With the news stands currently screaming the imminent decline of the dollar and with it America’s power and seignorage in the international economy, interesting to see Anatole Kaletsky presenting an opposing view in today’s Times.
According to Kaletsky, the weak dollar combined with a housing slump is serving America rather well, posting 4.9% third quarter growth and turning back the balance of trade against Europe.
I can’t help wondering whether those Americans are a bit craftier than we take them for.
The fall of the dollar has been seen as symptomatic of economic mismanagement by the Bush administration and structural weaknesses in the American economic model. But is this all in fact a deliberate strategy on the part of US administrators to shift the terms of trade with Europe back in America’s favour?
Are we seeing the dollar weapon in action once more?
The dollar weapon describes the deliberate manipulation of market expectations by the US to force capital out of the dollar and into target currencies. This forces unwanted currency appreciation in the target country and a rise in relative prices, making US exports more competitive in that country’s markets. It was successfully used against the German trade surplus in the 1970s and, with consequences that still reverberate today, against Japan in the 1980s and 1990s. It is very possible that the same phenomenon is at work today.
The current lowly price of the dollar against the Euro is not a flash in the pan, but the culmination of a downward trend that began in late 2005. Given that a currency movement typically takes about two years to affect exports, this trend can now be seen more cynically: a deliberate long-term strategy to increase competitiveness in European markets by shifting capital out of the dollar and into the euro. And as the export figures can testify, it’s working.
That what we are seeing is the dollar weapon in action, not just a market diagnosis of the health of the US economy, makes perfect sense. After all, if the current position of the dollar was the make-or-break event that many in the media would have us believe, why have US officials done nothing rhetorically or through intervention to stem the tide? In fact, it is privately acknowledged that they are quite content to watch its decline. Moreover, the dollar has hardly moved at all vis-a-vis Asian currencies, suggesting that capital is not fleeing the dollar like a sinking ship, but rather being smooth-talked into a rational relocation: the euro.
The prophets of doom for the dollar would be wise to hold their fire a little longer. Those Americans aren’t as stupid as they look.