Part of the job description of the Treasury secretary is to declare at every opportunity that it is in the interest of the United States to maintain a strong dollar and preserve the dollar as the world’s reserve currency. To do otherwise would risk triggering a run on the dollar and a tidal wave of political denunciation.
If, however, you were to administer truth serum to the recent occupants of 1500 Pennsylvania Ave., my guess is that they would acknowledge that the dollar is in long-term decline that is inevitable and economically desirable. The question is whether the retreat of the dollar will be gradual and orderly, or sudden and disorderly.
Steven Pearlstein is a Pulitzer Prize-winning business and economics columnist at The Washington Post.
Why inevitable? To begin, it is worth remembering that the hegemony of the dollar was a result of two world wars that left most of our competitors in ruins and part of the world in thrall to a communist ideology that turned out to be folly.
Nearly a century later, a peaceful and revitalized Europe has begun to integrate into a large, unified economy. Its currency and financial markets are finally in a position to rival ours.
Just as significantly, developing countries in Asia and South America are in the midst of an unprecedented economic catch-up that will mean their output and productivity will grow much faster than those of advanced countries. Economic theory and history suggests that their currencies will rise as well.
Those unmistakable trends explain why just about every big corporation and lots of smart investors are busy shifting money to developing economies. Americans will profit two ways: the success of their investments, plus the bump they’ll get when converting those profits into deflated dollars.
In the nearer term, it’s a good bet that the dollar will decline as the global economy finally corrects for the massive imbalance that developed over the past 15 years between the United States and China, Taiwan and other Asian nations that artificially pegged their currencies to the dollar. The result of this currency manipulation and mispricing is too much debt-fueled consumption in the United States and too much production and reserve accumulation in the China bloc.
Now these macroeconomic imbalances have reached a tipping point. Here in the United States, they are generating intense deflationary pressures that manifest in falling real estate prices, stagnant wages and high unemployment, which require huge amounts of fiscal and monetary stimuli to offset. In Asia, it is the opposite — strong inflationary pressures are driving up wages, prices and real estate values and other financial assets, requiring increasingly heavy-handed regulation of lending and investment.
The practical effect of all this deflation and inflation is to accomplish what a straightforward exchange-rate adjustment would: Raise the relative price of Chinese goods while lowering the price of U.S. goods. The side effects from this type of backdoor adjustment, however, have become so distorting and risky that it is only a matter of time before the dollar is allowed to fall against these Asian currencies.