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Home Publications Blogs Beat the Press The Washington Post Wrongly Tells Readers that the United States Has Little Control Over the Value of the Dollar

The Washington Post Wrongly Tells Readers that the United States Has Little Control Over the Value of the Dollar

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Saturday, 22 January 2011 08:12

An article that discussed President Obama's public campaign to boost exports told readers that the federal government "has little control" over the value of the dollar. This is not true. The Treasury and Fed could set out to lower the value of the dollar if they opted to do so. This could mean selling dollars in international money markets and buying other countries' currencies. They could even opt to peg the value of the dollar against other countries currencies, as China has done with the dollar.

In the Clinton years, Robert Rubin had a policy of pushing up the value of the dollar. He put muscle behind this effort through the U.S. control of the IMF at the time of the East Asian financial crisis. The conditions that the IMF imposed were so onerous that developing countries decided that they needed to accumulate massive amounts of reserves in order to avoid being put in a similar situation. This meant accumulating large amounts of dollars. They did this by keeping down the value of their currencies against the dollar (i.e. raising the value of the dollar).

It is very misleading to assert that the value of the dollar is outside of the government's control. President Obama, like his predecessors, has allowed the dollar to remain over-valued. An over-valued dollar effectively subsidizes imports and imposes a tariff on exports. There is nothing that President Obama's new competitiveness panel can realistically hope to do that would come close to offsetting the competitive disadvantage created by an over-valued dollar.

Comments (7)Add Comment
So Obama's Competitiveness Panel is a Sham?
written by paul, January 22, 2011 9:34
You mean to say that Jeff Immelt's new job is just phony political theater? Why hasn't this been reported on NBC News?
...
written by shortale, January 22, 2011 10:04
I think Keith Olbermann had that slotted for spot number 4 in last night's "Countdown" but ....
Immelt Teaches Obama on Job Creation with Competitive Shortages
written by izzatzo, January 22, 2011 10:15
Any economist knows that Jeff Immelt made a brilliant observation on the shortage of generators in India, optimistic that the shortage would continue so GE could supply even more generators from the USA and create even more jobs.

Since a shortage means quantity demanded exceeds quantity supplied at the going price, Immelt was asked why GE wants to sell generators at below market-clearing prices and take an unnecessary loss.

Immelt explained that the excess shortage demand for underpriced over-employed resources in India acts to offset the excess surplus of overpriced under-employed resources in the USA, resulting in competition and a balanced trade deficit.

Obama chimed in, noting that Immelt was brought on board to create jobs with shortages for the next two years, in order to reduce the surplus of a Great Recession he had created over the last two years while pulling the economy back from brink.
does it matter where the dollars go
written by pete, January 22, 2011 2:52
It is a monster myth that buying $600B of treasuries will NOT lower the dollar, but that $600B of say Yuan will somehow lower the dollar. This is an old issue. Also well known is that attempted currency manipulations are costly...such as Ben's current manipulation. They are trying to manipulate the dollar, just not doing a very good job, because people think its temporary, that they will shrink the balance sheet at some point when the recovery takes hold. If they said, no, they will encourage banks to lend out the excess reserves instead, THEN it would immediately lower the dollar.
...
written by skeptonomist, January 23, 2011 9:47
If the Bush II administration and the Fed wanted to keep the dollar high they did a poor job of it:

http://research.stlouisfed.org/fred2/categories/105

Of course this is overall rate and the US/China exchange rate is a different story, but most of what the Fed does can't target individual rates. Other measures such as tariffs should be more effective against individual countries, and there is really no good reason to favor monetary policy over these things. The Fed is not our daddy, and it is not a good idea to invest the likes of Alan Greenspan with discretionary power over every aspect of the economy.
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can the U.S. 'government' control the value of the dollar?
written by William Osterberg, January 24, 2011 4:11
Needless to say it is hard to infer exact that the WPost is saying here. However, there is widespread dissagreement about whether sterlized U.S. foreign exchange intervention can influence the value of the U.S. dollar.
[Background: FX intervention is when a government buys or sell its own currency in terms of another. Suppose the U.S. tries to push down the value of the USD in terms of the Euro. In this case it would sells USD from its reserves and buys Euros. This operation would increase the supply of USD in the market and thus lower its value in terms of Euro. However, if it ended there the USD Money Supply would have risen. Sterlization would be when this increase in the USD Money Supply was countered by official sales of US Govt Bonds, which would remove the USD from the economy.]
The view that the U.S. government cannot influence the international value of the USD in this manner is largely based on the fact that U.S. official intervention is a drop in the bucket compared to the existing stock of USD held by institutions such as hedge funds and other speculators.
The official view in Washington (e.g. see writings at the Institute for International Economics) is that sterlized intervention works. However, in practice its effectiveness is at best limited; there must be a good reason why the U.S. has almost totally abandoned the policy.
Whether monetary policy or fiscal policy, or other policies beside intervention can influence the value of the USD is an entirely different matter. However, by law, the U.S. Treasury has primacy in terms of official policies regarding the international value of the dollar.
Just FYI. Hope this helps someone.

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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.

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