For many months we have been hit with daily messages on the dire slump of the almightly American dollar. It's as if the State of Liberty were sinking in New York harbor or the last bald eagle were expiring.
Most souls cannot understand why a strong nation like ours suffers this daily monetary indignity. Now comes one of my favorite economists - those fellows who search for black cats in dark cellars - Herbert Stein, to assure us all that the case of the declining dollar is indeed a mystery.
There are many suspects, he admits, but the case against any one of them is not convincing, and he includes inflation, his prime suspect, in this company.
Writing in the current issue of the American Enterprise Institute's "Economist," Stein, once chairman of the President's Council of Economic Advisers, says there is even a puzzle about what is meant by the decline of the dollar.
Headlines and newscasts all focus on how the exchange rate of the dollar against the Swiss franc has dropped 31 percent during the first nine months of 1978, against the Japanese yen by 30 percent and the German mark, by 14 percent. But the dollar has gained on the Brazilian cruzeiro by 21 percent, has kept even with the Mexican peso, and increased by 3.5 percent on the dollar of Canada - our biggest trading partner. Altogether, against 15 foreign currencies, the dollar has dropped about 9 percent.
Stein believes the seriousness of the effrontery is exaggerated by officials of several governments, whose frowns are quickly translated into news copy. He acknowledges the dip is a problem, however - one that signals apprehension over the U.S. inflation rate (now about 9 percent) - and could become grave if hysteria develops and our foreign trade is hurt.
The leading explanation for our dollar trouble is the failure of the U.S. to develop an energy policy restraining imports. This rationale is popular with President Carter and Europeans, particularly the Germans, who find it difficult to compete against the cheapened dollar in foreign markets.
The argument goes that oil exporters accumulate more dollars than they can spend in the United States, so they sell them for other currency, thus devaluing the back. The trouble with that explanation, Stein says, is that it hinges on how many dollars the oil nations want to hold. In 1977, OPEC nations transferred 60 percent of the dollars they got from the United States - enough to make a difference, but not to explain all.
Nor is the balance-of-trade deficit the single culprit. Stein says that the amount of dollars going to foreigners because of our trade deficit is still relatively small.
Then there is the explanation that the United States has printed too much money, thus cheapening it, but the latest, data available show that the money supply rose less in the United States than in Switzerland, Japan, Germany, and other nations, where the dollar fell.
So the mystery continues. There is the theory that, as the world economy matures, some investors diversify their portfolios for safety's sake, and that depresses the dollar. But this might be a case of the dog chasing its tail. If the dollar starts to dip, investors then diversify to cut their losses.
As an economic sleuth, Stein is most suspicious of inflation and the expectancy that the U.S. inflation rate will continue to rise. Price levels in the United States have risen sharper than in Switzerland, Germany and Japan, where the dollar's decline was greatest. Again, it's not the entire explanation because, while U.S. inflation is 2 percent greater than Japan's, the dollar fell 20 percent against the yen in the 15-month period studied.
So, confronted with explanation and theories, Stein concludes: "Probably the simplest explanation is that the dollar has declined to its present level because people expect it to decline even futher."
The rest of the world thinks that those crazy American's are going to allow their inflation to get worse. "In the winter of 1977-78 there was not only a rise in the U.S. inflation rate," Stein wrote, "but also a growing belief that the United States was firmly committed to an inflationary policy for the future."
Another pessimistic expectation about the United States is that we may continue to run a large trade deficit, despite a decline in the real exchange rate of the dollar. In other words, even when the dollar is devalued as it is now, we still go in the hole on foreign trade.
At that, Stein wonders if we don't fret too much about the decline of the dollar, which is really the devaluaton of the dollar, an event the U.S. government caused in 1971 when the dollar was made inconvertible and therefore fell.
His dismisses as "a doubtful proposition" the notion that "the decline of the dollar is commonly said to be the cause in the loss of prestige of the United States and its influence in world affairs."
If uncertain currency caused a loss in a nation's influence, the Soviets would long ago have been out of business, Stein declares, and also makes a point that Switzerland's strong currency earns them no special prestige in the world, except with central bankers and skiers.
What Stein's properly worried about is inflation, once stuck in our minds at 6 percent, then at 8, and perhaps in the future at 10. By accepting higher and higher levels of this awful stuff, we are doing great economic damage to ourselves and to our dollars.
Since Jimmy Carter's Phase I program for fighting inflation isn't working, let's all hope that Phase II does, and that the president and vice president as well have th guts to deal with the pressure groups.