Devaluing America - declining value of the US dollar - Editorial

National Review, July 11, 1994

Hardly a day goes by without some Clinton Administration economic official declaring allegiance to a sound and stable dollar. Treasury Undersecretary Lawrence Summers recently told a reporter that no country can devalue its way to prosperity." Only a few days later his boss, Lloyd Bentsen, assured a conference of investors there was "absolutely no link" between the Treasury's management of the dollar and trade disagreements with Japan.

Practically no one in world financial markets believes this. Since early this year the dollar has fallen about 10 per cent when measured against traditionally hard currencies such as the German Mark, Swiss franc, and Japanese yen. Nor could a much-publicized but ineffectual "dollar defense" action, coordinated with over twenty foreign central banks (the Treasury wasted 1.4 billion U.S. taxpayer dollars), stop the downward slide. Nor have four short-term interest-rate increases, including a discount hike, stopped the slippage.

As well as losing ground against foreign currencies, the greenback has depreciated at home too. Broad commodity indexes have increased about 10 per cent this year, following a similar rise in 1993. The price of crude oil has surged to $20 per barrel, without any production cuts from Arab producers, and gold is once again pushing $400 per ounce. When the dollar declines both internationally and domestically, it is a sure sign of higher future inflation. Consistent with this, as the U.S. consumes nearly twice what it produces, the merchandise trade deficit is on track to reach $145 billion this year, its highest level since 1987.

Apologists for the weak Clinton dollar are blaming the threat of hostilities with North Korea. But there was a time - the Gulf War, for example - when world tensions generated a stronger dollar as the ultimate haven of safety. Not any more. More likely, today's dollar slide is related to new anxieties about Federal Reserve independence, since we have learned that Chairman Greenspan is a Clinton team player - indeed one of the "ghostwriters" of Clintonomics, according to Bob Woodward.

Moreover, while real interest rates are low and taxes are rising in the U.S., foreign real rates remain higher amidst talk of growth-stimulating tax cuts in Europe and Japan. World Capital always flows to those areas where prospective after-tax, inflation-adjusted investment returns are highest, and country risk lowest. So persistent dollar selling is a vote against current U.S. policies, clear and simple. And the spectacle of Jimmy Carter negotiating with North Korea is a stark reminder of the last time U.S. foreign policy ran completely amok.