I was passed yesterday by a gargantuan Ford 350 dual rear wheel pickup--clean as a whistle, so it's not a working truck--going 80 mph with one person inside.
A friend recently told me he won't convert to fluorescent lights until incandescents are no longer available.
Far too many people still waste far too much energy. We can save far more oil by conservation than we can by drilling offshore and in Alaska--and the results are immediate, not 10 years down the road.
In the meanwhile, alternative forms of energy may ease the pain a tad, but it's only a tad. It will be years and years before anything else begins to make a dent.
We're stuck with oil for at least 10 years, so let's use as little of it as possible!
Americans have to give up the sense of entitlement to waste whatever they want. It's going to be a long, slow, painful process.
Posted by Bill Lockhart | July 2, 2008 1:37 PM
Posted on July 2, 2008 13:37