The Dol­lar’s Trump Slump

The Progress-Index - - OPINION -

Al­ready in 1965, Valery Gis­card d’Es­taing, Pres­i­dent Charles De Gaulle’s min­is­ter of fi­nance, com­plained about the “ex­or­bi­tant priv­i­lege” that the U.S. dol­lar af­forded to the United States. By this, he meant that the fact that the dol­lar served as the world’s in­ter­na­tional re­serve cur­rency that for­eign­ers were ea­ger to hold, the United States could run con­tin­u­ous trade deficits with­out fear of pro­vok­ing a bal­ance-of-pay­ments cri­sis. This in turn al­lowed the United States the en­vi­able lux­ury of be­ing able to con­sume more than it pro­duced on a con­tin­ual ba­sis.

The dol­lar’s pro­nounced weak­ness since Pres­i­dent Trump took of­fice in Jan­uary 2017, to­gether with his seem­ing aban­don­ment of the strong dol­lar pol­icy con­sis­tently es­poused by his pre­de­ces­sors over the last 25 years, has to raise ques­tions about how long the United States will con­tinue to en­joy its ex­or­bi­tant dol­lar priv­i­lege. This in turn could pose se­ri­ous ob­sta­cles to to­day’s ba­sic eco­nomic chal­lenge of im­prov­ing U.S. liv­ing stan­dards for Amer­ica’s work­ing pop­u­la­tion.

One rea­son to be con­cerned about the dol­lar’s fu­ture tra­jec­tory is its very poor per­for­mance over the last nine months. With the Fed be­gin­ning the process of nor­mal­iz­ing in­ter­est rates and with it now ac­tively talk­ing about the need to start re­duc­ing the size of its bloated bal­ance sheet, one might have ex­pected that the U.S. dol­lar would strengthen as U.S. mon­e­tary pol­icy be­came more re­stric­tive. This would seem to have been es­pe­cially the case at a time that the Bank of Ja­pan and the Euro­pean Cen­tral Bank are still con­tin­u­ing ag­gres­sively to print money and to stick to very loose mon­e­tary pol­icy stances.

Sim­i­larly one might have ex­pected that the U.S. dol­lar would be buoyed, as it would have been in the past, by ris­ing geopo­lit­i­cal ten­sions in North Korea, the Mid­dle East and Rus­sia. In such cir­cum­stances of geopo­lit­i­cal un­cer­tainty, one might have ex­pected that for­eign­ers would seek out the U.S. dol­lar as a safe haven for their in­vest­ments.

Yet, de­spite th­ese sup­port­ive fac­tors, far from strength­en­ing, the dol­lar has man­aged to slump by around 10 per­cent since Jan­uary. This has to sug­gest that un­der the Trump ad­min­is­tra­tion the dol­lar might be los­ing some of its al­lure to for­eign in­vestors.

An­other ba­sic rea­son to be con­cerned about the dol­lar’s fu­ture is the seem­ing loss of for­eign con­fi­dence in U.S. eco­nomic pol­icy man­age­ment in gen­eral and con­cern about the in­con­sis­ten­cies in Pres­i­dent Trump’s bud­get poli­cies in par­tic­u­lar. At a time when the U.S. econ­omy is close to full em­ploy­ment, the Trump ad­min­is­tra­tion con­tin­ues to ad­vo­cate an un­funded tax cut and a large in­crease in in­fra­struc­ture spend­ing. If im­ple­mented, that bud­getary pol­icy ap­proach risks erod­ing the level of U.S. pub­lic sec­tor sav­ings. That in turn will al­most cer­tainly in­crease the U.S. trade deficit and could bring us back to the “twin deficit” prob­lems of the past.

In the con­text of the dol­lar’s re­cent sharp de­cline, it has to be of con­cern that Pres­i­dent Trump seems to have lit­tle com­mit­ment to the strong dol­lar pol­icy of his pre­de­ces­sors. Worse yet is his seem­ing lack of com­mit­ment to those sorts of dis­ci­plined bud­get poli­cies that would give cre­dence to the no­tion of a strong dol­lar pol­icy.

It would be a great mis­take if the Trump ad­min­is­tra­tion were to con­tinue to take for granted the ex­or­bi­tant priv­i­lege that the U.S. dol­lar has af­forded to our coun­try through­out the post-war pe­riod. Since, es­pe­cially in the con­text of com­pe­ti­tion from other cur­ren­cies like the euro, that priv­i­lege can be eas­ily lost through the pur­suit of care­less eco­nomic poli­cies at home.

Should the U.S. ex­or­bi­tant priv­i­lege in­deed be lost and should cap­i­tal not flow to the United States as read­ily as it has un­til now, the United States will be­come like any other coun­try that is forced to live within its means. This would re­quire painful ad­just­ment to U.S. liv­ing stan­dards as we would no longer be able to con­sume on an in­def­i­nite ba­sis more than our coun­try pro­duces.

Des­mond Lach­man Amer­i­can En­ter­prise Institute Wash­ing­ton, DC

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