NEW YORK (TheStreet) -- In the future, the U.S., China, a united Europe and other rising economic powers will vie for dominance. For the U.S. to stay on top, policymakers in Washington should support a strong dollar.
This might sound counterintuitive to some investors, who like to see U.S. companies sell attractively price goods in foreign markets. Let me explain.
The world is heading into a new economic era in which the United Stats will not simply be able to stand at the top of the world in terms of economics, politics, and military power, with everyone else below. It's a world where China will be a major player -- the Eurozone could be there, too. Others also aspire to these heights.
As such, the United States will need to change its economic philosophy to compete in this new era. For most of the past fifty years, the U.S. has actually supported a weak dollar (even though it often says that it doesn't).
Early in the 1960s, Washington began supporting a policy of credit inflation, a policy adopted by both political parties, with the goals of low unemployment, home ownership for as many people as possible, and credit to satisfy other consumer desires.
This policy resulted in a period of consumer price inflation, which was brought under control in the mid-1980s. However, the policy continued to underwrite asset price inflation, something that continues to this day.
This policy of credit inflation had a huge impact on the market for the U.S. dollar. It resulted in the breakdown of the Bretton Woods system, the international financial system created at the end of World War II that ruled currency trading, leading to the decline in the value of the U.S. dollar by more than one-third between early 1973 and the summer of 2011. This decline helped drive the U.S. economy, particularly exports, during this time.
The United States was able to get away with this because it was not only the No. 1 country in the world in economics, but also first in political power and in military power. Because of these factors, the U.S. dollar was and has been ever since the reserve currency of the world. The U.S. basically inflated itself into a relatively comfortable fifty years of economic prosperity, which also contributed to global economic growth and prosperity.
Since 2011, however, Europe and the rest of the world seem to have fallen out-of-sync economically with the United States. Today, the U.S. is not growing rapidly. Still, its growth rate is the envy of others who are experiencing very slow growth or recessions and disinflation, if not deflation.
Furthermore, central banks, like the European Central Bank, are attempting to stimulate their economies, even creating more inflation, while the United States looks to be headed toward raising interest rates and reducing liquidity.
As a consequence, the value of the dollar has risen to where it is now, as high as it's been in decades. It's now one of the strongest currencies in the world.
For a country to be competitive in the new economic era, it's going to have to produce goods and services in the most productive way possible. Such countries are going to have to contain inflation and conduct their economic policies in a disciplined way, supporting a strong currency and a solid financial system.
China and the Eurozone (under the leadership of the Germans) are already headed in this direction. The United States, however, must change its out-of-date economic philosophy to support a stronger dollar.
A strong-currency economy encourages the development of businesses that aren't reliant on easy export profits: They are financially disciplined, innovative and develop competitive advantages to outmaneuver firms that don't have to deal with a challenging export environment. These kinds of companies face almost-constant threat from organizations similarly forged in a strong-currency environment as well as from foreign competitors who are attracted by earning revenues in the stronger currency.
Washington is going to have to accept some new economic goals and a new economic philosophy to maintain the strong dollar.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.