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click here for a free trial. A weak dollar is a sign of a weak government and a weak economy. So why are so many people saying the sagging greenback is nothing to worry about? Though the dollar is down 21% against the euro over the past 12 months, the U.S. Treasury and Wall Street economists, and even media commentators, have downplayed the relevance of the slide. Indeed, some people say the decline, if moderate, is a good thing, because it will make American goods cheaper to foreigners and will therefore boost exports and add juice to the sluggish economy. Truth be told, this fondness for a depreciating currency springs out of the something-for-nothing school of economics, which also advocates higher government spending and lower interest rates as solutions to any form of economic malaise. Though all these things actually end up causing more economic malaise, we should never underestimate the seductiveness of quack solutions to politicians, traders and idealists. Now, with the economy showing few signs of strength after drastic cuts in interest rates and massive lending to individuals for houses and cars, we have reached the point at which central bankers and government officials start to favor the next brand of snake oil. After months of rock-bottom interest rates, an influential Federal Reserve governor said that the central bank must be prepared to buy all manner of financial assets to reflate an economy not responding to very low interest rates. And we have had Treasury Secretary John Snow making strangely soft remarks on the dollar. On March 4, Snow said he was "not particularly concerned about" the dollar's drop. Then, in a Sunday TV interview, he made the following remark: "When the dollar is at a lower level, it helps exports, and I think exports are getting stronger as a result."
So, does Snow's second remark mean he doesn't believe in devaluation as a useful economic tool? No. Look how he has inserted the adjectives "long-run" and "long-term." The message seems to be that devaluation may give your economy a short-term boost but it will have little effect over time. That stance is economic orthodoxy, and it fits nicely with Fed and Treasury efforts to boost the economy. The party line goes something like this: "Yes, low interest rates may be causing overpricing of houses in certain pockets of the country, overproduction of autos and swelling debt levels on personal and corporate balance sheets, but these things won't matter when we get the economy humming again." But what if these things end up restricting economic growth? Won't chronically high debt levels make individuals and companies cautious in their spending till their balance sheets are restructured? The same principle applies to the dollar. Benign neglect of dollar weakness will lead to much more weakness of the dollar if the economy doesn't pick up. Investors are selling dollars for a number of reasons -- the swelling trade and fiscal deficits, Fed and Treasury statements, weak productivity numbers, stubbornly high leverage numbers and the obvious fact that neither Wall Street nor corporations have learned anything from the bubble's popping and are back to pumping overpriced stocks. The bull argument is that economic revival is just around the corner and the dollar will rise when that materializes. But if growth doesn't happen and the Fed and Treasury still seem unconcerned by the drop, many of the dollar bulls will flee the currency and the slide will be gruesome.
Finally, at its very core, the devaluation argument makes no sense. Money's worth is defined by what it can buy in real goods and services. Devaluation leads to inflation as producers experience higher demand for their products and raise prices. As prices rise, the currency buys fewer real goods and services. No one wins. The market knows that and bids the currency even lower, forcing economic officials to jack up interest rates to stop the slide. This causes the economy to grind to a halt. Granted, we are not at that point. But someone needs to make a strong defense of the greenback soon. Snow could make unambiguously tough statements about the greenback and intervene in the markets along with other countries to ambush investors making the short-dollar trade. He could effectively become Mr. Dollar, just as Eisuke Sakakibara was known as Mr. Yen. The fact that he doesn't is evidence that he's fine with the decline. But if he waits much longer, it will be too late to stop.