What Is a Strong Dollar?

American artist Gilbert designed zero dollar bills to ridicule the current state of the US economy, and distributed some of his printed zero dollars on Wall Street in New York.

Zero dollar

The use of a strong dollar as a "national policy" began with the Clinton administration. The Clinton administration's choice of a strong dollar went through a process. The main problems Clinton faced at the beginning of his administration were the double deficits-the trade and fiscal deficits, and the weak economy. It now appears that although the trade deficit and the fiscal deficit were not mentioned at the time, they have set a historical record at that time. In addition, the United States has just experienced an economic recession from 1990 to 1991. Clinton's GDP in the first quarter after he took office fell by 0.1%. Therefore, how to consolidate the still fragile rebound is another challenge facing the new government.

In terms of reducing the trade deficit, although Clinton appointed Laura Tyson, who is well-known for advocating active trade policy, as the chairman of the Economic Advisory Committee, in fact, under the circumstances, trade policy did not have much use. On the one hand, the United States is negotiating with Canada and Mexico to sign the North American Free Trade Agreement. On the other hand, the GATT Uruguay Round negotiations are at an impasse. The regression of the United States will make this round of original ambitious negotiations fruitless. And finally. Therefore, strengthening the competitiveness through the depreciation of the US dollar and promoting exports seem to be a natural choice. In American history, Democratic President Franklin Roosevelt used the devaluation of the dollar to solve the macroeconomic problems he was facing. As a Democrat, Clinton also tends to adopt a weaker dollar to resolve external imbalances. At least on the surface. During the first two years of Clinton s administration, the dollar s exchange rate as an indicator of the US dollar s exchange rate fell sharply from 125 to about 80, even with the fluctuations of the 1970s and 1980s. "The Hotel Declaration" has led to a depreciation of the US dollar).

The United States Congress has shown rare solidarity in cutting fiscal deficits. As the two parties split in the Senate, many of Clinton's motions were not passed, and the only support was the Clinton-Mitchell-Furley deficit reduction bill. However, in the face of a weak economy, reducing government spending without other measures to increase demand will stifle an economy that is just beginning to recover.

In this context, the Clinton administration has formulated a strategy to stimulate economic growth by stimulating private investment. In order to stimulate private investment, the Fed must lower interest rates, which is premised on falling inflation. To this end, the Clinton administration has adopted two measures. One is to abandon its promise of reducing taxes, increasing infrastructure spending and education spending during the election, and adopting austerity fiscal policy, thus leaving room for loose monetary policy. . Another measure is a strong dollar policy. On the one hand, due to the J-curve effect, the depreciation of the US dollar will not immediately stimulate exports, but will cause the price of imported products to rise and increase inflationary pressure. On the other hand, according to interest parity conditions, the US dollar will depreciate only if the US maintains interest rates higher than those of other countries. Therefore, a weak dollar is not conducive to prompting the Federal Reserve to lower interest rates.

From a political economy perspective, the Clinton administration eventually switched to a strong dollar policy for two other important reasons. First, due to the "serviceization" of the economy, that is, the increasing importance of the service industry in the economy, the influence of the American manufacturing industry is far less than before. After Rubin, who was from Wall Street, became the Treasurer, its impact was minimal. Another reason is that during the time of Clinton's administration, the Treasury Department was prominent, and it strongly advocated a strong dollar policy. As early as the end of 1993, the Treasury Department and the Ministry of Commerce were unable to compete on the direction of the US dollar. At the time, Summers, who was working in the Treasury Department, had repeatedly had fierce disputes over exchange rates with Trade Representative Kate and Commerce Minister Brown. At a conference held in the summer of 1994, Atman, then Deputy Treasury Secretary, called the controversy "a strong dollar policy", hence the name of a strong dollar policy. (See Delong et al. 2001)

After Rubin took over as treasurer in early 1995, his support for the strong dollar became public. At the G7 Finance Ministers' Meeting held on April 25 of the same year, Rubin broke the rule of not discussing sensitive issues such as exchange rates and declared that it was more desirable to reverse the decline of the US dollar against the Japanese yen. Subsequently, the United States and Japan cooperated with Germany and other G7 members to intervene in the foreign exchange market and pulled up the US dollar, which marked the final determination of the status of a strong US dollar policy. By November 1996, the USD / JPY had reached around 120, the highest level in 42 months. After taking over as Treasurer, Summers continued to pursue a strong dollar policy.

The future of a strong dollar policy

When considering adopting or changing a certain exchange rate policy, the government needs to consider the pros and cons of the new policy and the state of the world economy at the time. From these two perspectives, we believe that the United States will not abandon the strong dollar policy at present.

(1) The United States has benefited greatly from a strong dollar policy. Comparatively speaking, Japan advocates a weak currency, and the European Central Bank was dissatisfied with the depreciation of the euro. It intervened in the market several times in September 2000 and changed course after not achieving the expected results. So why is the United States reluctant to fall in love with the strong dollar and what benefits does it gain?

The United States is a country with a very low savings rate. Therefore, domestic savings alone cannot meet the funds needed for rapid economic development. Foreigners holding a large amount of US dollars or assets denominated in US dollars make the US capital market stronger (thick) and more liquid. American companies and governments can easily raise funds. A developed capital market is very useful for the United States to achieve its political and economic goals. For example, in the 1980s, in order to conduct an arms race with the former Soviet Union, the US government increased its defense spending significantly. The developed capital market made it easy for the US government to borrow money. The uninterrupted economic growth of the United States for ten years in the 1990s is also inseparable from the developed capital markets. Enterprises can easily raise the capital needed for development, which is very conducive to technological innovation and increase productivity.

Another benefit of a strong currency is that the issuing country can get a coinage tax. According to statistics, about 70% of the US dollars in circulation worldwide are in countries outside the United States, and the amount is as high as 400 billion U.S. dollars, even at current interest rates. Level), which is equivalent to saving US $ 60 billion in interest annually.

These are the long-term benefits of a strong currency. In addition to these long-term benefits, in the context of a weak economy, this administration of the United States will need a strong dollar policy like the Clinton administration. So far, the only supporting force of the US economy is consumption. Another important component of total demand-capital expenditure is very weak, and non-residential investment has fallen for three consecutive quarters. As a result, the Federal Reserve has reduced interest rates 11 times since the beginning of 2001 to stimulate investment, coupled with the Bush administration's tax cuts, the pressure on inflation has been very great. In order to restore private investment, it is necessary for the Fed to maintain a loose monetary policy for a long time. The depreciation of the US dollar may increase the pressure of inflation and restrain the Fed's monetary policy.

After the dot-com bubble burst, the US stock market has shrunk sharply. Since 2001, there have been only a handful of initial public offerings (IPOs) on Nasdaq, and signs of capital outflows from the United States have become increasingly apparent. Abandoning a strong US dollar policy will exacerbate capital outflows from the United States and will also be detrimental to corporate funding and economic recovery.

Because of the huge benefits mentioned above, although the strong dollar has also caused some trouble for the United States and other countries, such as the US trade deficit reached astronomical figures, the US government will not easily give up the strong dollar policy, as Lindsay said That way, the benefits of a strong dollar policy to the United States "far outweigh" the costs.

Fifty years ago, the GNP of the United States accounted for half of the world, and the international status of the US dollar was undisputed. Accordingly, the strength of the US dollar was taken for granted. However, times have changed. With the rise of Japan and Europe, the United States is no longer the only supereconomic power. The strong position of the US dollar depends on the government to "strive." In order to reap the benefits of a strong currency, the government must maintain confidence in the dollar. When Reagan was in office, he had united the then G5 to pass the "Plaza Hotel Declaration" and promote the depreciation of the dollar, which greatly damaged people's confidence in the dollar. If the government blame others when facing economic difficulties, this will be a great blow to the confidence of the US dollar and US dollar asset holders, and once it is destroyed, it is difficult to restore confidence. In the long run, the damage caused by devaluation far exceeds the short-term benefits it receives.

(2) World economic conditions have not left much room for the depreciation of the US dollar. First, if the dollar is weak, it is difficult to find an alternative currency for a while. Because the exchange rate is a relative parity, a bit like a "zero-sum game", the dollar becomes weaker, and some kind of currency is bound to be stronger. It is undeniable that the US economy is currently very bad, but the other two poles of the world economy-Japan and the European Union are also in a difficult situation. From the perspective of economic aggregate and growth prospects, it cannot replace the United States as the new "locomotive" of the world economy. From the perspective of growth, as shown in Table 1, both the IMF and the OECD predict that European growth will be better than that of the United States in the next two years, but in the long run, they are still optimistic about the United States. %, Which is higher than Europe s 2.9% growth rate. Therefore, the US dollar remains strong with fundamental support.