Here's What the U.S. Needs to Do in the Era of the Strong Dollar
The dollar has been getting stronger lately, and it could get even stronger. Analysts at Morgan Stanley predict the U.S. currency will strengthen to parity with the euro by the end of 2016 and to 125 yen, according to this recent Wall Street Journal article.
If the greenback gets that strong against these currencies, it will change things significantly. As your currency gets stronger, your exports tend to decline and your imports increase. Can the U.S. withstand this shock to its system?
Economies in Europe, Japan and the emerging markets all seem to be having difficulties gaining any momentum. Consequently, many central banks continue to pursue looser monetary policy in order to stimulate their moribund economies.
The U.S. is facing just the opposite situation, and the Federal Reserve seems to be on the verge of raising its short-term interest rate target for the first time in nearly 10 years. This points to continued strength for the dollar.
But declining exports and increasing imports is not going to be politically popular. Even though the unemployment rate has dropped to 5.0%, the U.S. economy is not that robust, and the labor force participation rate is less than 63%, its lowest level since the late 1970s.
However, this time around, it does not seem that Fed policymakers will be able to depreciate the dollar the way they have for much of the past 55 years in order to stimulate the economy and keep people employed. In today's environment, such a policy on the part of the Fed would only increase the possibility of currency wars.
An alternative governmental policy, tried by many nations in the 1930s, is for the government to seek protection against foreign competition and to reduce international flows of capital. Essentially, this means isolating a country economically. The drive to protectionism did not help the world economies in the '30s, and it was manifested in the U.S. in the form of the Smoot-Hawley Tariff Act.
Calls for protection could increase because of the strong greenback, but this doesn't seem to be a very good strategy. The world has prospered over the past 50 years as international markets for goods and services have boomed and the freer flow of capital has contributed to development almost everywhere.
Furthermore, with the Chinese economy playing a bigger and bigger role in world markets and the Chinese currency gaining greater world acceptance, this is no time for the U.S. to back away from a strong dollar.
In fact, a strong dollar is exactly what the U.S. needs to achieve in order to hold its place against a rapidly rising China. But that means U.S. businesses and the government need to do the right things in order to prosper with a strong dollars. American businesses need to focus on their labor and capital productivity, and their ability to compete in world markets.
Business will not be able to count on the U.S. government depreciating the value of the dollar in the future, although this is what it has gotten used to in the last half of the twentieth century.
This will mean that American business will have to stop concentrating on making money through financial engineering and the trading of financial instruments. The time is over when General Electric and General Motors, among others, can make huge chunks of their profits from financial subsidiaries.
This will mean that American businesses will have to focus on human capital and the education and training of American workers. Lifetime education will become so important, and corporations will have to step up their efforts to contribute to the achievement of this objective.
Governments at local, state, and national levels will also have to play a major role in this movement.
Labor force mobility will be important, and businesses and government will probably have to work together to see how this can be achieved.
Business models will also have to change as innovation and change within this environment will be essential. Over the past 40 years or so, most tech companies have become accustomed to introducing new products or new versions of products frequently. More and more businesses will have to operate this way in the future.
Leasing will become even more common as executives find that the drive to innovate is easier when they lease rather than buy their physical capital, whether plant or equipment. Many people have argued that the U.S. would not have to become this competitive for five to 10 years, until the Chinese really became head-to-head competitors with the U.S.
If the value of the dollar does continue to strengthen as analysts now expect it to do, the U.S. won't have time to wait to get its act in order. Leaders will have to follw different policies than those of the past half century.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.