The Less than Almighty Dollar
HALE, DAVID
The Less than Almighty Dollar What's behind the Bush economic strategy. BY DAVID HALE ONE OF THE FUNDAMENTAL principles of American political economy during the second half of the 20th century...
...Daniels, the director of the Office of Management and Budget, has resigned to pursue a political career in Indiana...
...Connally actually introduced the era of floating exchange rates, with the Nixon administration's 1971 severing of the dollar's longstanding link to gold...
...China's foreign exchange reserves will expand from $280 billion to $330 billion this year...
...But in the absence of a threat to the American housing market, the burden of adjustment to the falling dollar will fall upon other countries...
...When George W. Bush became president in 2001, it was unclear if he would align himself with the Texas or David Hale is a Chicago-based economist...
...The Bush administration is prepared to pursue aggressive fiscal and monetary policies in order to insure a healthy recovery during the run-up to the 2004 presidential election...
...The coming round of competitive monetary reflation is also likely to force central banks to pursue far more aggressive interest rate cuts than they currently anticipate...
...Baker organized a large dollar devaluation at a 1985 G-7 summit at the Plaza Hotel in New York in order to reduce the country's burgeoning trade deficit and constrain protectionist forces in Congress...
...John Snow has worked hard to improve ties with Congress, but the markets perceive him to be a salesman, not an architect, of policy...
...There is no precedent for a country playing the role of global superpower, while essentially financed by foreign investors...
...Thus, we will have to see a correction in either the currency or domestic asset markets...
...Finally, the markets perceive a vacuum at the center of U.S...
...With Washington pursuing a more unilateralist foreign policy, it will have to absorb more of the costs without help from traditional allies...
...This pressure for devaluation will set in motion a process of competitive monetary reflation with the euro zone, Britain, Canada, Australia, South Africa, and other countries with variable exchange rates...
...Bolten has had a close relationship with the president for many years and could emerge as a new Richard Darman...
...During the 1991 Gulf War, the United States received large subsidies from Japan, Saudi Arabia, and other countries...
...As Americans are not big savers, this increases U.S...
...In the heyday of empire, Great Britain was an exporter of capital...
...In this administration power is centralized at the White House...
...While the dollar has been falling at an erratic pace for over a year, its decline accelerated this spring for three reasons...
...Lindsey resigned from the White House in December and left behind a vacuum on the issue of exchange rate policy...
...First, the markets are concerned that the Bush administration's fiscal policy could boost the federal budget deficit to $400-500 billion...
...If it happens, George W. Bush will not only win reelection next year...
...It reflected ancient divisions in American history extending back to the gold standard era of the late 19th century...
...The Treasury's stature and influence declined steadily during the tenure of Paul O'Neill because of his caustic comments about many issues and poor relationship with Congress...
...If Asia is able to stabilize its exchange rates, the United States will have to devalue against other currencies...
...Bentsen, in turn, advocated a soft dollar in order to boost U.S...
...The new Treasury secretary, John Snow, has filled it by aligning himself with the Texas tradition...
...The Bush administration's economic policy appears to be under the control of White House political advisers, not the traditional institutions of government...
...But as Bolten is less aggressive and egotistical than Dar-man, it is not yet clear if he will attempt to dominate every issue...
...The only highly visible cabinet ministers are at the departments of State and Defense...
...The decision last week of the White House to appoint Joshua Bolten as director of OMB could help to fill some of the new institutional vacuum...
...The new director of the National Economic Policy Council is focused on internal administration rather than influencing markets...
...The people who actually created the administration's economic policy, Larry Lindsey and Glenn Hubbard, have resigned...
...During the Clinton administration, by contrast, the dollar benefited from the perception that there was a strong Treasury secretary who commanded the confidence of the president and understood the risks of a falling currency...
...As an industrialist from Pittsburgh, Treasury Secretary Paul O'Neill appeared to be susceptible to the desires of manufacturing companies for a cheap currency to increase sales abroad, but the president's chief economic adviser, Larry Lindsey, was aligned with the New York financial community and advocated a strong dollar...
...If deflation is a possibility, the dollar's decline would pose far fewer risks than in the past...
...The Federal Reserve has publicly admitted that deflation is a risk, and bond yields have fallen to a 45-year low despite the weakness of the dollar...
...Mitch The White House would probably not be able to encourage a dollar rally unless Karl Rove held a press conference on the subject...
...In the first Bush administration, Darman ran economic policy from the OMB, not the Treasury...
...As the dollar has been declining for over a year, he may have decided that he should simply accept the market's verdict rather than continuing to pay homage to the idea of a strong currency...
...dependence on foreign investors...
...defense spending in Germany...
...The eastern states were dominated by financial conservatives who favored sound money and protecting America's good name in the global capital market (London) through the gold standard...
...New York tradition in exchange rate policy...
...During the late 1980s Japan created a bubble economy with skyrocketing prices for land equities by pursuing a monetary policy designed to stabilize the dollar...
...Foreigners own financial assets equal to 75 percent of American economic output, so they could produce a major decline in bond prices if they suddenly decided to withdraw...
...In the modern era, the big advocates of a soft dollar were Texans John Connally, James Baker, and Lloyd Bentsen...
...Its new weak dollar policy is designed to put pressure on other countries to reinforce this domestic growth agenda...
...There could be Bush bubbles in many asset markets during late 2004 and 2005...
...Second, the markets are alarmed that the United States is embarking on an imperialist foreign policy that will have unknown economic consequences...
...The Council of Economic Advisers is being evicted from the White House...
...Asia will resist dollar depreciation through large-scale market intervention...
...Japan's reserves will mushroom from $500 billion to $600 billion this year and reach $1 trillion by 2008...
...These countries will be compelled to cut interest rates to prevent their currencies from appreciating against the dollar...
...He may also have been encouraged to accept a weak-dollar policy because of the financial market's new obsession with the risk of deflation...
...At the G-8 finance ministers' meeting in France last week, he publicly abandoned the strong dollar policy bequeathed by the East Coast Clinton Treasury secretaries, Robert Rubin and Lawrence Summers...
...economic policy-making...
...Singapore, Korea, Taiwan, and Hong Kong will also continue to accumulate dollar reserves...
...It is unclear why Snow decided to pursue such a high-risk strategy...
...exports...
...Yet capital flows to the United States have declined in recent months...
...BY DAVID HALE ONE OF THE FUNDAMENTAL principles of American political economy during the second half of the 20th century was that Treasury secretaries from New York always produced rallies in the value of the dollar, while Treasury secretaries from Texas produced devaluations...
...This geographic bias was not an accident...
...It is also possible that Snow decided to accept a weak dollar because it is actually a byproduct of the administration's own policies...
...The Bundesbank, for example, stockpiled dollars as a quid pro quo for U.S...
...The other institutions of economic policy are also weak...
...As Snow's recent comments have made clear, Washington will do nothing to stabilize the dollar until there is a major correction in bond prices that might jeopardize the boom in the housing market...
...In that period, the western states supported populist candidates who opposed the gold standard and favored dollar devaluation to bolster commodity prices...
...In fact, the White House would probably not be able to encourage a dollar rally unless Karl Rove held a press conference on the subject...
...During the Cold War, Washington was able to finance its defense spending in part through offset programs with other countries...
Vol. 8 • June 2003 • No. 38
