Ezra Klein Gets It half Right on the Dollar
|Tuesday, 17 May 2011 05:17|
Ezra Klein makes the case that the United States needs a weaker dollar in order to increase net exports and move towards more balanced trade. (Former Senator Ernest Hollings referred to the weaker dollar as a "competitive" dollar.) However it wrongly thinks the need is temporary and that China' currency policy is the sole problem.
In fact, the problem of the over-valued dollar is longstanding and dates back to Robert Rubin's days as Treasury Secretary. When Rubin took over as Treasury Secretary he reversed his predecessor's position that the dollar should be allowed to drift downward.
In fact, the decline in the value of the dollar was supposed to be one of the fruits of President Clinton's deficit reduction policy. A lower valued dollar was suppose to boost U.S. net exports and turn our trade deficit into a trade surplus. In standard economic theory rich countries are supposed to run trade surpluses, lending capital to poorer developing countries.
Rubin instead insisted that the United States wanted a high dollar. He put muscle behind this view in 1997 East Asian financial crisis. He used the Treasury Department's control over the IMF to force the crisis countries to repay their debts in full, instead of allowing for defaults and write--downs. The repayment was financed by a massive boost in exports from the region. This was made possible by sharply lower values of their currencies against the dollar. In other words, the value of the dollar rose.
The harsh conditions imposed by the IMF in the East Asian crisis led countries throughout the developing world to begin to accumulate reserves on a massive basis in order to avoid ever being forced to deal with the IMF. This meant deliberately depressing the value of their currency against the dollar.
The huge U.S. trade deficit in the late 90s and the last decade was a major source of the imbalances of these years. A trade deficit logically implies (i.e. there is no damn way around it) either a large budget deficit or negative private savings, or some combination.
In the late 90s, the country had a budget surplus, but negative private savings. This was the result of the stock bubble. The wealth created by that bubble led to a consumption boom which pushed savings rates to levels that were at the time record lows.
After the stock bubble collapsed, the budget deficit returned. While the deficit fell back to more normal levels in 2006 and 2007, this was associated with private savings again becoming highly negative as the household saving rate fell to near zero in the years 2004-2007. The culprit in this case was the wealth created by the housing bubble.
Klein misses this story. The over-valued dollar is not a side-bar, nor is China a lonely culprit in this story. The over-valued dollar is central to any understanding of the U.S. economy over the last 15 years.