March 12 , 2003
Treasury Secretary John Snow probably thought the
question about the dollar's value was innocuous.
That is probably why he dismissed it with the statement:
"It's within normal range. I
don't see anything troubling about it."
After a decline of more than 20 percent against the euro
in the past year, speculators were trying to determine if the decline was U.S.
policy or something that might soon be resisted. Of course, Secretary Snow's comment suggested that no attempt
would be made to stem the tide of the falling dollar, causing the dollar to
fall even further.
Thus, another Treasury official learned under fire that
no statement is innocuous, especially when a specific trend already had been
established. He tried to correct
the damage the next day by reiterating that the U.S. policy is for a strong
dollar, and the currency markets did respond.
I am sure he will be more careful in future remarks about the dollar
and other issues that fall under the concern of a Treasury Secretary.
Whether Secretary Snow was wrong in his comments, was he
right in his instincts? Is the
dollar not troubling at this time or should we be concerned about its decline?
In 1933, with more than 20 percent of our workers without
work, prices rose more than 6 percent. That
price rise actually helped to ease pressures upon financial institutions,
which were suffering from defaults as prices plunged soon after the Great
Some historians believe that interference with market
conditions, especially through the National Industrial Relations Act, caused
that inflation, and they would be partially right. However, the primary source of that price increase in the
midst of idle resources was a dramatic devaluation of the dollar.
Instead of using $20.66 to purchase an ounce of gold, prices jumped to
$35, and the deflation was finished.
Resources are no where near as under-utilized as they
were during the Depression. Also,
dollar devaluation has been less than 5 percent against all currencies,
despite a more than 20 percent plunge against the euro.
Certainly, few American producers are experiencing any ability to raise
prices because of the dollar's slide. Nevertheless,
a declining dollar usually generates inflation.
So far, this weak dollar has not.
A weak dollar also improves the competitiveness of
American producers against international providers.
If world markets maintain their economic strength, a weak dollar can
add to domestic economic activity either by providing sales opportunities
abroad or displacing imported goods at home.
However, that "if" is major.
When the Depression began, countries tried to diminish their own
weakness by slashing the value of their currencies.
Because almost all countries tried the same policy, no country gained
any competitive advantage. However, banks who made loans expecting to get paid in a
strong currency suffered losses. Financial
institutions collapsed and the economic downturn intensified.
Can the current dollar weakness undermine world financial
stability? So far, I believe the
answer is no. In other words,
Secretary Snow's instincts are sound. The
dollar's weakness is not troubling at this time.
Indeed, the dollar's strength a year ago was a cause of
concern. Reduced exports and
surging imports actually removed more than a percentage point from economic
growth. Furthermore, the euro
zone appeared willing to use their weak currency to stimulate exports and
strengthen their economies.
By relying only on a weak currency, growth in the euro
zone was only 0.8 percent, far below the 2.3 percent gains in the U.S. and
Great Britain, where more stimulative monetary policies were used.
In Japan, growth was an anemic 0.3 percent, although
their currency certainly was not under-valued.
In Latin America, growth was negative as currencies once tracking the
dollar were forced to fall sharply in order to restore some competitiveness to
their export industries.
The weakening dollar has not helped Mexico, Brazil or
Argentina sell to the U.S., but those countries have been able to find some
markets in Europe and Asia. Despite
some inflation induced by weak currencies, those countries probably will do
better this year than in 2002.
Europe still needs to pursue more growth based policies.
As their exports begin to stall, something must take up the slack.
Thus, the world's recovery still hangs by slender threads.
Nevertheless, most economists would argue that the euro
at 1.05 to 1.1 per dollar prices goods about the same adjusted for
transportation costs both in the U.S. and Europe.
Japan might need some devaluation of their own to get deflation out of
their financial markets. The
dollar should be buying about 140 yen, not the current 117.
Thus, Secretary Snow could advocate a strong dollar while thinking about the yen. But I agree with him if he thinks the dollar is now about right against the euro. Still, even a Treasury Secretary should not always say what he thinks.