Robert Samuelson Mostly Right on Over-Valued Dollar

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Monday, 27 May 2013 07:40

Robert Samuelson makes an important point in his column today, the "strong" dollar is hurting the country's economy. This fact is central to understanding the imbalances that have shaken the U.S. and world economy over the last 15 years. Because of an over-valued dollar the trade deficit exploded in the late 1990s.

A trade deficit means that demand is going overseas rather than for goods and services in the United States. To offset this lost demand we must either have public sector deficits or we must have private savings lag investment, or some combination. In the late 1990s the consumption, and resulted low savings, generated by the stock bubble filled the demand gap. In the last decade, when the trade deficit hit a peak of 6.0 percent of GDP in 2006, the construction and consumption booms generated by the housing bubble filled the gap.

Until we get the dollar down to a level consistent with more balanced trade we will have a large demand gap that will have to be filled by either public or private sector deficits. That is a fact of accounting, not a debatable point. Those who disagree simply do not understand.

The part of the story that Samuelson misses is that the over-valued dollar is a relatively recent phenomenon, not something that dates from the U.S. becoming the world's leading reserve currency. The dollars soared in 1997 as a result of the U.S. government and IMF"s mismanagement of the East Asian bailout from the financial crisis.

The conditions they imposed on the countries of the region led developing countries around the world to begin to accumulate massive amounts of dollars as a cushion so that they would not ever be in the situation that the East Asian countries found themselves in 1997. This means that the imbalances of the last 15 years can be directly attributed to the failures of the Greenspan-Rubin-Summers team (a.k.a. "The Committee that Saved the World") that directed the bailout.

The other major misrepresentation is the description of currency manipulators as countries that:

"have regularly intervened in foreign exchange markets by buying dollars and euros 'to keep those currencies overly strong and their own currencies weak, mainly to boost their international competitiveness and trade surpluses.'"

In this comment Samuelson is relying on the work of Fred Bersgten and Joe Gagnon from the Peterson Institute for International Economics. In their work, the leading currency manipulator is Denmark. For the last 15 years Denmark has had its currency rigidly tied to the euro. That does not leave much room for the type of manipulation described in Samuelson's piece.

Rather than imply evil-doing on the part of other countries, it would be more useful if the discussion simply focused on whether the dollar is too high in value relative to other countries' currencies. Accusations of wrong-doing will only distract from the substantive issue that needs to be addressed.