Marketplace October 15, 2003
Tomorrow, Treasury Secretary John Snow gives his semi-annual testimony on international economic and exchange rate policies. That topic may sound a bit dull, but the stakes are huge.
Does the United States want a strong dollar or a weak dollar? For years now, the official Washington line was that the dollar should be strong and its valueshould be stable. The idea was that a strong, stable dollar was good for the global economy and good for America. Global traders needed to be confident about the dollar keeping its value. That way, most of the world's transactions would continue to be done in dollars. Global investors needed to be assurred that the United States was a reliable place to put their money. That way, a vast tide of global investment would continue to flow to America.
Now Washington is sending a different message. John Snow, the current Treasury secretary, has been telling anyone willing to listen that exchange rates ought to be flexible. The value of any nation's currency ought to rise and fall with the global demand for it. Snow's apparent target is China, which has been keeping the value of its currency low in order to flood world markets with its manufactured goods.
But currency traders around the world are interpreting Snow's comments to mean that Washington will no longer support a strong, stable dollar. Face it: Our budget deficit is so out of control, our trade deficit is so huge, and we're borrowing so much from the rest of the world, that the dollar is becoming a badbet. By urging flexible exchange rates, the Administration is in effect saying it will let the dollar's value drop to reflect all this mess. Which is, in fact, exactly what's starting to happen.
A lower dollar is good for American exporters because it makes American products cheaper in world markets. This may reduce the hemoraging of American manufacturing jobs -- especially important for the White House in an election year.
Yet this kind of dollar diplomacy is a risky, high-stakes game. If the dollar drops too much and too fast, the prices of everything we buy from the rest of the world will soar. And foreign investors will be scared off America. The net effect will be to push up interest rates and drag the economy back into recession.
My advice to Treasury Secretary John Snow: Be careful what you wish for.
