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Home Publications Blogs Beat the Press The Value of the Dollar Is NOT Out of the Control of Politicians

The Value of the Dollar Is NOT Out of the Control of Politicians

Friday, 07 September 2012 04:42

The NYT bizarrely told readers that the value of the dollar is "almost entirely outside of American politicians’ control," in an pseudo fact check of the Democratic convention speeches last night. This is clearly wrong.

First, the actions of the Federal Reserve Board could have an enormous impact on the value of the dollar. Raising and lowering interest affects the willingness of foreigners to hold dollar denominated assets. This means that whether intended or not, monetary policy will affect the value of the dollar. However the Fed could take steps with the explicit goal of raising or lowering the value of the dollar. 

To be specific, it could lower interest rates in order to lower the value of the dollar. Furthermore, if it chose it could amplify the impact of a drop in interests on the value of the dollar by explicitly targeting a lower valued dollar.

For example, if Bernanke were to announce that the Fed would continue to buy long-term bonds until the dollar had fallen by some fixed amount (e.g. 20 percent) against a basket of currencies, then it is likely that many investors would sell their dollar assets in order to get out before the price declined. This would help bring about the targeted price decline. 

The Fed could even carry this a step further. It could directly intervene in international currency markets, buying up hundreds of billions or trillions of dollars of foreign currency by selling dollars. This would also push down the value of the dollar.

While the Fed is independent of the executive branch and Congress, the president, with the approval of the Senate, does appoint 7 of the 12 voting members of the Fed's Open Market Committee. A president (or a majority in Senate) could insist that every new person appointed to the Fed must be committed to lowering the value of the dollar. The president and Congress could also try to pressure current members to follow this course.

In addition, there are measures that the president could pursue even without the cooperation of the Fed. Many countries, most importantly China, explicitly prop up the dollar against their own currencies in order to maintain their export markets in the United States. The president could negotiate agreements with these countries to get them to end this practice, thereby lowering the value of the dollar.

This would presumably involve trade-offs, especially with the more powerful countries. However, it is likely that if the United States were prepared to make concessions in other areas, for example on pushing market access for Goldman Sachs and other financial firms, on enforcing Microsoft's copyrights or Pfizer's patents, our trading partners would agree to raise the value of their currency against the dollar. In this case, it would simply be a question of whether the president was willing to put the interest of manufacturing workers ahead of the interests of other powerful interest groups.

Finally, there are a range of penalties that the president could impose on countries that are deliberately holding up the value of the dollar against their currencies. These include impose tariffs, which WTO rules allow against countries that deliberately hold down the value of their currency. The United States could also impose confiscatory taxes on the earnings on dollars assets of foreign central banks as proposed by former Fed economist Joe Gagnon. This would provide a serious disincentive to foreign governments seeking to prop up the value of the dollar against their currency.

In short, there are a wide range of policies that our elected politicians can pursue to lower the value of the dollar. They have not pursued these policies by choice. There are powerful interest groups that benefit from an over-valued dollar (e.g. retailers like Wal-Mart that import much of what they sell or manufacturers like General Electric who have most of their operations overseas).

Politicians have opted to put the interests of the groups that benefit from an over-valued dollar ahead of the interests of the workers who would benefit from millions of new manufacturing jobs. The NYT should be highlighting this choice, not concealing it.

Comments (5)Add Comment
written by David, September 07, 2012 7:05
Sounds like it's time for those backbones of steel to stand up against the Waltons et al.
Whatever happened to the old Greenback?
written by FS, September 07, 2012 8:44
As a non-US-citizen, I always wondered if this:


wouldn't still be possible?

written by Bill, September 07, 2012 12:01
Thanks for the explanation of the mechanisms for lowering the value of the dollar. Rubin and his crowd did just the opposite in the 90s.
The Value of the Dollar
written by sherparick, September 07, 2012 12:02
Here is some excellent support for your argument for David Glaser of the blog "Uneasy Money." You guys probably would not agree on much, but you agree on this:

Cochrane asserts that the Fed has no power to raise nominal income. Does he believe that the Fed is unable to depreciate the dollar relative to other currencies?… [D]oes he believe that the Fed is less able to control the exchange rate of the dollar in relation to, say, the euro than the Swiss National Bank is able to control the value of the Swiss franc in relation to the euro? Just by coincidence, I wrote about the Swiss National Bank exactly one year ago in a post I called “The Swiss Naitonal Bank Teaches Us a Lesson.” The Swiss National Bank, faced with a huge demand for Swiss francs, was in imminent danger of presiding over a disastrous deflation…. The Swiss National Bank could not fight deflation by cutting its bank rate, so it announced that it would sell unlimited quantities of Swiss francs at an exchange rate of 1.20 francs per euro, thereby preventing the Swiss franc from appreciating against the euro, and preventing domestic deflation in Switzerland. The action confounded those who claimed that the Swiss National Bank was powerless to prevent the franc from appreciating against the euro.

If the Fed wants domestic prices to rise, it can debauch the dollar by selling unlimited quantities of dollars in exchange for other currencies at exchange rates below their current levels. This worked for the US under FDR in 1933, and it worked for the Swiss National Bank in 2011. It has worked countless times for other central banks. Why at I would like to know is why Cochrane thinks that today’s Fed is less capable of debauching the currency today than FDR was in 1933 or the Swiss National Bank was in 2011?"


But of course Tim Geithner and Barack Obama, being true disciples of Robert Rubin would be shocked at the very idea.

supply side economics
written by freebird, September 07, 2012 12:17
Would it be easier to simply legalize counterfeiting?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.