In defense of the dollar

Chief Executive, The, Jan-Feb, 2005 by William J. Holstein

The debate about the dollar is almost like a religious argument--the subject is so unknowable that we can argue only on the basis of blind conviction. With that caveat, here is my view: It's a mistake to allow the dollar's decline to continue, and perhaps intensify, for these reasons:

* It doesn't have nearly the positive, immediate impact on trade that pundits seem to think. I keep reading that a lower dollar will spur exports, but that is true for mostly commodities. The real heart of the U.S. export challenge is bringing more small and medium-sized companies into the game. Impediments include their relative absence of knowledge about global markets, the absence of a strong Chamber of Commerce or governmental role in leading them into new markets, problems in obtaining trade financing and export controls on technology goods. A weaker dollar doesn't address any of these issues. In fact, a sagging greenback makes it even more expensive to travel to prospect for sales. If a hotel room is $400 a night, how many CEOs are going to spend a week in Tokyo or Paris?

The weaker dollar also doesn't have the immediate impact of dramatically reducing imports. We still have to buy some commodities from abroad, such as oil. The market for more expensive goods isn't as elastic as some economists argue. If a person of wealth wants to buy a BMW, it doesn't matter whether it costs $45,000 or $50,000. Think back to how Washington tried to devalue the dollar to diminish Japan's automotive prowess: It didn't work. Toyota and others shifted their manufacturing patterns and are still gaining on Detroit. Currency shifts don't solve structural economic problems.

* A plunging currency means a loss of geopolitical power that ultimately hurts American CEOs. The Bush administration is wielding military power, but on economic issues it is losing any high ground it once possessed. Despite all the rhetoric, the suspicion in markets is that Washington is happy the dollar is losing value because it reduces the size of the IOUs that the U.S. has written to the world. Here's what officials in Asian capitals must think when the Bush administration bangs on their doors: "We own hundreds of billions of your debt and your nation's assets, Uncle Sam. You are a pauper, not a superpower."

* Allowing the dollar to decline will be hard to reverse. If markets lose confidence in the U.S. currency, the consequences could be severe and unpredictable. Rebuilding confidence could take years.

Debasing the dollar seems to be a cheap, politically attractive way to address huge financial and trade imbalances in the global economy. (See our conference coverage, page 50.) But it is much less effective than advertised and carries huge risks. Far better to attack the root causes of those imbalances, however painful that may be. I'd be interested in what you think. Write me at bholstein@chiefexecutive.net.

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